-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P3y3lk4P2CnkhTlWNyqp+/n6mPOs64d0efAbtBWN1GaouGxqhCFjHC5i/X9XJV0X m4W0Z7JHUftcWEm71dyVow== 0000950123-98-003092.txt : 19980331 0000950123-98-003092.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003092 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEENS COUNTY BANCORP INC CENTRAL INDEX KEY: 0000910073 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 061377322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22278 FILM NUMBER: 98577922 BUSINESS ADDRESS: STREET 1: 38-25 MAIN ST CITY: FLUSHING STATE: NY ZIP: 11354 BUSINESS PHONE: 7183596400 MAIL ADDRESS: STREET 1: 38-25 MAIN STREET CITY: FLUSHING STATE: NY ZIP: 11354 10-K405 1 QUEENS COUNTY BANCORP INC 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1997 Commission File Number 0-22278 QUEENS COUNTY BANCORP INC. (Exact name of registrant as specified in its charter) Delaware 06-1377322 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 38-25 Main Street, Flushing, New York 11354 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (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, $.01 par value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not considered herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K of any amendment to this Form 10-K. /X/ As of March 17, 1998, the aggregate market value of the shares of common stock of the registrant outstanding was $541,592,113, excluding 1,620,337 shares held by all directors and executive officers of the registrant. This figure is based on the closing price by the NASDAQ National Market for a share of the registrant's common stock on March 17, 1998, which was $40.75 as reported in The Wall Street Journal on March 18, 1998. The number of shares of the registrant's common stock outstanding as of March 17, 1998 was 14,910,941 shares. Documents Incorporated by Reference Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1998 and the 1997 Annual Report to Shareholders are incorporated herein by reference - Parts I, II and III. 2 CROSS REFERENCE INDEX
PART I Page ---- Item 1. Business Description of Business ........................................ 1 Statistical Data: Lending Activities ........................................... 19 Loan Maturity and Repricing .................................. 20 Summary of Allowance for Loan Losses ......................... 21 Composition of Mortgage and Other Loan Portfolio ............. 21 Securities and Mortgage-Backed Securities Portfolio .......... 22 Item 2. Properties ....................................................... 23 Item 3. Legal Proceedings ................................................ 24 Item 4. Submission of Matters to a Vote of Security Holders .............. 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................................ 24 Item 6. Selected Financial Data .......................................... 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation ....................................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 24 Item 8. Financial Statements and Supplementary Data ...................... 24 Queens County Bancorp, Inc. and Subsidiary: .................... 24 Independent Auditors' Report ................................. 24 Consolidated Statements of Financial Condition ............... 24 Consolidated Statements of Income ............................ 24 Consolidated Statements of Stockholders' Equity .............. 24 Consolidated Statement of Cash Flows ......................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................ 25 PART III Item 10. Directors and Executive Officers of the Registrant ............... 25 Item 11. Executive Compensation ........................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management ... 25 Item 13. Certain Relationships and Related Transactions ................... 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 25 Signatures ................................................................ 28
3 PART I ITEM 1. BUSINESS Queens County Bancorp, Inc. (the "Company") was incorporated in the State of Delaware on July 20, 1993 to serve as the holding company for Queens County Savings Bank (the "Bank"). The Company acquired all of the stock of the Bank upon its conversion from a New York State-chartered mutual savings bank to a New York State-chartered stock savings bank on November 23, 1993. The information and consolidated financial statements in this Form 10-K report relate principally to the Company's wholly-owned subsidiary, Queens County Savings Bank, through which the Company conducts its principal business activity. Queens County Savings Bank was organized in April 14, 1859 as a New York State-chartered mutual savings bank and was the first savings bank chartered in the Borough of Queens, City of New York. The Bank is subject to regulation by the New York State Banking Department ("Banking Department") and its deposits are insured by the Bank Insurance Fund ("BIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"). GENERAL The Bank's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, into the origination of mortgage loans on multi-family properties and one-to-four family homes. To a lesser extent, the Bank also originates loans on commercial real estate, construction loans, home equity loans, and other consumer loans. In addition, the Bank invests in U.S. Treasury and Government agency securities. The Bank's revenues are derived primarily from interest on its mortgages and other loans, its mortgage-backed securities portfolio, and the interest and dividends earned on its securities. The Bank's primary sources of funds are deposits, amortization and prepayments of loans, and amortization, prepayments, and maturities of mortgage-backed and investment securities. In addition, the Company draws on its $481 million line of credit with the Federal Home Loan Bank of New York ("FHLB-NY") in times of above-average loan demand. The Company's objective of enhancing the value of its shares has been accomplished through the implementation of stock repurchase programs, four stock splits, and the payment of quarterly cash dividends to stockholders, and by maintaining a high level of asset quality and a strong capital position through the generation of stable earnings. Since October 1994, the Company has announced six stock repurchase authorizations and increased its Treasury stock, net of options exercised, to 5,734,442, or 27.77% of the shares issued at its initial public offering on November 23, 1993. At March 17, 1998, the total number of shares outstanding was 14,910,941, as compared to 14,912,791 at December 31, 1997. MARKET AREA AND COMPETITION The Bank is a community-oriented financial institution offering a wide variety of financial products and services to meet the needs of the communities it serves. Headquartered in the heart of Flushing, New York, in the Borough of Queens, the Bank currently operates nine branch offices and three customer service centers in Queens and a tenth branch office in Nassau County. The Bank's deposit gathering base is concentrated in the communities surrounding its offices, while its primary lending area extends throughout the greater New York metropolitan area. Most of the Bank's mortgage loans are secured by properties located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County. The metropolitan area has historically been home to a significant number of corporations, including those within the manufacturing and financial services industries. Despite the ongoing trend toward corporate downsizing and bank consolidation, and the slow path of economic growth within the region as compared to the rest of the country, the Bank has managed to maintain a consistently high level of asset quality. The Bank faces significant competition both in making loans and in attracting deposits. Its market area has a high density of financial institutions, many of which have greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings banks, credit unions, savings and loan associations, mortgage banking companies and insurance companies. The Bank has recently faced increased competition for the origination of multi-family loans, which comprised 78.78% of the Bank's loan portfolio at year-end 1997. Management anticipates that competition for both multi-family and one-to-four family loans will continue to increase in the future. Thus, no assurances can be made that the Bank will be able to maintain its current level of such loans. 1 4 The Bank's most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks, and credit unions. The Bank faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other financial institutions such as brokerage firms and insurance companies. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. LENDING ACTIVITIES Loan and Mortgage-Backed Securities Portfolio Composition. The Bank's loan portfolio consists primarily of multi-family loans on both rental and cooperative apartment buildings, and conventional first mortgage loans secured by one-to-four family homes. To a lesser extent, the Bank also originates commercial real estate loans, construction loans, and home equity and other consumer loans. At December 31, 1997, the Bank's gross loan portfolio totaled $1,405.7 million, of which $1,107.4 million, or 78.78%, were multi-family mortgage loans, and $224.3 million, or 15.96%, were one-to-four family first mortgage loans. Of the total mortgage loan portfolio at year-end 1997, 92.80% were adjustable rate loans and 7.20% were fixed rate loans. The Bank's loan portfolio also included $61.7 million in commercial real estate loans, $1.5 million in construction loans, $5.0 million in cooperative apartment loans, $2.4 million in home equity loans generally secured by second liens on real property, and $3.4 million in other consumer loans. The types of loans originated by the Bank are subject to Federal and State laws and regulations. Interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and the rates offered by its competitors. These factors are, in turn, affected by general economic conditions, the monetary policy of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), legislative tax policies, and governmental budgetary matters. The Bank has invested in a variety of mortgage-backed securities, substantially all of which are directly or indirectly insured or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") or the Government National Mortgage Association ("GNMA"). At December 31,1997, mortgage-backed securities totaled $49.8 million, or 3.10% of total assets. The market value of such securities was approximately $50.6 million at December 31, 1997. At December 31, 1997, all of the Bank's $49.8 million in mortgage-backed securities were held to maturity. Loan Originations, Purchases, Sales, and Servicing. The Bank originates both adjustable rate mortgage ("ARM") loans and fixed rate loans, the amounts of which are dependent upon customer demand and market rates of interest. Generally, the Bank does not purchase whole mortgage loans or loan participations. It is the Bank's current policy to sell all newly originated fixed rate one-to-four family mortgage loans into the secondary market to Savings Bank Life Insurance ("SBLI"), the Federal National Mortgage Association ("FNMA"), the State of New York Mortgage Agency ("SONYMA"), and other secondary market purchasers. ARM loans are retained for the Bank's portfolio. For the fiscal years December 31, 1997 and 1996, originations of new ARM loans totaled $388.7 million and $295.3 million, respectively, or 95.53% and 99.83%, of all mortgage loan originations. Originations of fixed rate loans totaled $6.8 million and $7.9 million, respectively, for the same periods, while sales of ARM loans of $12.9 million and fixed rate loans totaled $3.2 million and $350,000, respectively, for those periods. The Bank generally sells all loans without recourse and retains the servicing rights of such loans. As of December 31, 1997, the Bank was servicing $30.8 million in loans for others. The Bank is generally paid a fee of 0.25% for servicing loans sold. Multi-Family Lending. The Bank originates multi-family loans (defined as loans on properties with five or more units) which are secured by rental or cooperative apartment buildings located primarily in the greater New York metropolitan area. At December 31, 1997, the Bank's portfolio of multi-family mortgage loans totaled $1,107.4 million, representing 78.78% of the total loan portfolio. Of these, $631.6 million, or 44.93%, were secured by rental apartment buildings and $475.8 million, or 33.85%, were secured by underlying mortgages on cooperative apartment buildings. Such loans are typically originated for terms of 10 years at a rate that adjusts to the prime rate of interest, as reported in The New York Times, plus a margin of 100 basis points, in each of years six through ten. In 1997, the majority of the Bank's multi-family mortgage loan originations featured a fixed rate for the first five years of the credit; prepayment penalties range from five points to one over the first five years of the loan. At year-end 1997, 96.2% of the Bank's multi-family mortgage loans were adjustable rate credits, including $369.1 million that are due to step upward in 1998. Properties securing multi-family mortgage loans are appraised either by appraisers employed by the Bank or by independent appraisers approved by the Bank. 2 5 In originating such loans, the Bank bases its underwriting decisions primarily on the net operating income generated by the property in relation to the debt service. The Bank also considers the financial resources of the borrower, the borrower's experience in owning or managing similar property, the market value of the property, and the Bank's lending experience with the borrower. The Bank generally requires minimum debt service ratios of 120% on multi-family properties. In addition, the Bank requires a security interest in the personal property at the premises, and an assignment of rents. The Bank's largest concentration of loans to one borrower at December 31, 1997 consisted of 15 loans secured by 15 multi-family properties located in the Bank's primary market area. These loans were made to several borrowers who are deemed to be related for regulatory purposes. As of December 31, 1997, the outstanding balance of these loans totaled $16.1 million and, as of such date, all such loans were performing in accordance with their terms. The Bank's concentration of such loans did not exceed its "loans-to-one-borrower" limitation. See "Loans to One Borrower Limitations." Loans secured by multi-family properties are generally larger and involve a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by multi-family buildings are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the local economy. The Bank seeks to minimize these risks through its underwriting policies, which restrict new originations of such loans to the Bank's primary lending area and require such loans to be qualified on the basis of the property's net income and debt service ratio. Since 1988, one loan on a multi-family property outside of the primary lending area was foreclosed upon and subsequently sold. One-to-Four Family Mortgage Lending. The Bank offers first mortgage loans secured primarily by owner-occupied, one-to-four family residences, including condominium loans, located in its primary lending area. The Bank offers both fixed rate and ARM loans with maturities of up to 30 years, to a maximum amount of $500,000. The Bank's one-to-four family mortgage loan originations are generally made to existing or past customers and members of the local community, and through referrals from local attorneys, realtors, and independent mortgage brokers. With the exception of limited documentation loans, one-to-four family residential mortgage loans are generally underwritten to FNMA and other agency guidelines. At December 31, 1997, $224.3 million, or 15.96% of the Bank's loan portfolio, consisted of one-to-four family mortgage loans. Since 1985, full documentation mortgage loans are offered in amounts up to 75% of the lower of the appraised value or sales price of the property, or up to 85% with private mortgage insurance. The Bank has originated one-to-four family loans without verification of the borrower's level of income and, in many instances, without verification of financial assets, basing approval on a credit report and property appraisal alone. The Bank originates such limited documentation loans with full asset verification on properties located within its Community Reinvestment Act ("CRA") market area with loan-to-value ratios of up to 75% of the lower of the appraised value or the sales price of the property. All other limited documentation loans are originated with loan-to-value ratios of up to 70% of the lower of the appraised value or sales price of the property. A majority of the Bank's one-to-four family loan originations during 1997 and 1996 were limited documentation loans. These loans involve a higher degree of risk of default as compared to full documentation one-to-four family mortgage loans. In recognition of this risk, the Bank is stringent in its review and verification of the borrower's credit. In addition, it primarily utilizes staff appraisers to perform real estate appraisals and charges a higher rate of interest on such loans. The Bank's $7.7 million in non-performing loans at December 31, 1997, was comprised of one-to-four family loans. Since 1990, the Bank has foreclosed on 45 one-to-four family residential properties; three of these properties remained in foreclosed real estate as of December 31, 1997, with a carrying value of $435,000. The Bank also has one commercial property in foreclosed real estate with a carrying value of $595,000. The Bank currently offers ARM loans secured by one-to-four family residential properties that adjust every one, two, or three years. The interest rate on ARM loans fluctuates based upon a spread above either the Federal Housing Finance Board rate or the average yield on U. S. Treasury securities, adjusted to a constant maturity which corresponds to the adjustment period of the loan (the "U. S. Treasury constant maturity index") as published weekly by the Federal Reserve Board. Rates on ARM loans are generally subject to limitations on interest rate increases of a 2% to 3% adjustment per period 3 6 and an aggregate adjustment of 6% over the life of the loan. Accordingly, increases in interest rates and the resulting cost of funds in a rapidly rising interest rate environment could exceed the cap levels on these loans and negatively impact net interest income. In the year ended December 31, 1997 and 1996, the Bank originated $2.6 million and $8.5 million, respectively, in one-to-four family residential ARM loans. The volume and types of ARM loans originated by the Bank have been affected by such market factors as the level of interest rates, competition, consumer preferences, and availability of funds. During 1997, demand for ARM loans was impacted by the low interest rate environment and consumer preference for fixed rate loans. Accordingly, although the Bank will continue to offer ARM loans, there can be no assurance that the Bank will be able to originate a sufficient volume of ARM loans to increase or maintain the proportion that these loans bear to total loans in the future. The retention of ARM loans in the Bank's loan portfolio, as opposed to fixed rate residential mortgage loans, helps reduce the Bank's exposure to increases in interest rates. However, ARM loans generally pose credit risks different from the risks inherent in fixed rate loans, primarily because, as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected. In order to minimize risk, borrowers of ARM loans are qualified at the Bank's current offering rate for fixed rate loans, but not less than 7.0%. The Bank has not originated in the past, nor does it currently originate, ARM loans that provide for negative amortization. The Bank currently offers fixed rate mortgage loans with terms of 15 to 30 years secured by one-to-four family residences. Interest rates charged on fixed rate loans are competitively priced, based on market conditions. The Bank originates fixed rate loans for sale in amounts of up to 75% of the lower of the appraised value or the sales price of the property, with private mortgage insurance required for loans in excess of 80%. Fixed rate loans are made in amounts up to the maximum amount permitted by FNMA, FHLMC, and SONYMA guidelines. For the years ended December 31, 1997 and 1996, the Bank originated $1.5 million and $1.6 million, respectively, in fixed rate one-to-four family residential mortgage loans. An origination fee of up to 2% may be charged on one-to-four family mortgage loans. Mortgage loans in the Bank's portfolio generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. It is the Bank's policy to enforce due-on-sale provisions within the applicable regulations and guidelines imposed by New York law and secondary market purchasers. The Bank generally sells its newly originated conforming fixed rate mortgage loans in the secondary market to such Federal and State agencies as FNMA, SONYMA, and other secondary market purchasers, while retaining the servicing rights on all such loans sold. For the twelve months ended December 31, 1997, the Bank sold loans totaling $3.2 million. As of December 31, 1997, the Bank's portfolio of loans serviced for others totaled $30.8 million. The Bank intends to continue to sell all of its newly originated fixed rate one-to-four family mortgage loans as a means of managing its interest rate risk. No assurances can be made, however, that the Bank will be able to do so in the future. Commercial Real Estate Lending. The Bank offers commercial real estate loans that are typically secured by office buildings, retail stores, medical offices, warehouses, and other non-residential buildings. At December 31, 1997, the Bank had loans secured by commercial real estate of $61.7 million, comprising 4.39% of the Bank's total loan portfolio. Commercial real estate loans may be originated in amounts of up to 65% of the appraised value of the mortgaged property. Such loans are typically made for terms of ten years with interest rates charged in the same manner as the Company's loans. To originate commercial real estate loans, the Bank requires one or more of the following: personal guarantees of the principals, a security interest in the personal property, and an assignment of rents and/or leases. Properties securing the loan are appraised either by appraisers employed by the Bank or by independent appraisers approved by the Bank. In recent years, the Bank has de-emphasized its origination of commercial real estate loans. At December 31, 1997 and 1996, such loans totaled $61.7 million and $63.5 million, respectively. 4 7 Loans secured by commercial real estate properties, like multi-family loans, are generally larger and involve a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation and management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its lending policies and underwriting standards, which restrict new originations of such loans to the Bank's primary lending area and qualify such loans on the basis of the property's net income and debt service ratio. Construction Lending. The Bank's construction loans primarily have been made to finance the construction of one-to-four family residential properties and, to a lesser extent, multi-family properties. The Bank's policies provide that construction loans may be made in amounts of up to 70% of the appraised value of the project. The maximum loan amount is $3.0 million. The Bank generally has provided construction loans only as an accommodation to existing customers and does not actively solicit such loans. The Bank generally requires personal guarantees and a permanent loan commitment. Construction loans are made with adjustable rate terms of up to 18 months. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are structured to be converted to permanent end loans originated by the Bank at the end of the construction period or upon the borrower receiving permanent financing from another financial institution. As of December 31, 1996, the Bank had $1.5 million, or 0.10%, of its total loan portfolio invested in construction loans. The Bank does not currently intend to increase the level or ratio of its construction loans to total loans. Other Lending. The Bank also offers other full documentation loans, primarily cooperative apartment, home equity, student, and passbook loans. Other loans outstanding at December 31, 1997 totaled $10.8 million, or 0.77% of the Bank's loan portfolio and included cooperative apartment loans of $5.0 million, or 46.30%. The Bank's home equity loan extends a line of credit ranging from a minimum of $10,000 to a maximum of $400,000. The credit line, when combined with the balance of the first mortgage lien, may not exceed 70% of the appraised value of the property at the time of the loan commitment. Home equity loans outstanding at December 31, 1997 totaled $2.4 million, against total available credit lines of $3.8 million. Loan Approval Authority and Underwriting. The Board of Directors establishes lending authority for individual officers for its various loan products. For one-to-four family mortgage loans, including cooperative apartment and condominium loans, the Senior Vice President, Mortgages has the authority to approve loans in amounts of up to $300,000. Any two executive officers have the authority to issue commitments on one-to-four family loans in amounts up to $400,000. Any one-to-four family loan in excess of $400,000 must be approved by the Mortgage and Real Estate Committee. For multi-family and commercial real estate loans, the Mortgage and Real Estate Committee must approve all loans. A loan in excess of $3.0 million must be approved by the Executive Committee; as of December 31, 1997, the Bank had twenty-six loans in excess of $3.0 million, with the highest amount being $7.5 million. For one-to-four family mortgage loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is requested, and the borrower's income, assets, and certain other information are verified for full documentation loans; if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is required, and currently is performed by staff or independent certified appraisers designated and approved by the Board of Directors. It is the Bank's policy to obtain appropriate insurance protection, including title insurance, on all real estate mortgage loans. Borrowers must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds for certain items such as real estate taxes, flood insurance, and private mortgage insurance, when applicable. Limited documentation loans are underwritten according to the same guidelines, except that no income and, in many instances, no financial asset verification is performed. The Bank has originated limited documentation loans in response to the characteristics and demands of its primary market area. The majority of such loans have been originated within the primary market area served by the Bank. Non-performing Loans and Foreclosed Assets. The Bank had $7.7 million in loans delinquent 90 days or more at December 31, 1997, consisting of 68 one-to-four family mortgage loans with an average principal balance of approximately $113,200. Management does not expect to incur significant losses on its non-performing mortgage loans. Management reviews non-performing loans on a regular basis and reports monthly to both the Mortgage and Real Estate Committee and the Executive Committee regarding delinquent loans. The Bank hires outside counsel experienced in foreclosure and bankruptcy to institute foreclosure and other proceedings on the Bank's delinquent loans. 5 8 With respect to one-to-four family mortgage loans, the Bank's collection procedures include sending a past due notice when the regular monthly payment is 17 days past due. In the event that payment is not received following notification, another notice is sent after the loan becomes 30 days delinquent. If payment is not received after the second notice is sent, personal contact with the borrower is attempted through additional letters and telephone calls. If a loan becomes 90 days delinquent, the Bank then issues a demand note and sends an inspector to the property. When contact is made with the borrower at any time prior to foreclosure, the Bank attempts to obtain full payment or to work out a repayment schedule with the borrower to avoid foreclosure. If a satisfactory repayment schedule is not worked out with the borrower, foreclosure actions are generally initiated prior to the loan becoming 120 days past due. With respect to multi-family and commercial real estate loans, any loans that become 20 days delinquent are reported to the Senior Vice President, Mortgages. The Bank then attempts to contact such borrowers by telephone. Before a loan becomes 30 days past due, the Bank conducts a physical inspection of the property. Once contact is made with the borrower, the Bank attempts to obtain full payment or to work out a repayment schedule. If the Bank determines that successful repayment is unlikely, the Bank initiates foreclosure proceedings, typically before the loan becomes 60 days delinquent. The Bank's policies provide that management reports monthly to the Mortgage and Real Estate Committee and Executive Committee regarding classified assets. The Bank reviews the problem loans in its portfolio on a monthly basis to determine whether any loans require classification in accordance with applicable regulatory guidelines and believes its classification policies are consistent with regulatory policies. All classified assets of the Bank are included in non-performing loans delinquent 90 days or more or foreclosed real estate. Loans are designated as "in foreclosure", and beginning in 1997, the accrual of interest and amortization of origination fees continues up to net realizable value less transaction cost of disposition. During the years ended December 31, 1997, 1996, and 1995, the amounts of additional interest income that would have been recorded on mortgage loans in foreclosure, had they been current, totaled $161,000, $891,000, and $822,000 respectively. These amounts were not included in the Bank's interest income for the respective periods. The following table sets forth information regarding all mortgage loans in foreclosure, loans which are 90 days or more delinquent, commercial real estate pending foreclosure, and foreclosed real estate at the dates indicated. At December 31, 1997, the Bank had no restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" as amended by SFAS No. 114.
At December 31, --------------- 1997 1996 1995 1994 1993 ------ ------- ------ ------ ------- (dollars in thousands) Mortgage loans in foreclosure .. $6,121 $ 6,861 $4,929 $5,437 $ 7,417 Loans 90 days or more delinquent and still accruing interest .. 1,571 2,798 2,864 1,674 2,329 Commercial real estate loans pending foreclosure ......... -- -- -- -- 2,009 ------ ------- ------ ------ ------- Total non-performing loans ..... 7,692 9,659 7,793 7,111 11,755 ------ ------- ------ ------ ------- Foreclosed real estate ....... 1,030 627 774 975 884 ------ ------- ------ ------ ------- Total non-performing assets .... $8,722 $10,286 $8,567 $8,086 $12,639 ====== ======= ====== ====== ======= Total non-performing loans to loans, net ................... 0.55% 0.84% 0.78% 0.76% 1.51% Total non-performing assets to total assets ................ 0.54 0.76 0.69 0.69 1.16
Non-performing loans totaled $7.7 million as of December 31, 1997. Management monitors such loans and, when deemed appropriate, writes down such loans to their current appraised values, less transaction costs. There can be no assurances that further write-downs will not occur with respect to such loans. 6 9 At December 31, 1997, foreclosed real estate was comprised of three residential properties and one commercial real estate parcel located within the Bank's primary lending area, with an aggregate carrying value of $1 million. The Bank generally conducts appraisals on all properties securing non-accrual mortgage loans, commercial real estate loans pending foreclosure, and foreclosed real estate as deemed appropriate and, if necessary, charges off any declines in value at such times. Based upon management's estimates as to the timing of, and expected proceeds from, the disposition of these loans, no material loss is currently expected to be incurred. Once a loan is placed into foreclosure, the Bank performs an appraisal of the property. In the event that the carrying balance of the loan exceeds the appraisal amount less transaction costs, a charge-off is recognized. It is the Bank's general policy to dispose of properties acquired through foreclosure or by deed in lieu thereof as quickly and as prudently as possible, in consideration of market conditions and the condition of such property. Foreclosed real estate is titled in the name of the Bank's wholly-owned subsidiary, Main Omni Realty Corp., which manages the property while it is offered for sale. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the regional and national economies. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers, among other matters, the fair value of the underlying collateral, economic conditions, historical loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and the valuation of foreclosed real estate. In recent periods, regulatory authorities have applied a greater level of scrutiny to the loan portfolios of financial institutions and more conservative criteria in evaluating real estate market values, which the Bank believes has resulted in significantly increased provisions for loan losses for financial institutions generally. While the Bank considers this conservative approach when evaluating the adequacy of its loan loss allowance, such authorities may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examinations. When the Bank determines that an asset should be classified, it generally does not establish a specific allowance for such asset unless it determines that such asset may result in a loss. The Bank may, however, increase its general valuation allowance in an amount deemed prudent. General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. The Bank's determination as to the classification of its assets and the amount of its valuation allowances are subject to review by the FDIC and the Banking Department, which can order the establishment of additional general or specific loss allowances. At December 31, 1997, the total allowance was $9.4 million, which amounted to 122.61% of non-performing loans and 108.13% of non-performing assets. For the years ended December 31, 1997 and 1996, the Bank had no net charge-offs against this allowance. The level of the allowance reflects management's assessment of the risks inherent in its loan portfolio, including those risks associated with the Bank's increased emphasis on multi-family mortgage loans on rental and cooperative apartment buildings, which are considered to be at greater risk of default than one-to-four family loans. In determining the provision for loan losses, the Bank also considers the greater risks associated with its sizeable portfolio of limited documentation loans, and local and national economic conditions. The Bank will continue to monitor and modify the level of its allowance for loan losses in order to maintain such allowance at a level which management considers adequate. See Statistical Data-A, B, C, and D for components of the Bank's mortgage loan portfolio, maturity and repricing, and for a summary of the allowance for loan losses. MORTGAGE-BACKED SECURITIES All of the Bank's mortgage-backed securities are directly or indirectly insured or guaranteed by the FHLMC or GNMA. At December 31, 1997, mortgage-backed securities totaled $49.8 million, or 3.10% of total assets, and were classified by the Bank as held to maturity. Because a majority of the Bank's mortgage-backed securities are either adjustable rate or are FHLMC five-year term securities, the Bank anticipates that all of its mortgage-backed securities will prepay or reprice within five years. At December 31, 1997, the mortgage-backed securities portfolio had a weighted average interest rate of 6.14% and a market value of approximately $50.6 million. See Statistical Data-E for components of the mortgage-backed securities portfolio. 7 10 INVESTMENT ACTIVITIES General. The investment policy of the Bank, which is established by the Board of Directors and implemented by the Real Estate and Mortgage Committee and the Investment Committee and certain executive officers of the Bank, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. The Bank's current securities investment policy permits investments in various types of liquid assets, including U.S. Treasury securities, obligations of various Federal agencies, bankers' acceptances of other Board approved financial institutions, investment grade corporate securities, commercial paper, certificates of deposit, and Federal funds. The Bank currently does not participate in hedging programs or interest rate swaps and does not invest in non-investment grade bonds or high risk mortgage derivatives. To improve the quality of the Bank's securities portfolio and the Bank's liquidity and regulatory capital position, management has restructured the securities portfolio in recent years by shifting its investments primarily to medium-term Government agency securities from U.S. Treasury securities as the latter securities matured or were redeemed. As a result, at December 31, 1997, Government agency securities totaled $84.9 million and U.S. Treasury securities totaled $14.0 million, as compared to $10.4 million and $76.1 million at December 31, 1996, respectively. The Bank's aggregate securities portfolio totaled $94.9 million at December 31, 1997. See Statistical Data-E, "Securities, Money Market Investments, and Mortgage-Backed Securities." SOURCES OF FUNDS General. Deposits, repayments of loans and mortgage-backed securities, and maturities and redemptions of investment securities are the Bank's primary sources of funds for lending, investing, and other general purposes. Borrowings from the FHLB in times of heavy loan demand complement these sources of funds. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposits principally consist of certificates of deposit ("CDs") and savings accounts, together with money market accounts, demand deposits, and NOW accounts. The flow of deposits is influenced significantly by general economic conditions, the restructuring of the banking industry, changes in money market and prevailing interest rates, and competition with other financial institutions. The Bank's deposits are typically obtained from the area in which its offices are located. The Bank relies primarily on long-standing relationships with customers to retain these deposits. At December 31, 1997, $139.7 million, or 13.07% of the Bank's gross deposit balance, consisted of CDs with a balance of $100,000 or more. Borrowings. The Bank is a member of the FHLB-NY, and had a $481.0 million line of credit at December 31, 1997. To supplement its funding source in a year of increased lending, the Company drew on its line of credit with the FHLB in 1997. Borrowings, which are used to finance loan production, totaled $309.7 million at December 31, 1997. A $10.0 million line of credit with a correspondent financial institution is also available to the Bank. At December 31, 1997, the Bank also had an outstanding loan in the amount of $13.3 million from the Company to fund the Employee Stock Ownership Plan ("ESOP") and $9.5 million in inter-company demand loans at a fixed rate of 6%. SUBSIDIARY ACTIVITIES Under its New York State leeway authority, the Bank has formed three wholly-owned subsidiary corporations. M.F.O. Holding Corp. ("MFO") holds title to banking premises, while Main Omni Realty Corp's purpose is to hold, operate, and maintain real estate acquired by the Bank as a result of foreclosure or by deed in lieu, and Queens Realty Trust, Inc. holds a pool of qualifying mortgage loans for investment purposes. SAVINGS BANK LIFE INSURANCE As an issuing bank, the Bank offers Savings Bank Life Insurance ("SBLI") to its customers up to the legal maximum of $50,000 per insured individual and, as a trustee bank, offers an additional $350,000 in group coverage per insured under SBLI's Financial Institution Group Life Insurance policy. The SBLI Department's activities are separate from the Bank's and, while they do not materially affect the Bank's earnings, management believes that offering SBLI is beneficial to the Bank's relationship with its depositors and the general public. The SBLI Department pays its own expenses and reimburses the Bank for expenses incurred on its behalf. 8 11 PERSONNEL At December 31, 1997, the number of full-time equivalent employees was 275. The Bank's employees are not represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. FEDERAL, STATE, AND LOCAL TAXATION FEDERAL TAXATION General. The Company and the Bank report their income on a consolidated basis using a calendar year on the accrual method of accounting, and are subject to Federal income taxation in the same manner as other corporations with some exceptions, including, particularly, the Bank's addition to its reserve for bad debts, as discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the "1996 Act"), which was enacted on August 20, 1996, made significant changes to provisions of the Internal Revenue Code of 1986 (the "Code") relating to a savings institution's use of bad debt reserves for Federal income tax purposes and requires such institutions to recapture (i.e. take into income) certain portions of their accumulated bad debt reserves. The effect of the 1996 Act on the Bank is discussed below. Prior to the enactment of the 1996 Act, the Bank was permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions, within specified formula limits, were deducted in arriving at the Bank's taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications, and reduced by the amount of any permitted addition to the non-qualifying reserve. The 1996 Act. Under the 1996 Act, for its current and future taxable years, the Bank is not permitted to make additions to its tax bad debt reserves. In addition, the Bank is required to recapture (i.e. take into income) over a six-year period the excess of the balance of its tax bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. The amount subject to recapture is approximately $7.4 million. Distributions. To the extent that the Bank makes "non-dividend distributions" to stockholders that are considered to result in distributions from the excess bad debt reserve, i.e., that portion, if any, of the balance of the reserve for qualifying real property loans attributable to certain deductions under the percentage of taxable income method, or the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the distribution will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for Federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserves. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserves and deducted for Federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, the additional taxable income would be an amount equal to approximately one and one-half times the amount of the Excess Distribution, assuming a 35% corporate income tax rate (exclusive of state taxes). See "Regulation and Supervision" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. Corporate Alternative Minimum Tax. The Code imposes a tax on Alternative Minimum Taxable Income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. The adjustment to AMTI based on adjusted current earnings is an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative 9 12 Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT. The Bank was subject to an environmental tax liability for the year ended December 31, 1995 which was not material. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company and the Bank own more than 20% of the stock of the corporation distributing a dividend, then 80% of any dividends received may be deducted. STATE AND LOCAL TAXATION The Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of the Bank's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greatest of (a) 0.01% of the value of the Bank's assets allocable to New York State with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or (c) $250. Entire net income is similar to Federal taxable income, subject to certain modifications (including the fact that net operating losses cannot be carried back or carried forward) and alternative entire net income is equal to entire net income without certain deductions. The Bank is also subject to a similarly calculated New York City tax of 9% on income allocated to New York City and similar alternative taxes. A temporary Metropolitan Transportation Business Tax Surcharge on banking corporations doing business in the metropolitan district has been applied since 1982. The Bank does all of its business within this District and is subject to this surcharge rate of 17.00%. Delaware State Taxation. 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. These taxes and fees were not material in 1996. REGULATION AND SUPERVISION GENERAL The Bank is a New York State-chartered stock form savings bank and its deposit accounts are insured under the BIF up to applicable limits by the FDIC. The Bank is subject to extensive regulation and supervision by the New York State Banking Department ("Banking Department"), as its chartering agency, and by the FDIC, as the deposit insurer. The Bank must file reports with the Banking Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions. There are periodic examinations by the Banking Department and the FDIC to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulation, whether by the Banking Department, the FDIC, or through legislation, could have a material adverse impact on the Company and the Bank and their operations, and the Company's stockholders. The Company is required to file certain reports, and otherwise comply with the rules and regulations of the Federal Reserve Board and the Banking Department and of the Securities and Exchange Commission ("SEC") under Federal securities laws. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. 10 13 NEW YORK LAW The Bank derives its lending, investment, and other authority primarily from the applicable provisions of Banking Law and the regulations of the Banking Department, as limited by FDIC regulations. See "Restrictions on Certain Activities." Under these laws and regulations, savings banks, including the Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities (including certain corporate debt securities and obligations of Federal, state, and local governments and agencies), certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a savings bank may directly invest up to 7.5% of its assets in certain corporate stock, and may also invest up to 7.5% of its assets in certain mutual fund securities. Investment in the stock of a single corporation is limited to the lesser of 2% of the outstanding stock of such corporation or 1% of the savings bank's assets, except as set forth below. Such equity securities must meet certain earnings ratios and other tests of financial performance. A savings bank's lending powers are not subject to percentage of asset limitations, although there are limits applicable to single borrowers. A savings bank may also, pursuant to the "leeway" power, make investments not otherwise permitted under the New York State Banking Law. This power permits investments in otherwise impermissible investments of up to 1% of assets in any single investment, subject to certain restrictions and to an aggregate limit for all such investments of up to 5% of assets. Additionally, savings banks are authorized to elect to invest under a "prudent person" standard in a wide range of debt and equity securities in lieu of investing in such securities in accordance with and reliance upon the specific investment authority set forth in the New York State Banking Law. Although the "prudent person" standard may expand a savings bank's authority, in the event a savings bank elects to utilize the "prudent person" standard, it will be unable to avail itself of the other provisions of the New York State Banking law and regulations which set forth specific investment authority. A savings bank may also exercise trust powers upon approval of the Banking Department. New York savings banks may also invest in subsidiaries under a service corporation power. A savings bank may use this power to invest in corporations that engage in various activities authorized for savings banks, plus any additional activities which may be authorized by the Banking Department. Investment by a savings bank in the stock, capital notes, and debentures of its service corporations is limited to 3% of the savings bank's assets, and such investments, together with the savings bank's loans to its service corporations, may not exceed 10% of the savings bank's assets. The exercise by an FDIC-insured savings bank of the lending and investment powers of a savings bank under the New York Banking Law is limited by FDIC regulations and other Federal law and regulations. In particular, the applicable provisions of New York State Banking law and regulations governing the investment authority and activities of an FDIC-insured state-chartered savings bank have been effectively limited by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto. See "Restrictions on Certain Activities." With certain limited exceptions, a New York State chartered savings bank may not make loans or extend credit for commercial, corporate, or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank's net worth. The Bank currently complies with all applicable loans-to-one-borrower limitations. Under New York State Banking Law, a New York State chartered stock savings bank may declare and pay dividends out of its net profits, unless there is an impairment of capital, but approval of the Superintendent is required if the total of all dividends declared in a calendar year would exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, subject to certain adjustments. Under New York State Banking Law, the Superintendent of Banks may issue an order to a New York State-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices, and to keep prescribed books and accounts. Upon a finding by the Banking Department that any director, trustee, or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee, or officer may be removed from office after notice and an opportunity to be heard. The Bank does not know of any past or current practice, condition, or violation that might lead to any proceeding by the Superintendent or the Banking Department against the Bank or any of its Directors or officers. 11 14 FDIC REGULATIONS Capital Requirements. The FDIC has adopted risk-based capital guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. The Bank is required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as the Bank's "risk-based capital ratio." Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. These guidelines divide a savings bank's capital into two tiers. The first tier ("Tier I") includes common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Savings banks are required to maintain a total risk-based capital ratio of 8%, of which at least 4% must be Tier I capital. In addition, the FDIC has established regulations prescribing a minimum Tier I leverage capital ratio (Tier I capital to adjusted total assets as specified in the regulations). These regulations provide for a minimum Tier I leverage capital ratio of 3% for banks that meet certain specified criteria, including that they have the highest examination rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage capital ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The FDIC may, however, set higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. Savings banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. The following is a summary of the Bank's regulatory capital at December 31, 1997: GAAP Capital to Total Leverage Assets ........... 9.30% Total Capital to Risk-Weighted Assets ........... 15.26% Tier I Capital to Risk-Weighted Assets .......... 14.32%
In August 1995, the FDIC, along with the other Federal banking agencies, adopted a regulation providing that the agencies will take account of the exposure of a bank's capital and economic value to changes in interest rate risk in assessing a bank's capital adequacy. According to the agencies, applicable considerations include the quality of the bank's interest rate risk management process, the overall financial condition of the bank and the level of other risks at the bank for which capital is needed. Institutions with significant interest rate risk may be required to hold additional capital. The agencies recently issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies' evaluation of interest rate risk in connection with capital adequacy. The agencies have determined not to proceed with a previously issued proposal to develop a supervisory framework for measuring interest rate risk and an explicit capital component for interest rate risk. Standards for Safety and Soundness. Federal law requires each Federal banking agency to prescribe for depository institutions under its jurisdiction standards relating to, among other things, internal controls; information systems and audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; compensation; fees and benefits; and such other operational and managerial standards as the agency deems appropriate. The Federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the "Guidelines") to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the Federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings and compensation; fees and benefits. If the appropriate Federal 12 15 banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institutions to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the Federal Deposit Insurance Act, as amended, ("FDI Act"). The final regulation establishes deadlines for the submission and review of such safety and soundness compliance plans. Real Estate Lending Standards. The FDIC and the other Federal banking agencies have adopted regulations that prescribe standards for extensions of credit that (i) are secured by real estate or (ii) are made for the purpose of financing the construction or improvements on real estate. The FDIC regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying FDIC Guidelines, which include loan-to-value limitations for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified. Dividend Limitations. The FDIC has authority to use its enforcement powers to prohibit a savings bank from paying dividends, if in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law prohibits the payment of dividends by a bank that will result in the bank failing to meet applicable capital requirements on a pro forma basis. The Bank is also subject to dividend declaration restrictions imposed by New York law. INVESTMENTS AND ACTIVITIES Since the enactment of FDICIA, all state-chartered financial institutions, including savings banks and their subsidiaries, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, FDICIA and the FDIC regulations thereunder permit certain exceptions to these limitations. For example, certain state chartered banks, such as the Bank, may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the National Market System of NASDAQ and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. Such banks may also continue to sell savings bank life insurance. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the BIF. The FDIC has recently proposed revisions to its regulations governing the procedures for institutions seeking approval to engage in such activities or investments. These proposed revisions would, among other things, streamline certain application procedures for healthy banks and impose certain quantitative and qualitative restrictions on a bank's dealing with its subsidiaries engaged in activities not permitted for national bank subsidiaries. All non-subsidiary equity investments, unless otherwise authorized or approved by the FDIC, must have been divested by December 19, 1996, pursuant to a FDIC-approved divestiture plan unless such investments were grandfathered by the FDIC. The Bank received grandfathering authority from the FDIC in February 1993 to invest in listed stock and/or registered shares subject to the maximum permissible investments of 100% of Tier 1 Capital, as specified by the FDIC's regulations, or the maximum amount permitted by New York State Banking Law, whichever is less. Such grandfathering authority is subject to termination upon the FDIC's determination that such investments pose a safety and soundness risk to the Bank or in the event the Bank converts its charter or undergoes a change in control. As of December 31, 1997, the Bank had $2.7 million of such investments. PROMPT CORRECTIVE REGULATORY ACTION Federal law requires, among other things, that Federal bank regulatory authorities take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action legislation. Among other things, the regulations define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a leverage ratio of 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of 13 16 less than 4%, or generally a leverage capital ratio of less than 4%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. "Undercapitalized" banks are subject to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the bank's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" banks are subject to one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. "Critically undercapitalized" institutions also may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any material transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator. Generally, subject to a narrow exception, the appointment of a receiver or conservator is required for a "critically undercapitalized" institutions within 270 days after it obtains such status. TRANSACTIONS WITH AFFILIATES Under current Federal law, transactions between depository institutions and their affiliates are governed by Section 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any company or entity that controls, is controlled by, or is under common control with the savings bank, other than a subsidiary. In a holding company context, at a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. The Federal Reserve Board ("FRB") has proposed regulations that would treat as an affiliate any subsidiary of a savings bank that engages in activities not permissible for the parent savings bank to engage in directly. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such savings bank's capital stock and surplus, and contains an aggregate limit on all such transaction with all affiliates to an amount equal to 20% of such capital stock and surplus. The term "covered transaction" includes the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate, the purchase of, or an investment in, the securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on term substantially the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with nonaffiliates. Further, Section 22(h) of the Federal Reserve Act restricts a savings bank with respect to loans to directors, executive officers, and principal stockholders. Under Section 22(h), loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of voting securities of a savings bank, and certain related interests of any of the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the savings bank's total capital and surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate Federal banking agency to directors, executive officers, and shareholders who control 10% or more of voting securities of a stock savings bank, and their respective related interests, unless such loan is approved in advance by a majority of the board of directors of the savings bank. Any "interested" director may not participate in the voting. The loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus or any loans over $500,000. Further, pursuant to Section 22(h), loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as offered in comparable transactions to other persons. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to executive officers over other employees. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive officers. 14 17 ENFORCEMENT The FDIC has extensive enforcement authority over insured savings banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders, and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. The FDIC has authority under Federal law to appoint a conservator or receiver for an insured savings bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state savings bank if that savings bank was "critically undercapitalized" on average during the calendar quarter beginning 270 days after the date on which the savings bank became "critically undercapitalized." For this purpose, "critically undercapitalized" means having a ratio of tangible capital to total assets of less than 2%. See "Prompt Corrective Regulatory Action." The FDIC may also appoint a conservator or receiver for a state savings bank on the basis of the institution's financial condition or upon the occurrence of certain events, including: (i) insolvency (whereby the assets of the savings bank are less than its liabilities to depositors and others); (ii) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (iii) existence of an unsafe or unsound condition to transact business; (iv) likelihood that the savings bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and (v) insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution's capital with no reasonable prospect of replenishment of capital without Federal assistance. INSURANCE OF DEPOSIT ACCOUNTS The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on the supervisory evaluation provided to the FDIC by the institution's primary Federal regulator, and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Assessment rates for BIF deposits currently range from 0 basis points to 27 basis points, and the FDIC has determined to retain such range of assessment rates for the first half of 1998. The FDIC is authorized to raise the assessment rates in certain circumstances, including to maintain or achieve the designated reserve ratio of 1.25%, which requirement the BIF currently meets. The FDIC has exercised its authority to raise rates in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment of Savings Association Insurance Fund member institutions to recapitalize SAIF. The Funds Act also spreads the obligations for payment of the Financing Corporation ("FICO") bonds across all SAIF and BIF members. As of January 1, 1997, BIF deposits are assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated 6.4 basis points on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date BIF and SAIF are merged. The Funds Act specifies that BIF and SAIF will be merged on January 1, 1999 provided that no savings associations remain at that time. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition, or violation that might lead to the termination of deposit insurance. LOANS-TO-ONE-BORROWER LIMITATIONS With certain limited exceptions, a New York State chartered savings bank may not make loans or extend credit for commercial, corporate, or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank's capital. The Bank currently complies with all applicable loans-to-one-borrower limitations. 15 18 COMMUNITY REINVESTMENT ACT Federal Regulation. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA requires the FDIC, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. CRA requires public disclosure of an institution's CRA rating and to require the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. The Bank's latest CRA rating, received from the FDIC in July 1997, was "satisfactory." New York Regulation. The Bank is also subject to provisions of the New York Banking Law which impose continuing and affirmative obligations upon banking institutions organized in New York to serve the credit needs of its local community ("NYCRA"), which are substantially similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of all Federal CRA reports with the Banking Department. The NYCRA requires the Banking Department to make an annual written assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating system, and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank's NYCRA rating when reviewing a bank's application to engage in certain transactions, including mergers, asset purchases, and the establishment of branch offices or ATMs, and provides that such assessment may serve as a basis for the denial of any such application. The NYBD has adopted, effective December 3, 1997, new regulations to implement the NYCRA. The NYBD replaced its process-focused regulations with performance-focused regulations that are intended to parallel current CRA regulations of federal banking agencies and to promote consistency in CRA evaluations by considering more objective criteria. The new regulations require a biennial assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating system, and require the NYBD to make available to the public such rating and a written summary of the results. The Bank's latest NYCRA rating, received from the Banking Department in May 1997, was a "2" or "satisfactory." FEDERAL RESERVE SYSTEM Under Federal Reserve Board ("FRB") regulations, the Bank is required to maintain non-interest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $49.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $49.3 million, the reserve requirements is $1.5 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14% against that portion of total transaction accounts in excess of $49.3 million. Effective December 16, 1997, the Federal Reserve Board has reduced the amount of transaction accounts subject to the 3% ratio from $49.3 million to $47.8 million and increased from $4.4 million to $4.7 million the amount of reserve liabilities that is exempted from reserve requirements. The Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB-NY, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB-NY, whichever is greater. The Bank was in compliance with this requirement, with an investment in FHLB-NY stock at December 31, 1997 of $16.6 million. FHLB advances must be secured by specified types of collateral and may be obtained primarily for the purpose of providing funds for residential housing finance. 16 19 The FHLBs are required to provide funds to cover certain obligations on bonds issued to fund the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the fiscal years ended December 31, 1997, 1996, and 1995, dividends from the FHLB-NY to the Bank amounted to $822,000, $665,000 and $740,000, respectively. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income might also be reduced. HOLDING COMPANY REGULATION Federal Regulation. The Company currently is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act ("BHCA"), as administered by the FRB. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those maintained by the FDIC for the Bank. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval will be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In addition to the approval of the FRB, before any bank acquisition can be completed, prior approval thereof may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired, including the Banking Department. A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for the Bank. See "Capital Maintenance." The Company's total and Tier 1 capital exceed these requirements. Bank holding companies are generally required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. The FRB has now adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions. The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FRB's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distribution. The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain Federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the Federal securities laws. 17 20 Under the FDI Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would have potential applicability if the Company ever acquired as a separate subsidiary a depository institution in addition to the Bank. Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or issuance of letters of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and FRB regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors, and principal shareholders of the Bank, the Company, any subsidiary of the Company, and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the Holding Company or any of its subsidiaries) in connection with any extension of credit, lease, or sale of property or furnishing of services. The Company and its subsidiary, the Bank, will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for the management of the Company to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or the Bank. ACQUISITION OF THE HOLDING COMPANY Federal Restrictions. Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's shares of Common Stock outstanding, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain "control" of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25 percent or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company's directors. An existing bank holding company would be required to obtain the FRB's prior approval under the BHCA before acquiring more than 5% of the Company's voting stock. See "Holding Company Regulation." Approval of the Banking Department may also be required for acquisition of the Company. New York Change in Control Restrictions. In addition to the CIBCA and the BHCA, the New York Banking Law generally requires prior approval of the New York Banking Board before any action is taken that causes any company to acquire direct or indirect control of a banking institution which is organized in New York. FEDERAL SECURITIES LAWS The Company's common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information and proxy solicitation requirements, insider trading restrictions, and other requirements under the Exchange Act. Registration of the shares of the Common Stock that were issued in the Bank's conversion from mutual to stock form under the Securities Act of 1933, as amended (the "Securities Act"), does not cover the resale of such shares. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed in any three-month period the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. 18 21 STATISTICAL DATA The detailed statistical data that follows is being presented in accordance with Guide 3, prescribed by the Securities and Exchange Commission. This data should be read in conjunction with the financial statements and related notes and the discussion included in the Management's Discussion and Analysis of Financial Condition and Results of Operations that are indexed on the Form 10-K Cross Reference Index. A. MORTGAGE AND OTHER LENDING ACTIVITIES The following table sets forth the Bank's loan originations and mortgage-backed securities, including purchases, sales, and principal repayments, for the periods indicated:
For the Years Ended December 31, ------------------------ (dollars in thousands) .... 1997 1996 1995 ---------- ---------- ---------- Mortgage loans (gross): At beginning of period ...... $1,144,317 $ 993,242 $ 936,716 Mortgage loans originated: One-to-four family .......... 22,914 11,150 14,754 Multi-family ................ 418,869 273,421 124,289 Commercial real estate ...... 10,248 17,438 5,796 Construction ................ 1,089 1,214 915 ---------- ---------- ---------- Total mortgage loans originated 453,120 303,223 145,754 Principal repayments .......... 185,033 151,391 87,974 Mortgage loans sold ........... 16,060 350 508 Mortgage loans transferred to foreclosed real estate ...... 1,405 406 746 ---------- ---------- ---------- At end of period .............. 1,394,939 1,144,318 993,242 ---------- ---------- ---------- Other loans (gross): At beginning of period ........ 12,275 13,861 13,693 Other loans originated ........ 1,375 1,471 3,069 Principal repayments* ......... 2,843 2,975 2,703 Student loans sold ............ 12 82 198 ---------- ---------- ---------- At end of period .............. 10,795 12,275 13,861 ---------- ---------- ---------- Total loans ................... $1,405,734 $1,156,593 $1,007,103 ========== ========== ========== Mortgage-backed securities: At beginning of period ...... $ 73,732 $ 92,868 $ 107,451 Principal repayments ........ 23,951 19,136 14,583 ---------- ---------- ---------- At end of period ............ $ 49,781 $ 73,732 $ 92,868 ========== ========== ==========
*Includes a loan on a co-operative apartment in the amount of $64,000 transferred to foreclosed real estate in 1995. 19 22 B: LOAN MATURITY AND REPRICING The following table shows the maturity or period to repricing of the Bank's loan portfolio at December 31, 1997. Loans that have adjustable rates are shown as being due in the period during which the interest rates are next subject to change. The table does not include prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on mortgage loans totaled $88.0 million for the twelve months ended December 31, 1997. Mortgage and Other Loans At December 31, 1997
1 - 4 Multi- Commercial Home Total (dollars in thousands) Family Family Real Estate Construction Equity Other Loans - ---------------------- ------ ------ ----------- ------------ ------ ----- ----- Amounts due: Within one year ....... $148,534 $ 405,638 $30,427 $1,538 $2,386 $ 4,850 $ 593,373 After one year: One to three years ... 41,858 115,962 13,502 -- -- 1,937 173,259 Three to five years .. 8,718 463,036 15,794 -- -- 730 488,278 Five to ten years .... 18,691 117,895 1,760 -- -- 836 139,182 Ten to twenty years .. 5,157 4,843 257 -- 31 10,288 Over twenty years .... 1,329 -- -- -- -- 25 1,354 -------- ---------- ------- ------ ------ ------- ---------- Total due or repricing after one year ..... 75,753 701,736 31,313 -- -- 3,559 812,361 -------- ---------- ------- ------ ------ ------- ---------- Total amounts due or repricing, gross .. $224,287 $1,107,374 $61,740 $1,538 $2,386 $ 8,409 $1,405,734 ======== ========== ======= ====== ====== ======= ==========
The following table sets forth, at December 31, 1997, the dollar amount of all loans due after December 31, 1998, and indicates whether such loans have fixed or adjustable interest rates.
Due after December 31, 1998 --------------------------- (dollars in thousands) Fixed Adjustable Total ------- -------- -------- Mortgage loans: One-to-four family ... $39,386 $ 36,367 $ 75,753 Multi-family ......... 38,935 662,801 701,736 Commercial real estate 13,624 17,689 31,313 ------- -------- -------- Total mortgage loans . $91,945 $716,857 $808,802 Other loans ............ 2,558 1,001 3,559 ------- -------- -------- Total loans .......... $94,503 $717,858 $812,361 ======= ======== ========
20 23 C: SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses at December 31, 1997, 1996, and 1995 was allocated as follows:
At December 31, --------------- 1997 1996 1995 ---- ---- ---- Percent Percent Percent of of of Loans in Loans in Loans in Category Category Category to Total to Total to Total (dollars in thousands) Amount Loans Amount Loans Amount Loans ------ ------ ------- ------ ------- ------ Mortgage loans: One-to-four family ..... $1,592 16.88% $ 1,812 19.36% $ 2,914 28.64% Multi-family ........... 6,521 69.14 6,168 65.90 6,519 63.70 Construction ........... 23 0.24 24 0.26 30 0.12 Commercial real estate . 1,080 11.45 1,110 11.86 1,550 6.16 Other loans ............ 215 2.29 245 2.62 346 1.38 ------ ------ ------- ------ ------- ------ Total loans .......... $9,431 100.00% $ 9,359 100.00% $11,359 100.00% ====== ====== ======= ====== ======= ======
The allocation above is based upon an estimate at a given point in time, based on various factors, including local economic conditions. A different allocation methodology may be deemed to be more appropriate in the future. D: COMPOSITION OF MORTGAGE AND OTHER LOAN PORTFOLIO The following table sets forth the composition of the Bank's portfolio of mortgage and other loans in dollar amounts and in percentages at the dates indicated.
At December 31, --------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Percent Percent Percent Percent Percent of of of of of (dollars in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Mortgage loans: One-to-four family ..... $ 224,287 15.96% $ 256,904 22.21% $ 288,470 28.64% $ 306,028 32.20% $276,442 34.96% Multi-family ........... 1,107,343 78.78 822,364 71.10 641,564 63.70 561,589 59.09 428,746 54.23 Commercial real estate . 61,740 4.39 63,452 5.49 62,003 6.16 66,609 7.01 67,467 8.53 Construction ........... 1,538 0.11 1,598 0.14 1,205 0.12 2,490 0.26 1,750 0.22 ---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------ Total mortgage loans . 1,394,939 99.23 1,144,318 98.94 993,242 98.62 936,716 98.56 774,405 97.95 ---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------ Other loans: Cooperative apartment .. 5,041 0.36 5,764 0.50 6,684 0.66 7,238 0.76 7,429 0.94 Home equity ............ 2,386 0.17 2,819 0.24 3,069 0.31 3,352 0.35 3,338 0.42 Student ................ 8 0.00 24 0.00 116 0.01 241 0.03 3,011 0.38 Passbook savings ....... 312 0.02 375 0.03 470 0.05 691 0.07 989 0.13 Other .................. 3,048 0.22 3,293 0.29 3,522 0.35 2,171 0.23 1,474 0.19 ---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------ Total other loans ..... 10,795 0.77 12,275 1.06 13,861 1.38 13,693 1.44 16,241 2.05 ---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------ Total loans ........... 1,405,734 100.00% 1,156,593 100.00% 1,007,103 100.00% 950,409 100.00% 790,646 100.00% ========== ====== ========== ====== ========== ====== ========== ====== ======== ====== Less: Unearned discounts ...... 19 24 29 42 63 Net deferred loan origination fees ....... 1,281 1,058 912 1,549 1,249 Allowance for loan losses 9,431 9,359 11,359 11,268 10,320 ---------- ---------- ---------- ---------- -------- Loans, net .............. $1,395,003 $1,146,152 $ 994,803 $937,550 $779,014 ========== ========== ========== ========== ========
21 24 E: SECURITIES, MONEY MARKET INVESTMENTS, AND MORTGAGE-BACKED SECURITIES The following table sets forth certain information regarding the carrying and market values of the Bank's securities, money market investments, and mortgage-backed securities portfolios at the dates indicated:
At December 31, --------------- 1997 1996 1995 ---- ---- ---- Carrying Market Carrying Market Carrying Market (dollars in thousands) Value Value Value Value Value Value ------- ------- ------- ------- ------- ------- Securities: U.S.Government and agency obligations ...... $78,279 $78,345 $76,121 $76,064 $68,126 $68,226 Equity securities ........ 19,274 19,339 10,374 10,419 9,890 9,925 ------- ------- ------- ------- ------- ------- Total securities ......... $97,553 $97,684 $86,495 $86,483 $78,016 $78,151 ======= ======= ======= ======= ======= ======= Money market investments: Federal funds sold ....... $ 6,000 $ 6,000 $ 7,000 $ 7,000 $13,650 $13,650 ------- ------- ------- ------- ------- ------- Total money market investments ............ $ 6,000 $ 6,000 $ 7,000 $ 7,000 $13,650 $13,650 ======= ======= ======= ======= ======= ======= Mortgage-backed securities: GNMA ..................... $20,069 $20,789 $23,569 $23,962 $27,914 $28,562 FHLMC .................... 29,712 29,830 50,163 50,230 64,954 64,912 ------- ------- ------- ------- ------- ------- Total mortgage-backed securities .............. $49,781 $50,619 $73,732 $74,192 $92,868 $93,474 ======= ======= ======= ======= ======= =======
22 25 ITEM 2. PROPERTIES The Bank conducts its business through ten full-service offices, and two customer service centers and one mortgage service center. The Bank's main office is located at 38-25 Main Street, Flushing, New York. The Bank believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Date Lease Leased or Leased or Expiration Net Book Value at Owned Acquired Date December 31, 1997 ----- -------- ---- ----------------- Main Office(1)................................ Owned 1911 -- $1,820,675 38-25 Main Street Flushing, NY 11354 Corona Branch................................. Owned 1923 -- 163,722 37-97 103rd Street Corona, NY 11368 Little Neck Branch............................ Owned 1946 -- 53,108 251-31 Northern Blvd. Little Neck, NY 11363 Kew Gardens Hills Branch...................... Owned 1948 -- 125,425 75-44 Main Street Kew Gardens Hills, NY 11367 Jackson Heights Branch........................ Leased 1974 2023 480,202 76-02 Northern Blvd. Jackson Heights, NY 11372 Astoria Branch(2)............................. Leased 1993 2018 134,854 31-42 Steinway Street Astoria, NY 11103 Fresh Meadows Branch.......................... Leased 1995 2010 84,894 61-49 188th Street Fresh Meadows, NY 11365 College Point Branch.......................... Leased 1996 2021 6,501 15-01 College Point Blvd. College Point, NY 11356 Murray Hill Branch............................ Leased 1997 2007 31,590 156-18 Northern Blvd. Flushing, NY 11354 Plainview Branch.............................. Owned 1974 -- 306,603 1092 Old Country Road Plainview, NY 11803 Mortgage Service Center(3).................... Owned 1991 -- 4,636,475 158-14 Northern Blvd. Flushing, NY 11354 Auburndale Customer Service Center............ Leased 1996 2006 7,463 193-01 Northern Blvd. Flushing, NY 11358 Ditmars Service Center........................ Leased 1996 2005 15,943 31-09 Ditmars Blvd. Astoria, NY 11105
--------------- 23 26 (1) The Bank commenced operations in 1859 at a location near its current headquarters which it has occupied since approximately 1911. The Bank owns additional office space adjacent to its Main Office which is used for administrative operations, the net book value of which is included in the amount shown. (2) This branch office replaced another branch office, formerly located at 31-02 Steinway Street, Astoria, which was closed as of June 28, 1993. The vacated space, which is owned by the Bank, has a net book value of $1.3 million and has subsequently been leased. (3) The Bank currently leases to unrelated tenants a majority of the office space at this location. ITEM 3. LEGAL PROCEEDINGS The Bank is involved in various legal actions arising in the ordinary course of its business. All such actions, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The Nasdaq Stock Market and quoted under the symbol "QCSB". Information regarding the Company's common stock and its price for the 1997 fiscal year appears on page 24 of the 1997 Annual Report under the caption "Market Price of Common Stock and Dividends Declared per Common Share" and is incorporated herein by this reference. As of March 6, 1998 the Company had approximately 700 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. ITEM 6. SELECTED FINANCIAL DATA Information regarding selected financial data appears on page 1 of the 1997 Annual Report under the caption "Financial Highlights" and is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information regarding management's discussion and analysis of financial condition and results of operations appears on pages 7 through 23 of the 1997 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by this reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk appears on pages 12 through 13 of the 1997 Annual Report under the caption "Interest Rate Sensitivity" and is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information regarding the financial statements and the Independent Auditors' Report appears on pages 25 through 48 of the 1997 Annual Report and is incorporated herein by this reference. 24 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors and executive officers of the Registrant appears on pages 4 through 7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, under the caption "Information with Respect to Nominees and Continuing Directors" and is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation appears on page 16 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners appears on page 3 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, under the caption "Security Ownership of Certain Beneficial Owners" and is incorporated herein by this reference. Information regarding security ownership of management appears on pages 5 through 8 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, under the caption "Information with Respect to the Nominees, Continuing Directors, and Executive Officers" and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions appears on page 20 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1998 under the caption "Transactions with Certain Related Persons" and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following financial statements are included in the Company's Annual Report to Shareholders for the year ended December 31, 1997 and are incorporated by this reference: - Consolidated Statements of Condition at December 31,1997 and 1996; - Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997; - Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1997; - Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997; - Notes to Consolidated Financial Statements - Management's Responsibility for Financial Reporting - Independent Auditors' Report 25 28 The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as a part of this report, except as expressly provided herein. 2. FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1997 On November 20, 1997, the Company filed a Current Report on Form 8-K regarding the date of the Company's 1998 Annual Meeting of Shareholders and the related date of record. (c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
Exhibit Number ------ 3.1 Certificate of Incorporation of Queens County Bancorp, Inc.(1) 3.2 Bylaws of Queens County Bancorp, Inc.(1) 10.1 Form of Employment Agreement between Queens County Savings Bank and Certain Officers (1) 10.2 Form of Employment Agreement between Queens County Bancorp, Inc. and Certain Officers (1) 10.3 Form of Change in Control Agreements among the Company, the Bank, and Certain Officers (1) 10.4 Form of Queens County Savings Bank Recognition and Retention Plan for Outside Directors (1) 10.5 Form of Queens County Savings Bank Recognition and Retention Plan for Officers (1) 10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan (2) 10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan for Outside Directors (2) 10.8 Form of Queens County Savings Bank Employee Severance Compensation Plan (1) 10.9 Form of Queens County Savings Bank Outside Directors' Consultation and Retirement Plan (1) 10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership Plan and Trust (1) 10.11 ESOP Loan Documents (1) 10.12 Incentive Savings Plan of Queens County Savings Bank (3) 10.13 Retirement Plan of Queens County Savings Bank (1) 10.14 Supplemental Benefits Plan of Queens County Savings Bank (4) 10.15 Excess Retirement Benefits Plan of Queens County Savings Bank (1) 10.16 Queens County Savings Bank Directors' Deferred Fee Stock Unit Plan 10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5) 11.0 Statement Re: Computation of Per Share Earnings 13.0 1997 Annual Report to Shareholders 21.0 Subsidiaries information incorporated herein by reference to Part I, "Subsidiaries" 23.0 Consent of KPMG Peat Marwick, LLP, dated March 17, 1998 99.0 Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1998
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-66852 (2) Incorporated herein by reference into this document from the Exhibits to Form S-8, Registration Statement, filed on October 27, 1994, Registration No. 33-85684. (3) Incorporated herein by reference into this document from the Exhibits to Form S-8, Registration Statement, filed on October 27, 1994, Registration No. 33-85682. (4) Incorporated by reference to Exhibits filed with the 1995 Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 1995. (5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement for the Annual Meeting of Shareholders held April 16, 1997. 26 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Queens County Bancorp, Inc. --------------------------- (Registrant) /s/Joseph R. Ficalora 03/17/98 ---------------------------- -------- Joseph R. Ficalora Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Joseph R. Ficalora 03/17/98 /s/ Robert Wann 03/17/98 - ----------------------------------- -------- -------------------------------------------- -------- Joseph R. Ficalora Robert Wann Chairman, President, and Senior Vice President, Comptroller, and Chief Executive Officer Chief Financial Officer (Principal (Principal Executive Officer) Financial and Accounting Officer) /s/ Harold E. Johnson 03/17/98 /s/ Donald M. Blake 03/17/98 - ----------------------------------- -------- -------------------------------------------- -------- Harold E. Johnson Donald M. Blake Director Director /s/ Luke D. Lynch 03/17/98 /s/ Max L. Kupferberg 03/17/98 - ----------------------------------- -------- -------------------------------------------- -------- Luke D. Lynch Max L. Kupferberg Director Director /s/ Henry E. Froebel 03/17/98 /s/ Howard C. Miller 03/17/98 - ----------------------------------- -------- -------------------------------------------- -------- Henry E. Froebel Howard C. Miller Director Director /s/ Joseph G. Chisholm 03/17/98 /s/ Dominick Ciampa 03/17/98 - ----------------------------------- -------- -------------------------------------------- -------- Joseph G. Chisholm Dominick Ciampa Director Director /s/ Richard H O'Neill 03/17/98 - ----------------------------------- -------- Richard H. O'Neill Director
27 30 EXHIBIT INEDX -------------- Exhibit Number ------ 3.1 Certificate of Incorporation of Queens County Bancorp, Inc.(1) 3.2 Bylaws of Queens County Bancorp, Inc.(1) 10.1 Form of Employment Agreement between Queens County Savings Bank and Certain Officers (1) 10.2 Form of Employment Agreement between Queens County Bancorp, Inc. and Certain Officers (1) 10.3 Form of Change in Control Agreements among the Company, the Bank, and Certain Officers (1) 10.4 Form of Queens County Savings Bank Recognition and Retention Plan for Outside Directors (1) 10.5 Form of Queens County Savings Bank Recognition and Retention Plan for Officers (1) 10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan (2) 10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan for Outside Directors (2) 10.8 Form of Queens County Savings Bank Employee Severance Compensation Plan (1) 10.9 Form of Queens County Savings Bank Outside Directors' Consultation and Retirement Plan (1) 10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership Plan and Trust (1) 10.11 ESOP Loan Documents (1) 10.12 Incentive Savings Plan of Queens County Savings Bank (3) 10.13 Retirement Plan of Queens County Savings Bank (1) 10.14 Supplemental Benefits Plan of Queens County Savings Bank (4) 10.15 Excess Retirement Benefits Plan of Queens County Savings Bank (1) 10.16 Queens County Savings Bank Directors' Deferred Fee Stock Unit Plan 10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5) 11.0 Statement Re: Computation of Per Share Earnings 13.0 1997 Annual Report to Shareholders 21.0 Subsidiaries information incorporated herein by reference to Part I, "Subsidiaries" 23.0 Consent of KPMG Peat Marwick, LLP, dated March 17, 1998 99.0 Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1998 (1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-66852 (2) Incorporated herein by reference into this document from the Exhibits to Form S-8, Registration Statement, filed on October 27, 1994, Registration No. 33-85684. (3) Incorporated herein by reference into this document from the Exhibits to Form S-8, Registration Statement, filed on October 27, 1994, Registration No. 33-85682. (4) Incorporated by reference to Exhibits filed with the 1995 Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 1995. (5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement for the Annual Meeting of Shareholders held April 16, 1997. EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.0 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, (1) (2) ------------ (in thousands, except per share amount) 1997 1996 ------- ------- Net income $23,264 $20,939 ------- ------- Weighted average common shares outstanding 13,636 15,477 Earnings per common share $ 1.71 $ 1.35 ======= ======= Total weighted average common shares outstanding 13,636 15,477 Additional dilutive shares using ending period market value versus average market value for the period when utilizing the Treasury stock method regarding stock options 913 834 ------- ------- Total shares for fully diluted earnings per share 14,549 16,311 ------- ------- Fully diluted earnings per common share and common share equivalents $ 1.60 $ 1.28 ======= =======
1) Reflects shares issued as a result of two 3-for-2 stock splits on both April 10, 1997 and October 1, 1997. 2) Reflects the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." EX-13 3 1997 ANNUAL REPORT TO SHAREHOLDERS 1 Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except share data) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31 Net interest income $62,398 $57,520 $51,908 $54,615 $46,391 (Reversal of) provision for loan losses -- (2,000) 150 1,200 4,700 Other operating income 2,305 2,445 3,033 1,971 1,884 Operating expense 27,084 23,271 22,871 23,047 21,417 Income tax expense 14,355 17,755 11,737 13,589 10,035 Net income(1) 23,264 20,939 20,183 18,750 12,123 Earnings per share(2)(3) $1.71 $1.35 $1.21 $1.05 $0.72(4) Diluted earnings per share(2)(3) 1.60 1.28 1.16 1.02 0.72(4) Dividends paid(2) 0.61 0.37 0.10 0.04 N.A. AT DECEMBER 31 Total assets $1,603,269 $1,358,656 $1,240,882 $1,166,024 $1,089,686 Loans, net 1,395,003 1,146,152 994,803 937,550 781,023 Allowance for loan losses 9,431 9,359 11,359 11,268 10,320 Securities held to maturity 94,936 86,495 78,016 79,017 94,330 Mortgage-backed securities held to maturity 49,781 73,732 92,868 107,451 129,230 Deposits 1,069,161 1,023,930 932,140 840,220 827,240 FHLB borrowings 309,664 81,393 46,077 83,304 -- Stockholders' equity 170,515 211,429 217,630 205,279 192,831 Book value per share(2)(5) $13.23 $14.14 $13.30 $12.06 $10.80 Common shares outstanding(2) 14,912,791 17,167,732 18,882,900 19,777,318 20,648,250 SELECTED FINANCIAL RATIOS Return on average assets 1.61% 1.63% 1.72% 1.71% 1.24% Return on average stockholders' equity 12.95 10.10 9.70 9.40 11.25 Stockholders' equity to total assets 10.64 15.56 17.54 17.61 17.70 Interest rate spread 3.84 3.88 3.80 4.49 4.49 Net interest margin 4.45 4.63 4.58 5.13 4.92 Operating expense to average assets 1.88 1.82 1.95 2.10 2.19 Efficiency ratio 41.86 38.81 41.63 40.73 44.36 Average interest-earning assets to average interest-bearing liabilities 1.16x 1.21x 1.22x 1.24x 1.14x ACTUAL CONTRIBUTIONS TO STOCKHOLDERS' EQUITY AND RESULTANT CASH EARNINGS DATA(1) Earnings $35,399 $27,458 $23,640 $21,990 $13,261 Earnings per share(2)(3) $2.60 $1.77 $1.42 $1.23 $0.79(4) Diluted earnings per share(2)(3) 2.43 1.68 1.36 1.20 0.79(4) Return on average assets 2.46% 2.14% 2.02% 2.00% 1.36% Return on average stockholders' equity 19.71 13.24 11.36 11.03 12.31 Operating expense to average assets 1.37 1.39 1.66 1.80 2.08 Efficiency ratio 30.47 28.83 35.43 35.00 42.01 ASSET QUALITY RATIOS Non-performing loans to loans, net 0.55% 0.84% 0.78% 0.76% 1.51% Non-performing assets to total assets 0.54 0.76 0.69 0.69 1.16 Allowance for loan losses to non-performing loans 122.61 96.90 145.76 158.46 87.79 Allowance for loan losses to loans, net 0.68 0.82 1.14 1.20 1.32 Allowance for loan losses to net accumulated charge-offs for the past 10 years 661.36 625.00 759.00 783.04 869.42 REGULATORY CAPITAL RATIOS (BANK ONLY)(6) Leverage capital ratio 9.30% 9.65% 11.95% 10.66% 14.42% Tier 1 risk-based capital ratio 14.32 16.19 21.95 22.74 29.03 Total risk-based capital ratio 15.26 17.38 23.20 23.99 30.28 ================================================================================================================================
(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, 1997 and October 1, 1997. (3) Reflects the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." (4) Represents net income per common share for the period from the conversion on November 23, 1993 to December 31, 1993, as adjusted for the stock splits listed in footnote 2. (5) Excludes unallocated ESOP shares. (6) Capital ratios for 1997, 1996, and 1994 reflect the transfer of $16.0 million, $38.0 million, and $34.0 million, respectively, from the Bank to the Company. 1 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Queens County Bancorp, Inc. (the "Company") was incorporated on July 20, 1993 to serve as the holding company for Queens County Savings Bank (the "Bank"), the first savings bank to be chartered by the State of New York in the New York City Borough of Queens. Headquartered in Flushing, New York, the Bank has a lengthy 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 that are located inside 24-hour stores. The latter two sites were opened in 1996, along with one full-service branch office; all three were accretive to earnings in 1997. In recent years, the Company has also made a practice of opening branches at sites that were previously operated by commercial banking institutions. This practice was continued in 1997 with the relocation and transition of a third customer service center into a full-service branch in the Murray Hill section of Queens. Of the Bank's locations, one is in Nassau County and the remainder are in Queens. The funds provided by the Bank's deposits are invested, together with funds from other sources, into the origination of residential mortgage loans. In 1997, the Bank reinforced its position as a leading mortgage lender with originations of $453.1 million, boosting mortgage loans outstanding to $1.4 billion at year-end. The market for the Company's loans extends into the neighboring boroughs of New York City, with Manhattan and Brooklyn accounting for the largest loan balances after Queens. The majority of the Company's loans are secured by multi-family buildings; at December 31, 1997, such loans accounted for 79.4% of the total mortgage loan portfolio. While achieving new levels of mortgage loan production, the Company has sustained its record of asset quality. In 1997, the Company recorded its tenth consecutive quarter without any net charge-offs and experienced reductions in the level of non-performing loans. In addition, the multi-family mortgage loan portfolio remained fully performing at December 31st. The combination of asset quality and volume loan production contributed to a year of solid earnings growth. In 1997, the Company reported an 11.1% rise in net income to $23.3 million and a 28.9% rise in cash earnings to $35.4 million from the levels recorded in 1996. Cash earnings represent the contribution made to capital by the Company's operations; the extent of this contribution is reflected in its 1997 cash return on average assets and cash return on average stockholders' equity, which equaled 2.46% and 19.71%, respectively. The value generated by the Company's fundamental performance has been enhanced by the value created through its capital management strategies. In 1997, two 3-for-2 stock splits were declared by the Board of Directors, resulting in the issuance of two 50% stock dividends, on April 10th and October 1st. The cash dividend was also raised by the Board in 1997, with an 80% increase recorded over the course of the year. In addition, the Board of Directors conveyed its confidence in the Company's future performance by expanding the Company's authorization to repurchase shares. The Company bought back 2,547,326 shares in 1997, bringing to 6,268,169 the total number repurchased since the fourth quarter of 1994. While trading activity tends to reflect both external and internal factors, the Company's capital management strategies and fundamental performance were rewarded by a 92.3% increase in the value of the Company's shares year over year. At December 31, 1997, shares of Queens County Bancorp closed at a record high of $40.50, as compared to $21.06 at December 31, 1996. The Company's 1997 financial results are discussed in detail on the following pages and are occasionally accompanied by forward-looking statements with regard to the Company's prospective goals and strategies. Such forward-looking statements are based on management's current expectations regarding a range of issues that may impact the Company's performance in future periods. 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 The Company recorded total assets of $1.6 billion at December 31, 1997, representing a $244.6 million, or 18.0%, increase from the level recorded at December 31, 1996. The primary source of asset growth was a $250.4 million, or 21.9%, rise in mortgage loans outstanding to $1.4 billion, sparked by $453.1 million in originations, which exceeded the 1996 level by 49.4%. Of the $453.1 million in loans originated in 1997, $418.9 million, or 92.4%, were secured by multi-family properties. Buoyed by the record level of originations, the portfolio of multi-family mortgage loans rose 34.7% to $1.1 billion at December 31, 1997, representing 79.4% of outstanding mortgage loans. The balance of the Company's mortgage loan portfolio consisted of $224.3 million in loans secured by one-to-four family homes, down $32.6 million from the year-earlier level; $61.7 million in loans secured by commercial real estate, down $1.7 million; and construction loans of $1.5 million, down $60,000. At December 31, 1997, 92.8% of the Company's mortgage loan portfolio featured adjustable rates, including $1.1 billion, or 96.2%, of multi-family mortgage loans. 7 3 While achieving a record level of mortgage loan originations, the Company also extended its record of asset quality. In addition to recording its tenth consecutive quarter without any net charge-offs, the Company achieved reductions in non-performing loans and assets and maintained the fully performing status of its multi-family mortgage loan portfolio. Non-performing loans declined to $7.7 million, or 0.55% of loans, net, at December 31, 1997, from $9.2 million (or 0.68% of loans, net) and $9.7 million (or 0.84% of loans, net), respectively, at September 30, 1997 and December 31, 1996. Foreclosed real estate totaled $1.0 million, as compared to $1.4 million and $627,000, respectively, at the earlier dates. As a result, non-performing assets declined to $8.7 million, or 0.54% of total assets, at December 31, 1997, from $10.6 million, or 0.69% of total assets, at September 30, 1997 and from $10.3 million, or 0.76% of total assets, at December 31, 1996. In view of the quality of the Company's loan portfolio, the loan loss provision was suspended for the tenth consecutive quarter, maintaining the allowance for loan losses at $9.4 million after recoveries of $72,000 were recorded in the second quarter of the year. The allowance represented 122.61% of non-performing loans at December 31, 1997, and 0.68% of loans, net, at that date. More significantly, the ratio of the allowance for loan losses to net accumulated charge-offs over the past decade equaled 661.36%. To supplement its portfolio of mortgage loans, the Company makes various other investments. At December 31, 1997, these included $10.8 million in other loans, down $1.5 million from the year-earlier level; $94.9 million in securities held to maturity, up $8.4 million; $49.8 million in mortgage-backed securities held to maturity ("mortgage-backed securities"), down $24.0 million, and $6.0 million in money market investments, down $1.0 million. In addition, the Company had $2.6 million in securities available for sale at year-end 1997. Deposits rose $45.2 million to $1.1 billion, primarily reflecting a $52.2 million increase in certificates of deposit ("CDs") to $703.9 million, as well as a $4.2 million increase in non-interest-bearing accounts to $29.2 million. These increases offset a reduction of $9.7 million in the year-end balance of savings accounts to $268.1 million and a decline of $1.5 million in the balance of NOW and money market accounts to $67.9 million. To fund the high volume of mortgage loan originations in 1997, the Company increasingly utilized its line of credit with the Federal Home Loan Bank of New York ("FHLB"). FHLB borrowings rose to $309.7 million at December 31, 1997 from $81.4 million at December 31, 1996. Stockholders' equity totaled $170.5 million at December 31, 1997 and $211.4 million at December 31, 1996, representing 10.64% and 15.56%, respectively, of total assets at said dates. The difference primarily reflects the allocation of $68.1 million in 1997 toward the repurchase of 2,547,326 shares at an average price of $26.73 per share. Also reflected in the 1997 amount are net income of $23.3 million and $12.1 million in non-cash expenses that were added back to capital (resulting in cash earnings of $35.4 million), less dividends paid and options exercised of $11.3 million. Book value was $13.23 per share at December 31, 1997, based on 12,891,389 shares. The Company's capital strength is further reflected in the excess of the Bank's regulatory capital ratios over the minimum levels required by the Federal government. At December 31, 1997, the Bank's leverage capital amounted to $143.9 million, or 9.30% of adjusted average assets, while 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. Loans In 1997, the Company reinforced its position as one of the region's leading mortgage lenders with the origination of $453.1 million in mortgage loans. Exceeding the year-earlier level by $150.1 million, the Company's 1997 originations boosted the portfolio of mortgage loans to $1.4 billion, representing a 21.9% increase from the level recorded at December 31, 1996. The significance of the portfolio is readily apparent: mortgage loans represented 87.0% of total assets at year-end 1997, and generated more than 92% of interest income for the year. The origination of mortgage loans is the Company's primary business and the multi-family market, increasingly, its primary niche. Of the $1.4 billion in loans outstanding at year-end, $1.1 billion were secured by multi-family buildings, reflecting 1997 originations of $418.9 million, or 92.4% of originations in the twelve-month period. In 1996, when multi-family mortgage loan originations totaled $273.4 million, the Company was identified by National Mortgage News as one of the top ten multi-family mortgage lenders in the United States. The emphasis on multi-family mortgage loans is based on two considered factors: their contribution to earnings and to asset quality. The yields on multi-family mortgage loans tend to be higher than the yields on one-to-four family mortgages, and the quality of such mortgages has been exceptional to date. In fact, the portfolio of multi-family mortgage loans was fully performing at both December 31, 1997 and 1996. Originated in a market that extends beyond Queens into the neighboring boroughs of New York City, multi-family mortgage loans are secured by two types of buildings: cooperative apartment buildings and rental properties. By definition, a multi-family building has five or more units; as an indication of the scope of this market, there are more than 311,000 such buildings in Queens County alone. At December 31, 1997, 48.9% of the Company's multi-family mortgage loans were secured by properties in Queens County; another 21.6% and 17.4% were secured by properties in Manhattan and Brooklyn, respectively. The remainder of the portfolio is secured by properties scattered throughout the remaining boroughs and the suburban counties of Nassau, Suffolk, and Westchester. The average loan in the portfolio at year-end 1997 was for $1.2 million; the average loan-to-value ratio was 53%. 8 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 4 ================================================================================ Loan Portfolio Analysis
At December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Percent Percent Percent (dollars in thousands) Amount of Total Amount of Total Amount of Total - ------------------------------------------------------------------------------------------------------------------- MORTGAGE LOANS: 1-4 family $ 224,287 15.96% $ 256,904 22.21% $ 288,470 28.64% Multi-family 1,107,374 78.78 822,364 71.10 641,564 63.70 Commercial real estate 61,740 4.39 63,452 5.49 62,003 6.16 Construction 1,538 0.10 1,598 0.14 1,205 0.12 - ------------------------------------------------------------------------------------------------------------------- Total mortgage loans 1,394,939 99.23 1,144,318 98.94 993,242 98.62 - ------------------------------------------------------------------------------------------------------------------- OTHER LOANS: Cooperative apartment 5,041 0.36 5,764 0.50 6,684 0.66 Home equity 2,386 0.17 2,819 0.24 3,069 0.31 Passbook savings 312 0.02 375 0.03 470 0.05 Student 8 -- 24 -- 116 0.01 Other 3,048 0.22 3,293 0.29 3,522 0.35 - ------------------------------------------------------------------------------------------------------------------- Total other loans 10,795 0.77 12,275 1.06 13,861 1.38 - ------------------------------------------------------------------------------------------------------------------- Total loans 1,405,734 100.00% 1,156,593 100.00% 1,007,103 100.00% - ------------------------------------------------------------------------------------------------------------------- Less: Unearned discounts 19 24 29 Net deferred loan origination fees 1,281 1,058 912 Allowance for loan losses 9,431 9,359 11,359 - ------------------------------------------------------------------------------------------------------------------- Loans, net $1,395,003 $1,146,152 $ 994,803 ===================================================================================================================
In support of management's emphasis on interest rate sensitive assets, 96.20% of the multi-family mortgage loan portfolio featured adjustable rates at year-end 1997. The Company's multi-family mortgage loans are typically originated for a term of ten years at a rate of interest that adjusts annually in each of years six through ten, but either steps up annually or is fixed in years one through five. While the majority of loans originated prior to 1996 featured the step-up rate of interest, the majority of loans originated since then have featured the first-five-year fixed rate. Still, in the four quarters of 1998, $125.0 million, $84.7 million, $60.8 million, and $98.6 million, respectively, in multi-family mortgage loans are scheduled to reprice upward, for a total of $369.1 million over the next twelve months. While the current interest rate environment has fostered an industry-wide increase in mortgage prepayments, the Company has, to date, experienced fewer pre-payments than might be expected, due to the penalties embedded in the terms of its multi-family mortgage loans. Such prepayment penalties range from five points to two in the first five years of the mortgage and apply to both the step-up and first-five-year fixed rate loan. In 1997, as a means of further enhancing earnings, the Company initiated the sale of multi-family mortgage loans to a third party, with servicing retained as a means of bolstering fee income in future periods. Included in the $418.9 million in multi-family mortgage loans originated in 1997 were $13.6 million in loans sold in the fourth quarter of the year. Although the extent of this program has not yet been determined, management anticipates that the sale of loans will continue in 1998. While the Company's primary focus is on the multi-family real estate market, it also maintains a portfolio of one-to-four family mortgage loans. At December 31, 1997, one-to-four family mortgage loans represented $224.3 million, or 16.1%, of mortgage loans outstanding, down $32.6 million from the year-end 1996 level after originations of $22.9 million. The majority of the Company's one-to-four family mortgage loans are secured by properties in Queens and Nassau County, and are originated on a limited documentation basis, in keeping with the preference of its customer base. Such borrowers' applications are approved on the basis of a credit report, a thorough property appraisal, and, when furnished, verification of financial assets. Limited documentation loans are made at higher rates of interest than those providing full documentation, and require a higher down payment, thus reducing credit risk. 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- or three-year intervals. At December 31, 1997, 80.9% of the one-to-four family portfolio consisted of loans originated on an adjustable basis; the balance consists of seasoned loans originated more than 20 years ago. While the Bank also originates one-to-four family fixed rate loans to address the demands of its market, such loans are sold into the secondary market and the servicing retained as a source of fee income. In addition to residential mortgage loans, the Company originates a modest number of commercial real estate mortgages and an even more modest number of construction loans. At December 31, 1997, commercial real estate loans totaled $61.7 9 5 million, down $1.7 million after originations of $10.2 million. Similarly, construction loans declined $60,000 to $1.5 million after originations of $1.1 million. The commercial real estate mortgage portfolio was 75.3% adjustable at December 31, 1997, while 100% of construction loans were made at adjustable rates. All told, the percentage of total mortgage loans featuring adjustable rates at December 31, 1997 was 92.8%. As a service to its depositors, the Bank also provides a range of consumer lending products, reflected on the balance sheet as "other loans." At December 31, 1997, the portfolio totaled $10.8 million, down from $12.3 million at December 31, 1996. Loans on individual cooperative apartment units accounted for 46.7% of other loans at year-end 1997, while home equity loans accounted for 22.1%. At December 31, 1997, the Company had $102.3 million in outstanding mortgage loan commitments, setting the stage for a strong first quarter of 1998. This said, it should be noted that the Bank's ability to close these loans--and to originate a like volume of loans in future quarters--may be adversely influenced by heightened competition, a change in the interest rate envi- ronment, and the impact of these factors on the level of loan demand. Asset Quality The Company's emphasis on mortgage loan origination is coupled with an emphasis on asset quality. In 1997, this focus was rewarded with reductions in the level of non-performing loans and assets and the continued flawless performance of the multi-family mortgage loan portfolio. In addition, the Company recorded ten consecutive quarters without any net charge-offs, bringing the average for the past decade to a mere $140,000 per year. Non-performing loans declined to $7.7 million, or 0.55%, of loans, net, at December 31, 1997, from $9.2 million (or 0.68% of loans, net) and $9.7 million, (or 0.84% of loans, net) at September 30, 1997 and December 31, 1996, respectively. Included in the December 31, 1997 amount were 40 mortgage loans in foreclosure totaling $6.1 million (down from $6.8 million and $6.9 million, respectively, at the earlier dates) and 28 mortgage loans 90 days or more delinquent of $1.6 million (down from $2.4 million and $2.8 million, respectively). All of these loans are secured by one-to-four family residences, primarily located in the borough of Queens. Foreclosed real estate totaled $1.0 million at December 31, 1997, as compared to $1.4 million and $627,000, respectively, at September 30, 1997 and December 31, 1996. The 1997 amount consisted of three one-to-four family residences and one commercial real estate parcel; all of these properties are currently being marketed for sale. Non-performing assets thus declined to $8.7 million, or 0.54% of total assets, at December 31, 1997, from $10.6 million (or 0.69% of total assets) and $10.3 million (or 0.76% of total assets) at the earlier dates. The Company also maintains a portfolio of real estate held for investment, which is included in "other assets" on the balance sheet. At December 31, 1997, the portfolio consisted of 13 one-to-four family properties totaling $1.4 million; all of these properties have been profitably rented and are generating an average rate of return to the Bank of 8.17%. The consistency and quality of the portfolio's performance is rooted in the conservative underwriting standards the Company maintains. The decision to approve a loan is based on 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 essential factor: each multi-family building is inspected from rooftop to basement by a member of the Board of Director's Real Estate and Mortgage Committee, together with a member of the senior management team. In the case of limited documentation loans on one-to-four family homes, approval depends on a thorough property appraisal and the verification of financial assets, when available. Credit risk is further reduced by placing limitations on the amount of credit granted to a borrower. While the Bank will lend up to 75% of appraised value on one-to-four family homes and multi-family properties, the loan-to-value ratio on its loans is more typically in the range of 50% to 55%. In addition, the Company tends to originate loans within its local market, primarily through brokers with whom the Bank has an established relationship. The care with which each loan is underwritten is mirrored in the attention provided once a loan has closed. While problem loans have been minimal, the Bank has set procedures to ensure that problems, when they do occur, are quickly identified and 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. Notwithstanding the efforts made to originate quality assets, management cannot guarantee that problems will not occur. A borrower's ability to fulfill his obligations may be impacted by personal circumstances, or by changes in real estate values or the local economy. Accordingly, the Company has established a $9.4 million allowance for loan losses that represented 122.61% of non-performing loans and 0.68% of loans, net, at December 31, 1997. For more information regarding the coverage provided, see the asset quality analysis that follows and the discussion of the loan loss provision on page 21 of this report. 10 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 6 ================================================================================ Asset Quality Analysis
At or For the Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES: Balance at beginning of year $9,359 $11,359 $11,268 $10,320 $ 6,062 Loan charge-offs -- -- (59) (438) (442) Loan recoveries 72 -- -- 186 -- - ------------------------------------------------------------------------------------------------------------------ Net recoveries (charge-offs) 72 -- (59) (252) (442) (Reversal of) provision for loan losses -- (2,000) 150 1,200 4,700 - ------------------------------------------------------------------------------------------------------------------ Balance at end of year $9,431 $ 9,359 $11,359 $11,268 $10,320 ================================================================================================================== NON-PERFORMING ASSETS AT YEAR-END: Mortgage loans in foreclosure $6,121 $ 6,861 $ 4,929 $ 5,437 $ 7,417 Loans 90 days or more delinquent 1,571 2,798 2,864 1,674 2,329 Commercial real estate loans pending foreclosure -- -- -- -- 2,009 - ------------------------------------------------------------------------------------------------------------------ Total non-performing loans 7,692 9,659 7,793 7,111 11,755 - ------------------------------------------------------------------------------------------------------------------ Foreclosed real estate 1,030 627 774 975 884 - ------------------------------------------------------------------------------------------------------------------ Total non-performing assets $8,722 $10,286 $ 8,567 $ 8,086 $12,639 ================================================================================================================== RATIOS: Non-performing loans to loans, net 0.55% 0.84% 0.78% 0.76% 1.51% Non-performing assets to total assets 0.54 0.76 0.69 0.69 1.16 Allowance for loan losses to non-performing loans 122.61 96.90 145.76 158.46 87.79 Allowance for loan losses to loans, net 0.68 0.82 1.14 1.20 1.32 Allowance for loan losses to net accumulated charge-offs for the past 10 years 661.36 625.00 759.00 783.04 869.42 ==================================================================================================================
Securities and Money Market Investments At December 31, 1997, the Company recorded securities held to maturity of $94.9 million, up from $86.5 million at December 31, 1996. The average maturity of the portfolio was one year at December 31, 1997 and seven months at the year-earlier date. In addition to $16.7 million in FHLB stock, the 1997 portfolio included U.S. Treasuries of $14.3 million and U.S. Government agency obligations of $64.0 million, as compared to $67.1 million and $9.0 million, respectively, at December 31, 1996. The shift in emphasis from U.S. Treasuries to agency obligations was due to the more attractive yields provided by the latter securities during 1997. The market value of the Company's securities held to maturity was 100.1% and 100.0%, respectively, of carrying value at December 31, 1997 and 1996. While, in recent years, the Company has held all securities to maturity, an additional $2.6 million in securities, in the form of equities, were designated as available for sale in the fourth quarter of the year. The flexibility provided by this action will enable the Company to take advantage of favorable market conditions to enhance net income in future periods. Money market investments, consisting entirely of Federal funds sold, totaled $6.0 million at December 31, 1997, down from $7.0 million at December 31, 1996. Mortgage-Backed Securities Held to Maturity Reflecting prepayments and the absence of any new investments, the Company's portfolio of mortgage-backed securities has steadily diminished since the second quarter of 1994. At December 31, 1997, the balance of this portfolio was $49.8 million, down from $73.7 million at December 31, 1996. The Company has historically held its mortgage-backed securities to maturity; at year-end 1997, the average maturity of the portfolio was 2.4 years. The market value of the Company's mortgage-backed securities rose to 101.7% of carrying value at December 31, 1997 from 100.6% at December 31, 1996. Sources of Funds The Company has traditionally drawn its funding from a solid base of deposits attracted through a growing network of branch offices. At year-end 1997, the network included ten full-service offices and two customer service centers, reflecting the relocation and transition of a third customer service center to a full-service location previously operated by Chase Manhattan Bank. The new Murray Hill branch is the fourth branch in four years to have been opened at a site previously tenanted by a money center institution. With each move, the Bank has attracted new deposits and boosted its balance of non-interest-bearing checking accounts. 11 7 At December 31, 1997, deposits totaled $1.1 billion, up $45.2 million from the level recorded at December 31, 1996. Included in the 1997 amount were CDs of $703.9 million (up $52.2 million from the year-end 1996 level) and non-interest-bearing accounts of $29.2 million (up $4.2 million). CDs represented 65.8% of total deposits at year-end 1997, as compared to 63.6% at year-end 1996. The increased balance reflects the continued popularity of longer-term, higher-yielding savings products during a period of relative stability in market interest rates. Even with the decline in interest rates that occurred in the fourth quarter, depositor interest in CDs continued, albeit for certificates with shorter maturities. Thus, in the twelve months ended December 31, 1997, 87.8% of maturing CDs were rolled over, consistent with the Bank's retention rate over the past few years. While no assurances may be made, management would expect a like percentage of CDs to be rolled over in the new year; the volume of CDs due to mature in 1998 is $553.4 million. The higher balances of CDs and non-interest-bearing accounts served to offset reductions in the year-end 1997 balances of savings accounts and NOW and money market accounts. At December 31, 1997, savings accounts totaled $268.1 million, representing 25.1% of total deposits, while NOW and money market accounts totaled $67.9 million, representing 6.4%. At December 31, 1996, savings accounts totaled $277.8 million, representing 27.1% of total deposits, while NOW and money market accounts totaled $69.4 million, or 6.8%. In 1997, a year of record loan production, additional funding was drawn from the Company's FHLB line of credit, which totaled $481.0 million at December 31st. FHLB borrowings rose to $309.7 million at year-end from the year-earlier $81.4 million, as the Company recorded $453.1 million in mortgage loan originations, up from $303.2 million in 1996. While the cost of borrowed funds exceeds that of deposits, the income generated through the use of such funding more than offset the higher costs involved. Accordingly, management anticipates that it will continue to access the Company's FHLB line of credit to support the origination of multi-family mortgage loans in 1998. To attract additional deposits, the Company has taken steps to enhance its locations, as well as its menu of financial services. In 1997, the Company introduced the VISA Check Card, which also serves as a source of fee income, and expanded its telephone banking service into a 24-hour operation, available seven days a week. In support of its goal of expanding the franchise, management continues to explore opportunities to acquire another bank. Absent such event, the Company remains open to acquiring individual branches and to opening branches at sites vacated by other banks. 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 its interest rate risk. Interest rate sensitivity is determined by analyzing the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same period of time. This difference, or "gap," provides an indication of 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 order to enhance the match between its interest-earning assets and interest-bearing liabilities, management has traditionally emphasized the origination of adjustable rate mortgage loans on one-to-four family homes and multi-family buildings, and has confined its other investments to short-term securities with an average maturity of one year or less. On the liability side of the balance sheet, management has closely monitored the pricing of its depository products and has limited its use of FHLB borrowings except when market conditions have been especially conducive to loan production, as they were in 1997. While a significant portion of the loan portfolio still features annual rate adjustments, the majority of multi-family mortgage originations in 1996 and 1997 have featured a fixed rate of interest for the first five years of the loan. At the same time, the Company has increasingly utilized higher cost 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 a negative 11.93% at December 31, 1997. The table on page 13 sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, 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. The Company's interest rate sensitivity analysis, which 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, is based on its historical experience during the seven years ended December 31, 1997, and 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 Bank's loans in preparing this table. Prepayments and scheduled principal amortization on mortgage loans totaled $185.0 million in the twelve months ended December 31, 1997. As this analysis does not necessarily indicate the impact of general interest rate movements on the Bank's net interest income, certain assets and liabilities indicated as repricing within a stated period may, in fact, reprice at different rate levels and times. 12 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 8 ================================================================================ Interest Rate Sensitivity Analysis
At December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Three Four to More Than More Than More Than More (dollars in thousands) Months Twelve One Year to Three Years Five Years Than Fair or Less Months Three Years to Five Years to 10 Years 10 Years Total Value(1) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Mortgage and other loans $ 169,209 $ 424,164 $ 173,259 $488,278 $139,182 $ 11,642 $1,405,734 $1,485,896 Securities 39,486 46,010 9,063 2,994 -- -- 97,553 97,684 Mortgage-backed securities(2) 9,140 21,472 19,169 -- -- -- 49,781 50,619 Money market investments 6,000 -- -- -- -- -- 6,000 6,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 223,835 491,646 201,491 491,272 139,182 11,642 1,559,068 1,640,199 - ------------------------------------------------------------------------------------------------------------------------------------ Less: Unearned discounts and deferred fees 557 740 3 -- -- -- 1,300 1,300 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest-earning assets 223,278 490,906 201,488 491,272 139,182 11,642 1,557,768 1,638,899 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES: Savings accounts 7,508 21,893 26,738 23,743 21,084 167,167 268,133 268,133 NOW and Super NOW accounts 1,195 3,384 3,760 2,924 2,273 7,949 21,485 21,485 Money market accounts 1,744 6,713 5,704 4,847 4,118 23,283 46,409 46,409 Certificates of deposit 275,391 278,020 122,143 28,394 -- -- 703,948 706,525 FHLB borrowings 286,664 23,000 -- -- -- -- 309,664 309,664 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 572,502 333,010 158,345 59,908 27,475 198,399 1,349,639 1,352,216 - ------------------------------------------------------------------------------------------------------------------------------------ Interest sensitivity gap per period $(349,224) $ 157,896 $ 43,143 $431,364 $111,707 $(186,757) $ 208,129 $ 286,683 ==================================================================================================================================== Cumulative interest sensitivity gap $(349,224) $(191,328) $(148,185) $283,179 $394,886 $ 208,129 ==================================================================================================================================== Cumulative interest sensitivity gap as a percentage of total assets (2.78)% (11.93)% (9.24)% 17.66% 24.63% 12.98% Cumulative net interest-earning assets as a percentage of net interest-bearing liabilities 39.00 78.87 86.07 125.20 134.30 115.42 ====================================================================================================================================
(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. Fair value of loans, depending on the type of loan, is based on carrying values or estimates based on discounted cash flow analyses. Fair values of deposit liabilities are either based on carrying amounts or estimates based on a discounted cash flow calculation. Fair values for FHLB advances are estimated using a discounted cash flow analysis that applies interest rates concurrently being offered on advances to a schedule of aggregated expected monthly maturities on FHLB advances. (2) Based upon historical repayment experience. 13 9 Liquidity and Capital Position Liquidity To ensure that its liquid resources are sufficient to fund its operations and obligations, the Company maintains a portfolio of highly liquid money market investments and another of securities held to maturity with an average maturity of one year or less. These portfolios were supplemented by the classification of another $2.6 million in securities as available for sale at December 31, 1997. Money market investments, consisting entirely of Federal funds sold, totaled $6.0 million at year-end 1997, down from $7.0 million at year-end 1996. Together with cash and due from banks, money market investments are the Company's most liquid assets; at December 31, 1997, the combined total was $22.7 million, up from $21.0 million at the earlier year-end. Securities held to maturity totaled $94.9 million at year-end 1997, as compared to $86.5 million at year-end 1996. Included in the 1997 amount were $64.0 million in U.S. Government agency obligations and $14.0 million in U.S. Treasuries with a combined average maturity of one year. The level of liquid assets is a function of the Bank's operating, investing, and financing activities and may also be impacted by such external factors as economic conditions, the current interest rate environment, competition for loans and deposits, and mortgage loan demand. In 1997, the net cash provided by operating activities rose to $34.9 million from $29.9 million in 1996. The $5.0 million difference reflects a combination of factors, including a $5.1 million increase in other assets, as compared to a $3.0 million decrease in the year-earlier period; a $2.2 million increase in deferred income taxes, as compared to a $2.5 million decline; a $5.3 million increase in other liabilities, in contrast to a $741,000 decrease; and a $2.7 million increase in official checks outstanding, versus a $1.1 million decline. In addition, the Company reversed $2.0 million from the allowance for loan losses in 1996. In 1997, the net cash used in investing activities rose to $236.3 million from $141.9 million in 1996. The $94.4 million increase primarily stemmed from a $265.1 million net increase in loans outstanding, as compared to a $151.7 million net increase in 1996. In addition, the 1997 amount reflects a $16.4 million decline in funds utilized to purchase securities to $79.6 million; a $15.6 million increase in proceeds from sales of loans and foreclosed real estate to $16.6 million; a $13.8 million increase in proceeds from the redemption of mortgage-backed securities to $32.9 million; and a $23.5 million reduction in the proceeds from maturities and sales of securities to $63.5 million. The net cash provided by financing activities rose to $203.1 million in 1997 from $94.1 million in 1996. The $109.1 million increase was triggered by a $228.3 million net increase in FHLB borrowings, as compared to a $35.3 million net increase in the year-earlier period. In addition, the 1997 amount reflects a $45.2 million net increase in deposits, as compared to the year-earlier $91.8 million net increase, and a $36.2 million net increase in funds utilized to purchase Treasury stock. In 1997, the Company allocated $61.8 million to repurchase shares, net of exercised stock options, as compared to $25.6 million in 1996. The Company's liquidity is enhanced by the influx of deposits, and by the additional funding provided through the FHLB. At December 31, 1997, the Company had access to $481.0 million through its FHLB line of credit, and another $10.0 million through a line of credit with a money center bank. Additional liquidity is provided by the flow of funds derived from loan principal and interest payments and the proceeds from maturing securities and mortgage-backed securities. In 1997, the additional funding from these sources amounted to $281.0 million; in 1998, the total amount of funds provided by these sources is expected to approximate $401.0 million. For additional information about the Company's sources of funding, see the discussion that begins on page 11 of this report. Capital Position The foundation for the Company's success, and its springboard to the future, is its significant capacity to manage capital. In 1997, that foundation was reinforced by a $35.4 million contribution from cash earnings, reflecting net income of $23.3 million and $12.1 million in non-cash expenses that were added back to capital at December 31st. In 1996, by comparison, the Company recorded cash earnings of $27.5 million, including net income of $20.9 million and non-cash expenses of $6.5 million. The significant level of capital strength provided by the Company's cash earnings has enabled it to engage in an active share repurchase program since the fourth quarter of 1994. The Company repurchased 2,547,326 shares at an average price of $27.73 in 1997, bringing the total number of shares repurchased to 6,268,169. In all, the Company allocated $68.1 million toward share buybacks in the twelve months ended December 31, 1997, substantially boosting share value, while contributing to a reduction in stockholders' equity. Specifically, stockholders' equity totaled $170.5 million at December 31, 1997, equivalent to 10.64% of total assets and a book value of $13.23 per share. At December 31, 1996, stockholders' equity totaled $211.4 million, equivalent to 15.56% of total assets and a book value of $14.14 per share. In addition to the allocation of $68.1 million for the repurchase of Company shares, and cash earnings of $35.4 million, the 1997 amount reflects $11.9 million in dividends paid and options exercised. The 1997 and 1996 book value calculations are based on 12,891,389 and 14,952,861 shares, respectively, reflecting the exclusion of unallocated ESOP shares from the number of shares outstanding at December 31, 1997 and 1996. 14 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 10 At December 31, 1997, 745,411 shares remained available for repurchase under the Stock Repurchase Program; the timing of such repurchases will depend on market conditions as well as the implementation of other value-enhancing strategies. While stockholders' equity was reduced by the share repurchase allocation, its level remained sufficient to significantly exceed the minimum Federal requirements for a bank holding company. Similarly, the Bank's capital strength was such that it continued to qualify for classification as a well capitalized institution and to exceed, by a significant margin, the minimum requirements under the FDIC Improvement Act ("FDICIA"). As defined by FDICIA, a well capitalized institution is one that has a ratio of leverage capital to adjusted total 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, 1997, the Bank's leverage capital totaled $143.9 million, or 9.30% of adjusted average assets, while 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. At December 31, 1996, the Bank's leverage capital totaled $127.7 million, representing 9.65% of total assets, while its Tier 1 and total risk-based capital equaled $127.7 million and $137.0 million, representing 16.19% and 17.38% of risk-weighted assets, respectively. The 1997 amounts reflect the transfer of $16.0 million in capital from the Bank to the Company in the fourth quarter of the year. Results of Operations Earnings Summary 1997 and 1996 Comparison: The Company recorded earnings of $23.3 million in 1997, equivalent to earnings per share of $1.71 and diluted earnings per share of $1.60. By comparison, the Company recorded 1996 earnings of $20.9 million, equivalent to earnings per share of $1.35 and diluted earnings per share of $1.28. The Company's earnings represented a return on average assets ("ROA") and return on average stockholders' equity ("ROE") of 1.61% and 12.95% in 1997, and 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 better reflects the extent of its earnings growth. In 1997, the Company's cash earnings rose $7.9 million, or 28.9%, to $35.4 million, representing a 46.9% increase in cash earnings per share to $2.60 from $1.77 and a 44.6% increase in diluted cash earnings per share to $2.43 from $1.68. The Company's cash earnings represent the contribution made to capital from operations and are determined by adding back to reported earnings the non-cash expenses stemming from the amortization and appreciation of shares in its stock-related benefit plans and the associated tax benefits. In 1997, the Company's non-cash expenses rose to $12.1 million from the year-earlier $6.5 million, as the value of its shares rose 92.3% over the twelve-month period. The Company's cash earnings represented an ROA and ROE of 2.46% and 19.71% in 1997, as compared to 2.14% and 13.24% in 1996. The Company's 1997 earnings were fueled by the record level of mortgage loan originations and the quality performance of its mortgage 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 triggered by the use of FHLB borrowings to fund mortgage loan production, and by the flattening of the yield curve in the fourth quarter of the year. In addition, earnings were boosted by a $3.4 million reduction in income tax expense to $14.4 million, 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 to $7.4 million related to the amortization and appreciation of shares in the Company's stock-related benefit plans. Also reflected in 1997 operating expense were respective increases of $162,000, $452,000, and $512,000 in occupancy and equipment, general and administrative ("G&A"), and other operating expenses. Notably, the Company continued to make progress toward achieving Year 2000 compliance without incurring any material expense in 1997; testing has been scheduled with the Company's external data systems providers for the third quarter of 1998. The Company's 1997 earnings also reflect the suspension of the provision for loan losses, continuing a practice that was initiated in the third quarter of 1995. In 1996, management recovered $2.0 million from the loan loss allowance, with a net benefit of $750,000 recognized. 1996 and 1995 Comparison: In 1996, the Company recorded earnings of $20.9 million, including a non-recurring income tax charge of $1.8 million. Absent this charge, $1.3 million of which was reversed in the first quarter of 1997, the Company's adjusted 1996 earnings equaled $22.7 million, as compared to $20.2 million in 1995. As adjusted for the adoption of Statement of Financial Accounting Standards ("SFAS") No. 128, the Company presented 1996 earnings per share of $1.35 and diluted earnings per share of $1.28, as compared to $1.21 and $1.16, respectively, in the prior year. On the basis of reported earnings, the Company's 1996 ROA and ROE amounted to 1.63% and 10.10%, respectively; absent the $1.8 million tax charge, these measures improved to 1.77% and 10.97%. By comparison, the Company recorded an ROA and ROE of 1.72% and 9.70% in 1995. 15 11 The Company's 1996 earnings reflected a significant rise in net interest income, driven by a dramatic increase in mortgage loan production and the higher yields provided by a growing loan portfolio. Net interest income rose to $57.5 million from the year-earlier $51.9 million, as the Company's interest rate spread and net interest margin widened to 3.88% and 4.63%, respectively, from 3.80% and 4.58%. In 1996, earnings were further boosted by the year-long suspension of the provision for loan losses and the reversal of $2.0 million from the loan loss allowance in the second quarter of the year. In 1995, the loan loss provision totaled a modest $150,000, as a result of having been suspended in the third and fourth quarters of the year. Collectively, the $5.6 million rise in net interest income and the $2.0 million reversal of the allowance for loan losses exceeded the impact of a $588,000 reduction in other operating income, a $400,000 increase in operating expense, and a $6.0 million increase in income tax expense. Other operating income declined to $2.4 million from $3.0 million, reflecting the Company's recognition of $1.3 million in interest earned on Federal income tax recoveries in the prior year. The reduction in this line item was partly offset by a $176,000 increase in customer services fees to $1.6 million and by the recovery of $420,000 from a reserve for possible losses that had been established pursuant to the seizure of Nationar, the Company's check-processing agent, by the New York State Banking Department in 1995. Operating expense totaled $23.3 million in 1996, as compared to $22.9 million in the prior year. The modest increase reflected a $998,000 reduction in the FDIC insurance premium (included in G&A expense) and a $1.5 million decline in other operating expense to $185,000, offset by increases in the remaining components of operating expense. Primary among these was a $2.5 million increase in compensation and benefits expense to $16.2 million, including $5.4 million stemming from the amortization and appreciation of allocated shares held in the Company's stock-related benefit plans. The Company's share price appreciated 59.7% in the twelve months ended December 31, 1996. Reflecting the $1.8 million tax charge, income tax expense rose to $17.8 million in 1996 from $11.7 million in 1995. In addition to the non-recurring charge, the increase included $830,000 in expenses stemming from the elimination of the percentage-of-income tax bad-debt deduction for Federal income tax purposes and an increase in pre-tax income to $38.7 million from $31.9 million in the prior year. ================================================================================ Cash Earnings Analysis
For the Years Ended December 31, - -------------------------------------------------------------------------------- (in thousands, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------- Net income $23,264 $20,939 $20,183 Add back non-cash expenses related to: Stock-related benefits plans 8,719 5,408 3,457 Associated tax benefits 3,416 1,111 -- - -------------------------------------------------------------------------------- Cash earnings $35,399 $27,458 $23,640 ================================================================================ Cash earnings per share $2.60 $1.77 $1.42 Diluted cash earnings per share 2.43 1.68 1.36 ================================================================================
16 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 12 Interest Income 1997 and 1996 Comparison: The level of interest income in any given period depends upon the average balance and composition of the Company's interest-earning assets, the yield on said assets, and the current level of market interest rates. In 1997, the Company recorded $453.1 million in mortgage loan originations, boosting the concentration of mortgage loans within the mix of interest-earning assets, and contributing to the generation of higher yields throughout the year. While competition for loan product increased, especially in the fourth quarter, the Company was undeterred in its drive to generate income through interest-earning asset growth. Average interest-earning assets rose $158.3 million, or 12.7%, to $1.4 billion in 1997, supported by a 17-basis point rise in the average yield to 8.40%. These increases combined to produce total interest income of $117.7 million in 1997, up 15.1% from $102.3 million in 1996. The bulk of this increase was generated by the Company's growing loan portfolio, which represented 89.7% of average interest-earning assets in 1997, up from 86.1% in the prior year. Specifically, the average balance of mortgage and other loans grew $187.2 million to $1.3 billion in 1997, accompanied by an average yield of 8.66%, up six basis points. As a result, the interest income derived from the Company's loans rose 18.3% to $108.9 million in 1997 from $92.0 million in 1996. The 1997 amount represented 92.5% of total interest income; the 1996 amount reflected 89.9%. While mortgage and other loans are the Company's primary source of interest income, additional interest income is derived from money market investments, securities, and mortgage-backed securities. In 1997, the interest income derived from securities rose $429,000, or 10.0%, to $4.7 million, representing 4.0% of interest income for the year. The increase reflects 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. In 1997, securities represented 5.4% of average interest-earning assets, down from 6.0% in 1996. Mortgage-backed securities generated $3.9 million in interest income, representing a $1.4 million, or 26.6%, decline from the year-earlier amount. The decrease reflects a $22.2 million decline in the average balance to $62.3 million, accompanied by 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, producing 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 the 1996 amount. The decline reflects an $8.6 million reduction in the average balance to $5.3 million, together with a seven-basis point drop in the average yield to 5.18%. 1996 and 1995 Comparison: In 1996, the Company's interest income rose $10.8 million to $102.3 million from $91.5 million in 1995. The 11.8% increase reflected a $110.6 million, or 9.8%, rise in average interest-earning assets to $1.2 billion and a 15-basis point rise in the average yield on these assets to 8.23% from 8.08%. These increases were substantially buoyed by a 108.0% increase in mortgage loan originations to $303.2 million from the year-earlier $145.8 million, and the higher yields provided by the Company's growing loan portfolio. The interest income provided by mortgage and other loans climbed to $92.0 million, representing a 14.9% increase from $80.1 million, the level in 1995. The increase reflected both a $120.9 million rise in the average balance of mortgage and other loans to $1.1 billion, and a 17-basis point rise in the average yield on said assets to 8.60% from 8.43%. Mortgage and other loans represented 86.1% and 83.9%, respectively, of average interest-earning assets in 1996 and 1995, and 89.9% and 87.5%, respectively, of total interest income in the corresponding years. Securities generated $4.3 million in interest income in 1996, down from $4.8 million in 1995. The $508,000 reduction reflected a decline in the average balance to $74.3 million from $75.6 million, and a decrease in the average yield on said assets to 5.80% from 6.37%. Securities accounted for 6.0% and 6.7%, respectively, of average interest-earning assets, and 4.2% and 5.3%, respectively, of interest income in 1996 and 1995. Mortgage-backed securities furnished $5.3 million in 1996 interest income, down from $6.3 million in 1995. The 16.3% decrease stemmed from a reduction in the average balance to $84.4 million from $100.8 million, and a one-basis point drop in the average yield to 6.22%. The average balance of mortgage-backed securities represented 6.8% of average interest-earning assets in 1996, down from 8.9% in 1995. Similarly, said assets furnished 5.1% of 1996 interest income, down from 6.9% in the prior year. Money market investments generated $727,000 in 1996 interest income, as compared to $383,000 in 1995. The increase reflected a $7.3 million rise in the average balance to $13.9 million from $6.6 million, offsetting a 58-basis point drop in the average yield to 5.25% from 5.83%. Interest Expense 1997 and 1996 Comparison: 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 market competition and the current level of interest rates. 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 these 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. 17 13 FHLB borrowings generated $10.8 million, or 19.4%, of interest expense in 1997, as compared to $3.4 million, or 7.6%, in 1996. 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 totaled $61.2 million, accounting for 5.9% of average interest-bearing liabilities. The rise in interest expense derived from FHLB borrowings was further 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 in 1996, which represented 72.6% of total interest expense. 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. The flattening of the yield curve in the fourth quarter of 1997 did not appear to dampen the appeal of CDs. As compared to the third quarter of the year, when CDs averaged $669.9 million, the average balance rose to $694.8 million in the fourth. The change in market interest rates is, however, reflected in a nine-basis point reduction in the cost of such funds from the one quarter to the next. Mortgagors' escrow added $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 1996. The decline reflects 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 11.8% of interest expense in 1997, as compared to 27.4% and 15.1%, respectively, in 1996. NOW and money market accounts accounted for interest expense of $1.8 million, down $195,000 from the level recorded 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 3.3% of interest expense in 1997, and 7.1% and 4.6%, respectively, in 1996. 1996 and 1995 Comparison: In 1996, the Company recorded interest expense of $44.8 million, as compared to $39.6 million in 1995. The $5.2 million increase stemmed from a $103.7 million rise in average interest-bearing liabilities to $1.0 billion, supported by a seven-basis point rise in the average cost to 4.35%. Throughout the year, the interest rate environment was relatively stable, with a single adjustment made to the Federal Funds rate early in the year. In January 1996, the Federal Funds rate was reduced 25 basis points to 5.25%, a level that maintained the popularity of higher cost savings products and the appeal of FHLB borrowings as a supplemental funding source. CDs generated $32.5 million in interest expense in 1996, up $4.9 million from $27.6 million in 1995. The 17.8% increase reflected a $98.7 million rise in the average balance of CDs to $598.0 million from $499.3 million, tempered by a nine-basis point drop in the average cost to 5.44% from 5.53%. In 1996 and 1995, average CDs represented 58.0% and 53.9%, respectively, of average interest-bearing liabilities and generated 72.6% and 69.7%, respectively, of total interest expense. The increasing concentration of CDs in the mix of interest-bearing deposits reflected the continuation of a trend that began when short-term rates started rising in 1995. In addition to new deposits attracted through the Bank's expanded franchise, the growth in CDs in 1996 reflected the transfer of funds from the savings accounts of long-term customers. Savings accounts generated $6.8 million in interest expense in 1996, down from the year-earlier $7.3 million, as the average balance fell to $282.1 million from $295.4 million in 1995. Simultaneously, the average cost of these funds dropped to 2.39% from 2.48% in the year-earlier twelve months. The average balance of savings accounts represented 27.4% and 31.9% of average interest-bearing liabilities in 1996 and 1995, respectively, and generated 15.1% and 18.5%, respectively, of total interest expense. In 1996, NOW and money market accounts contributed $2.0 million in interest expense, down from $2.3 million in 1995. The decrease reflected a $4.5 million drop in the average balance to $73.6 million from $78.2 million and a 22-basis point decline in the average cost to 2.77% from 2.99%. Average NOW and money market accounts represented 7.1% and 8.4% of average interest-bearing liabilities and contributed 4.6% and 5.9%, respectively, of total interest expense in 1996 and 1995. To supplement the funding provided by its deposits, the Company accessed its FHLB line of credit throughout the year. In 1996, such borrowings averaged $61.2 million, up $25.2 million from $36.0 million in 1995. While the higher average balance was somewhat offset by a reduction in the average cost of these funds to 5.59% from 6.22%, the 1995 level, the interest expense derived from FHLB borrowings rose to $3.4 million from $2.2 million, representing 7.6% and 5.6%, respectively, of total interest expense. Mortgagors' escrow generated interest expense of $39,000 in 1996, down from $115,000 in 1995. The decrease stemmed from a decline in the average balance to $15.3 million from the year-earlier $17.5 million, and a drop in the average cost to 0.26% from 0.66%. 18 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 14 ================================================================================ Net Interest Income Analysis
For the Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average (dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-Earning Assets: Mortgage and other loans, net $1,257,632 $108,868 8.66% $1,070,454 $92,017 8.60% $949,585 $80,067 8.43% Securities 76,208 4,737 6.22 74,328 4,308 5.80 75,558 4,816 6.37 Mortgage-backed securities 62,259 3,856 6.19 84,438 5,252 6.22 100,806 6,276 6.23 Money market investments 5,269 273 5.18 13,851 727 5.25 6,569 383 5.83 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest- earning assets 1,401,368 117,734 8.40% 1,243,071 102,304 8.23% 1,132,518 91,542 8.08% Non-interest- earning assets 39,895 38,980 40,070 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,441,263 $117,734 $1,282,051 $102,304 $1,172,588 $91,542 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Liabilities: NOW and money market accounts $ 67,347 $ 1,844 2.74% $ 73,641 $ 2,039 2.77% $ 78,170 $ 2,341 2.99% Savings accounts 272,043 6,523 2.40 282,064 6,754 2.39 295,422 7,318 2.48 Certificates of deposit 666,242 36,177 5.43 597,963 32,533 5.44 499,308 27,624 5.53 FHLB borrowings 189,136 10,751 5.68 61,191 3,419 5.59 35,965 2,236 6.22 Mortgagors' escrow 17,451 41 0.23 15,256 39 0.26 17,545 115 0.66 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,212,219 55,336 4.56% 1,030,115 44,784 4.35% 926,410 39,634 4.28% Non-interest-bearing deposits 26,622 23,215 20,275 Other liabilities 22,798 21,361 17,841 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,261,639 1,074,691 964,526 Stockholders' equity 179,624 207,360 208,062 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $1,441,263 $1,282,051 $1,172,588 ==================================================================================================================================== Net interest income/ interest rate spread $62,398 3.84% $57,520 3.88% $51,908 3.80% Net interest-earning assets/net interest margin $189,149 4.45 $212,956 4.63 $206,108 4.58 Ratio of interest- earning assets to interest-bearing liabilities 1.16x 1.21x 1.22x ====================================================================================================================================
19 15 ================================================================================ Rate/Volume Analysis The following table presents changes in interest and dividend income, and in interest expense, attributable to (i) changes in volume (change in average balance or volume multiplied by prior-year rate); (ii) changes in rate (change in average rate multiplied by prior-year volume); and (iii) the combined effect of changes in average rate and in average volume.
Year Ended Year Ended Year Ended December 31, 1997 December 31, 1996 December 31, 1995 Compared to Year Ended Compared to Year Ended Compared to Year Ended December 31, 1996 December 31, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Increase/(Decrease) Increase/(Decrease) Increase/(Decrease) - ------------------------------------------------------------------------------------------------------------------------------------ Due to Due to Due to (in thousands) Volume Rate Net Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Mortgage and other loans, net $16,210 $641 $16,851 $10,395 $1,555 $11,950 $8,212 $823 $ 9,035 Securities 117 312 429 (71) (437) (508) (15) 428 413 Mortgage-backed securities (1,373) (23) (1,396) (1,018) (6) (1,024) (1,013) 355 (658) Money market investments (445) (9) (454) 382 (38) 344 (700) 381 (319) - ------------------------------------------------------------------------------------------------------------------------------------ Total 14,509 921 15,430 9,688 1,074 10,762 6,484 1,987 8,471 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES: NOW and money market accounts (172) (23) (195) (125) (177) (302) (487) 232 (255) Savings accounts (241) 10 (231) (319) (245) (564) (1,111) 391 (720) Certificates of deposit 3,708 (64) 3,644 5,367 (458) 4,909 6,994 4,646 11,640 FHLB borrowings 7,267 65 7,332 1,410 (227) 1,183 145 354 499 Mortgagors' escrow 5 (3) 2 (6) (70) (76) 11 3 14 - ------------------------------------------------------------------------------------------------------------------------------------ Total 10,567 (15) 10,552 6,327 (1,177) 5,150 5,552 5,626 11,178 - ------------------------------------------------------------------------------------------------------------------------------------ Net change in interest income $ 3,942 $936 $ 4,878 $ 3,361 $2,251 $ 5,612 $ 932 $(3,639) $(2,707) ====================================================================================================================================
Net Interest Income 1997 and 1996 Comparison: 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 impacted, in turn, by the pricing and mix of the Company's interest-earning assets and its funding sources, and by such external factors as competition, economic conditions, and the monetary policy of the Federal Reserve Board of Governors. Fueled by the record level of mortgage loan originations, the average balance of interest-earning assets rose to $1.4 billion in 1997, supported by a 17-basis point rise in the average yield. While the funding for these increases largely stemmed from higher-cost sources, the growing volume of mortgage loans outstanding was sufficient to generate a $4.9 million, or 8.5%, rise in net interest income to $62.4 million for the year. Despite the increased use of FHLB borrowings and the flattening of the yield curve, the Company's interest rate spread equaled 3.84% in 1997, representing a modest four-basis point decline from the level recorded in 1996. The Company's net interest margin declined 18 basis points to 4.45% from the year-earlier level; the extent of this decline reflects the Company's allocation of $68.1 million that might otherwise have been invested into interest-earning assets into the repurchase of Company shares. 1996 and 1995 Comparison: In 1996, the Company's net interest income rose $5.6 million, or 10.8%, to $57.5 million from $51.9 million in 1995. The increase was fueled by the growing average balance of interest-earning assets and a year-long increase in the average yield. While asset growth was largely funded by CDs and FHLB borrowings, the volume of mortgage loans originated more than offset the impact of the higher costs involved. The Company recorded improvements in both its interest rate spread and net interest margin, with the interest rate spread rising 8 basis points to 3.88% in 1996 from 3.80%, the year-earlier level, and the net interest margin rising to 4.63% from 4.58%. 20 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 16 Provision for Loan Losses 1997 and 1996 Comparison: In 1997, the Company suspended the provision for loan losses, continuing a practice that was initiated in the third quarter of 1995. In 1996, the Company also reversed $2.0 million from the allowance for loan losses, resulting in the recognition of a $750,000 net benefit for the year. 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. Management's decision to suspend the loan loss provision throughout 1997 reflects the level of coverage provided by the Company's allowance for loan losses and the strong performance of its loan portfolio. In addition to recording its tenth consecutive quarter without any net charge-offs, the Company achieved significant reductions in the level of non-performing assets and maintained the fully-performing status of its multi-family mortgage loans. At December 31, 1997, non-performing assets declined to $8.7 million, or 0.54% of total assets, from $10.3 million (or 0.84%) at December 31, 1996. Included in these amounts were non-performing loans of $7.7 million (representing 0.55% of loans, net) and $9.7 million (representing 0.84% of loans, net), respectively. 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. This amount was equivalent to 122.61% of non-performing loans and 0.68% of loans, net, at that date. More significantly, the ratio of the allowance for loan losses to net accumulated charge-offs in the ten years ended December 31, 1997 was 661.36%. For more information about the Company's asset quality, see the discussion and analysis beginning on page 10 of this report. 1996 and 1995 Comparison: In addition to suspending the provision for loan losses, the Company reversed $2.0 million from the loan loss allowance in 1996. In the absence of any net charge-offs, the reversal reduced the loan loss allowance to $9.4 million, representing 96.90% of non-performing loans and 0.82% of loans, net, at December 31st. In 1995, the Company recorded loan loss provisions of $150,000 and net charge-offs of $59,000, contributing to a loan loss allowance of $11.4 million, representing 145.76% of non-performing loans and 1.14% of loans, net, at year-end. The reversal of the allowance and the suspension of the loan loss provision reflected the fundamental soundness of the Company's loan portfolio throughout 1996. While non-performing loans rose to $9.7 million at December 31st from the year-earlier $7.8 million, the increase was overshadowed by the absence of any net charge-offs for six consecutive quarters and the fully performing status of the multi-family mortgage loan portfolio. In addition, the loan loss allowance, at $9.4 million, equaled 625.0% of accumulated net charge-offs for the ten years ended December 31, 1996. Other Operating Income 1997 and 1996 Comparison: The Company recorded other operating income of $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 rise in other income to $1.0 million. The Company has traditionally derived other operating income from service fees and charges on loans and depository accounts. In 1997, these sources of other operating income were supplemented by gains on the sale of multi-family mortgage loans to a third party, with the servicing retained as a means of generating additional income in future periods. Transacted in the fourth quarter, such sales totaled $13.6 million; management anticipates that the Company will selectively expand on this program in 1998. Additional fee income was also produced by the introduction of the VISA Check Card, which was promoted through a direct mail campaign in the third quarter of the year. The Company is exploring other means of increasing fee income through the addition of other financial services in 1998. 1996 and 1995 Comparison: Other operating income totaled $2.4 million in 1996 and $3.0 million in 1995. The 1996 amount included $1.6 million in fee income (up $176,000 from $1.4 million in the year-earlier period) and $862,000 in other income (down $764,000 from $1.6 million in the prior year). The rise in fee income corresponded to the significant increase in mortgage loan originations to $303.2 million from $145.8 million in 1995. The decline in other income reflected the recognition of $1.3 million in interest earned on Federal income tax recoveries in the year-earlier period, tempered by the recovery of $420,000 from the reserve for possible Nationar-related losses in 1996. Operating Expense 1997 and 1996 Comparison: The Company recorded operating expense of $27.1 million in 1997 and $23.3 million in 1996, equivalent to 1.88% and 1.82% of average assets, respectively. The increase was primarily due to a $2.7 million rise in compensation and benefits expense to $18.9 million, largely reflecting a rise in non-cash expenses stemming from the amortization and appreciation of shares held in the Company's stock-related benefit plans during the year. Such non-cash expenses accounted for $7.4 million, or 39.1%, of compensation and benefits expense in 1997, as compared to $5.4 million, or 33.4% of the total, in 1996. The value of the Company's shares rose 92.3% in the twelve months ended December 31, 1997, and 59.7% in the preceding twelve-month period. The remaining components of operating expense experienced more modest increases, with occupancy and equipment expense rising $162,000 to $2.6 million, G&A expense rising $450,000 to $4.9 million, and other operating expenses rising $514,000 to $699,000. The higher level of G&A expense primarily reflects the expansion of the Company's advertising program. 21 17 The rise in occupancy and equipment expense reflects 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 office in July. Also included in occupancy and equipment expense are the costs associated with the Company's Year 2000 compliance, which is discussed in greater detail elsewhere on this page. The Company's efficiency ratio was 41.86% in 1997 and 38.81% in 1996. On the basis of cash earnings, these ratios improve to 30.47% and 28.83%, respectively. 1996 and 1995 Comparison: Operating expense totaled $23.3 million in 1996 and $22.9 million in 1995, representing 1.82% and 1.95% of average assets in the respective periods. The 1996 amount reflected declines in G&A expense and other operating expenses which were modestly offset by higher levels of compensation and benefits and occupancy and equipment expense. G&A expense was reduced to $4.4 million from $5.1 million, primarily reflecting a decline in the FDIC insurance premium to $2,000 from $1.0 million in 1995. On January 1, 1996, the premium was entirely eliminated and replaced by a per-quarter assessment of $500.00. Absent the decline in the premium, the Company's 1996 G&A expense rose $293,000, partly reflecting higher advertising expenses stemming from the initiation of a radio and cable TV promotional campaign. Other operating expense improved to $185,000 in 1996 from $1.7 million in the year-earlier period, reflecting a net gain of $124,000 on the sale of foreclosed real estate and a $1.5 million reduction related to the prior-year seizure of Nationar. Pursuant to this event, the Company had recorded a one-time charge against earnings of $349,000 and established a $1.0 million reserve for possible Nationar-related losses. In 1996, the Company received payment of all pending claims except for its original investment. Accordingly, the Company concluded its financial exposure to Nationar by realizing a net recovery of $420,000, recorded as other income as previously discussed. Occupancy and equipment expense rose $80,000 to $2.5 million, reflecting the addition of three new Queens-based locations, the installation of ATMs at each of these locations, and a Bank-wide computer systems upgrade that was implemented as part of the Company's preparation for the Year 2000. Compensation and benefits expense rose to $16.2 million from the year-earlier $13.7 million, primarily reflecting $5.4 million in charges related to the amortization and appreciation of shares held in the Company's stock-related benefit plans over the course of the year. In the year-earlier period, such non-cash expenses totaled $2.3 million. In 1996, the Company efficiency ratio was reduced to 38.81% from 41.63%, the year-earlier level; on a cash earnings basis, the efficiency ratio improved to 28.83% from 35.43%. Income Tax Expense 1997 and 1996 Comparison: The Company recorded income tax expense of $14.4 million in 1997 and $17.8 million in 1996. In addition to a $1.1 million decline in pre-tax income to $37.6 million, the $3.4 million reduction reflects 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 was 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. In addition to current and deferred Federal, state, and local income taxes, the Company's income tax expense includes certain non-cash expenses that are related to the amortization and appreciation of shares held in the Company's stock-related benefit plans. Such non-cash expenses totaled $3.4 million in 1997 and $1.1 million in 1996. In 1998, management expects the effective tax rate to be stabilized at approximately 45.0%. 1996 and 1995 Comparison: Income tax expense equaled $17.8 million in 1996 and $11.7 million in 1995. The $6.1 million increase reflected a $6.8 million rise in pre-tax income to $38.7 million and a $1.8 million tax charge stemming from the disqualification of all city tax deductions relating to the percentage-of-income tax bad-debt reserve since 1987, in the wake of changes to the Federal tax code enacted in August 1996. (The City of New York enacted legislation to de-couple its treatment of the tax bad-debt reserve from the Federal tax code in the first quarter of 1997, resulting in the reversal of $1.3 million during said quarter, as noted in the 1997 and 1996 comparison above.) In addition, the increase in 1996 income tax expense reflected $830,000 stemming from the elimination of the percentage-of-income tax bad-debt deduction for Federal income tax purposes, and $1.1 million in non-cash expenses related to the amortization and appreciation of shares held in the Company's stock-related benefit plans. Year 2000 Compliance The Company has been actively involved in the process of integrating its internal and external computer systems to ensure their Year 2000 compliance and has scheduled testing with its external data processing providers for the third quarter of 1998. It is management's current expectation that the additional costs incurred in this process will be minimal. However, it should be cautioned that the majority of the Company's data systems are provided by external vendors. While written assurances have been provided by its primary vendors, the Company's readiness for the Year 2000 will depend in large part on its vendors' ability to fulfill the necessary compliance requirements. 22 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 18 Impact of Accounting Pronouncements Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 also requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, with reclassification of prior periods required. Management is currently assessing the financial implications of implementing SFAS No. 130 and believes that its adoption will not have a material adverse effect on the Company. Disclosure about Segments of an Enterprise and Related Information In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way an enterprise reports information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 requires that a public business enterprise report both financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 requires a reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to the amounts in the enterprise's financial statements. SFAS No. 131 also requires an enterprise to report descriptive information about the way the operating segments were determined, the products and services provided by the operating segments, and any differences between the measurements used for segment reporting and financial statement reporting. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with comparative information for earlier years to be restated in the initial year of application. Management is currently assessing the financial implication of implementing SFAS No. 131 and believes that its adoption will not have a material adverse effect on the Company. 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 do general levels of inflation. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of goods and services. Market Price of Common Stock and Dividends Declared per Common Share Queens County Bancorp trades on the Nasdaq National Market under the symbol "QCSB." At December 31, 1997, the Company had 14,912,791 shares outstanding, reflecting the three-for-two stock splits on April 10, 1997 and October 1, 1997 and the repurchase of 2,547,326 shares during the year. The table on page 24 sets forth the high/low price range and closing prices, as reported by Nasdaq, and the cash dividends declared per common share for each of the four quarters of 1997 and 1996. 23 19 ================================================================================ Market Price and Dividends Declared 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 - -------------------------------------------------------------------------------------------------------------- 1997 1st Quarter $0.111** $119.00 $26.45 $90.50 $20.11 $109.76 $24.39 2nd Quarter 0.133** 144.00 32.00 107.01 23.78 136.49 30.33 3rd Quarter 0.167** 162.77 36.17 133.52 29.67 155.43 34.54 4th Quarter 0.200 182.25 40.50 156.38 34.75 182.25 40.50 - -------------------------------------------------------------------------------------------------------------- 1996 1st Quarter $0.067** $66.02 $14.67 $58.50 $13.00 $66.00 $14.67 2nd Quarter 0.083** 73.50 16.33 64.49 14.33 73.50 16.33 3rd Quarter 0.111** 76.14 16.92 70.34 15.63 74.50 16.56 4th Quarter 0.111** 98.78 21.95 73.75 16.39 94.75 21.06 ==============================================================================================================
* 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, 1997 and October 1, 1997. ** Dividends have been restated to reflect the 4-for-3 stock split on August 22, 1996 and the 3-for-2 stock splits on April 10, 1997 and October 1, 1997. At December 31, 1997, 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. 24 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS 20 Consolidated Statements of Condition ================================================================================
December 31, - ------------------------------------------------------------------------------------------------------------------ (in thousands, except share data) 1997 1996 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $16,733 $14,045 Money market investments 6,000 7,000 Securities held to maturity (estimated market value of $95,067 and $86,483, respectively) (notes 3 and 9) 94,936 86,495 Mortgage-backed securities held to maturity (estimated market value of $50,619 and $74,192, respectively) (notes 4 and 9) 49,781 73,732 Securities available for sale 2,617 -- Mortgage loans 1,393,658 1,143,260 Other loans 10,776 12,251 Less: Allowance for loan losses (9,431) (9,359) - ------------------------------------------------------------------------------------------------------------------ Loans, net (notes 5, 6, and 9) 1,395,003 1,146,152 Premises and equipment, net 10,782 11,077 Deferred tax asset, net (note 10) 5,514 3,312 Other assets (notes 7 and 12) 21,903 16,843 - ------------------------------------------------------------------------------------------------------------------ Total assets $1,603,269 $1,358,656 ================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 8): NOW and money market accounts $67,894 $69,443 Savings accounts 268,133 277,783 Certificates of deposit 703,948 651,705 Non-interest-bearing accounts 29,186 24,999 - ------------------------------------------------------------------------------------------------------------------ Total deposits 1,069,161 1,023,930 - ------------------------------------------------------------------------------------------------------------------ Official checks outstanding 29,440 26,729 FHLB borrowings (note 9) 309,664 81,393 Accounts payable and accrued expenses 1,857 1,169 Mortgagors' escrow 10,690 7,356 Other liabilities (note 12) 11,942 6,650 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 1,432,754 1,147,227 - ------------------------------------------------------------------------------------------------------------------ Stockholders' equity (note 2): Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) -- -- Common stock at par $0.01 (30,000,000 shares authorized; 20,647,233 shares issued; 14,912,791 and 17,167,732 outstanding at December 31, 1997 and 1996, respectively) 206 92 Paid-in capital in excess of par 125,000 116,607 Retained earnings (substantially restricted) (note 15) 166,230 154,886 Less: Treasury stock (5,734,442 and 3,479,852 shares, respectively) (104,148) (42,397) Unallocated common stock held by ESOP (note 13) (13,526) (14,820) Common stock held by SERP and Deferred Compensation Plans (notes 12 and 13) (2,492) (1,411) Unearned common stock held by RRPs (note 13) (812) (1,528) Net unrealized appreciation in securities, net of tax 57 -- - ------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 170,515 211,429 - ------------------------------------------------------------------------------------------------------------------ Commitments and contingencies (note 11) - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $1,603,269 $1,358,656 ==================================================================================================================
See accompanying notes to consolidated financial statements. 25 21 Consolidated Statements of Income ================================================================================
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ INTEREST INCOME: Mortgage and other loans (note 6) $108,868 $92,017 $80,067 Securities held to maturity 4,737 4,308 4,816 Mortgage-backed securities held to maturity 3,856 5,252 6,276 Money market investments 273 727 383 - ------------------------------------------------------------------------------------------------------------ Total interest income 117,734 102,304 91,542 - ------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: NOW and money market accounts 1,844 2,039 2,341 Savings accounts 6,523 6,754 7,318 Certificates of deposit 36,177 32,533 27,624 FHLB borrowings (note 9) 10,751 3,419 2,236 Mortgagors' escrow 41 39 115 - ------------------------------------------------------------------------------------------------------------ Total interest expense 55,336 44,784 39,634 - ------------------------------------------------------------------------------------------------------------ Net interest income 62,398 57,520 51,908 - ------------------------------------------------------------------------------------------------------------ (Reversal of) provision for loan losses (note 6) -- (2,000) 150 - ------------------------------------------------------------------------------------------------------------ Net interest income after (reversal of) provision for loan losses 62,398 59,520 51,758 - ------------------------------------------------------------------------------------------------------------ OTHER OPERATING INCOME: Fee income 1,287 1,583 1,407 Other (note 5) 1,018 862 1,626 - ------------------------------------------------------------------------------------------------------------ Total other operating income 2,305 2,445 3,033 - ------------------------------------------------------------------------------------------------------------ OPERATING EXPENSE: Compensation and benefits (notes 12 and 13)(1) 18,872 16,185 13,694 Occupancy and equipment (note 11) 2,641 2,479 2,399 General and administrative 4,872 4,422 5,127 Other 699 185 1,651 - ------------------------------------------------------------------------------------------------------------ Total operating expense 27,084 23,271 22,871 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 37,619 38,694 31,920 Income tax expense (note 10)(2) 14,355 17,755 11,737 - ------------------------------------------------------------------------------------------------------------ Net income $23,264 $20,939 $20,183 ============================================================================================================ Earnings per share(3) $1.71 $1.35 $1.21 Diluted earnings per share(3) 1.60 1.28 1.16 ============================================================================================================
(1) Includes non-cash expenses of $7.368 million, $5.411 million and $3.457 million, respectively. (2) Includes non-cash expenses of $3.416 million, $1.111 million and $0, respectively. (3) Reflects shares issued as a result of a 4-for-3 stock split on August 22, 1996 and 3-for-2 stock splits on April 10, 1997 and October 1, 1997. See accompanying notes to consolidated financial statements. 26 QUEENS COUNTY BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS 22 Consolidated Statements of Changes in Stockholders' Equity ================================================================================
Years Ended December 31, - ---------------------------------------------------------------------------------------------------------- (in thousands, except share data) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Common Stock (Par Value: $0.01): Balance at beginning of year $ 92 $ 69 $ 69 Stock splits (11,470,529 and 2,294,063 shares) 114 23 -- - ---------------------------------------------------------------------------------------------------------- Balance at end of year 206 92 69 - ---------------------------------------------------------------------------------------------------------- Paid-In Capital in Excess of Par: Balance at beginning of year 116,607 112,441 111,407 Tax benefit effect on stock plans 3,416 1,111 -- Common stock acquired by SERP and Deferred Compensation Plans 1,081 1,081 32 Allocation of ESOP Stock 4,021 2,002 1,002 Stock splits (11,470,529 and 2,294,063 shares) (114) (23) -- Cash paid in lieu of fractional shares (11) (5) -- - ---------------------------------------------------------------------------------------------------------- Balance at end of year 125,000 116,607 112,441 - ---------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 154,886 140,969 122,644 Net income 23,264 20,939 20,183 Dividends paid on common stock (8,135) (5,669) (1,632) Exercise of stock options (218,407; 150,797; and 55,116 shares) (3,785) (1,353) (226) - ---------------------------------------------------------------------------------------------------------- Balance at end of year 166,230 154,886 140,969 - ---------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance at beginning of year (42,397) (16,843) (7,444) Purchase of common stock (2,547,326; 844,360; and 422,015 shares) (68,086) (28,825) (9,963) Common stock acquired by SERP 1,337 1,081 32 Exercise of stock options (218,407; 150,797; and 55,116 shares) 4,998 2,190 532 - ---------------------------------------------------------------------------------------------------------- Balance at end of year (104,148) (42,397) (16,843) - ---------------------------------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN: Balance at beginning of year (14,820) (16,065) (17,343) Allocation of ESOP stock 1,294 1,245 1,278 - ---------------------------------------------------------------------------------------------------------- Balance at end of year (13,526) (14,820) (16,065) - ---------------------------------------------------------------------------------------------------------- SERP AND DEFERRED COMPENSATION PLANS: Balance at beginning of year (1,411) (330) (298) Common stock acquired by SERP and Deferred Compensation Plans (1,081) (1,081) (32) - ---------------------------------------------------------------------------------------------------------- Balance at end of year (2,492) (1,411) (330) - ---------------------------------------------------------------------------------------------------------- RECOGNITION AND RETENTION PLANS: Balance at beginning of year (1,528) (2,611) (3,756) Earned portion of RRPs 716 1,083 1,145 - ---------------------------------------------------------------------------------------------------------- Balance at end of year (812) (1,528) (2,611) - ---------------------------------------------------------------------------------------------------------- Net unrealized appreciation in securities, net of tax: Balance at beginning of year -- -- -- Net unrealized appreciation in securities, net of tax 57 -- -- - ---------------------------------------------------------------------------------------------------------- Balance at end of year 57 -- -- - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity $170,515 $211,429 $217,630 ==========================================================================================================
See accompanying notes to consolidated financial statements. 27 23 Consolidated Statements of Cash Flows
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------ (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 23,264 $ 20,939 $ 20,183 - ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 948 772 738 (Reversal of) provision for loan losses -- (2,000) 150 (Increase) decrease in deferred income taxes (2,202) 2,510 (481) Amortization of premiums (discounts), net 147 537 (506) Amortization of net deferred loan origination fees 217 141 650 Net loss on redemption of securities and mortgage-backed securities (20) (2) (6) Net (gain) loss on sale of foreclosed real estate and loans (556) 123 (12) Write-off of investment in Nationar -- -- 349 Provision for Nationar investment losses -- -- 1,000 Tax benefit effect on stock plans 3,416 1,111 -- Earned portion of RRPs 716 1,083 1,145 Earned portion of ESOP 5,315 3,247 2,280 Changes in assets and liabilities: (Increase) decrease in other assets (5,060) 3,014 (6,209) Increase (decrease) in accounts payable and accrued expenses 688 286 (254) Increase (decrease) in official checks outstanding 2,711 (1,117) 10,556 Increase (decrease) in other liabilities 5,292 (741) 350 - ------------------------------------------------------------------------------------------------------------ Total adjustments 11,612 8,964 9,750 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 34,876 29,903 29,933 - ------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: Proceeds from redemptions of mortgage-backed securities held to maturity 32,939 19,132 14,584 Proceeds from maturities and sales of investment securities 62,000 87,000 59,000 Proceeds from redemption of securities available for sale 1,519 -- -- Purchase of securities (79,575) (96,010) (57,488) Purchase of securities available for sale (4,009) -- -- Net increase in loans (265,152) (151,730) (60,523) Proceeds from sales of loans and foreclosed real estate 16,578 1,006 1,318 Purchase of premises and equipment, net (653) (1,323) (422) - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (236,353) (141,925) (43,531) - ------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities: Net increase (decrease) in mortgagors' escrow 3,334 (448) (2,838) Net increase in deposits 45,231 91,790 91,920 Net increase (decrease) from FHLB borrowings 228,271 35,316 (37,227) Cash dividends, cash paid in lieu of fractional shares, and options exercised (11,920) (7,027) (1,858) Purchase of Treasury stock, net of stock options exercised and shares acquired by SERP (61,751) (25,554) (9,399) - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 203,165 94,077 40,598 - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1,688 (17,945) 27,000 Cash and cash equivalents at beginning of year 21,045 38,990 11,990 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 22,733 $ 21,045 $ 38,990 ============================================================================================================ Supplemental information: Cash paid for: Interest $ 55,335 $ 44,810 $ 39,622 Income taxes 12,443 14,775 12,858 - ------------------------------------------------------------------------------------------------------------ Transfers to foreclosed real estate from loans 1,758 730 810 - ------------------------------------------------------------------------------------------------------------ Transfers to real estate held for investment from foreclosed real estate 533 222 687 ============================================================================================================
See accompanying notes to consolidated financial statements. 28 QUEENS COUNTY BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS 24 Notes to Consolidated Financial Statements 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 1997 presentation. Securities Held to Maturity, 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, 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 on 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 Standards ("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 1-4 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 1997 results of operations nor on its financial position, including the level of the reserve for possible credit losses. 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 the borrower's 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. 29 25 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 "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, 1997, 1996, and 1995 amounted to $948,000, $772,000, and $738,000, respectively. Year 2000 In January 1997, the Company developed a plan to deal with the Year 2000 issue and began converting its computer systems to be Year 2000 compliant. The plan provides for the conversion efforts to be completed by the end of 1998. 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 the costs 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 basis. 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 that it will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates 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 for entities that elect to continue to measure compensation cost using APB Opinion No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. The Company had three stock option plans at December 31, 1997. 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 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 for said plans. Retirement Plans The Company has pension plans 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. 30 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 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. The weighted average number of common shares outstanding used in the computation of Basic EPS was 13,636,414, 15,477,422, and 16,680,165 for the years ended 1997, 1996, and 1995, respectively. The weighted average number of common shares outstanding used in the computation of Diluted EPS was 14,549,455, 16,311,685, and 17,399,138 for the years ended 1997, 1996, and 1995, 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 stock options. 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 four 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, 1997 and October 1, 1997), the initial offering price was adjusted to $5.56 per share and the number of shares outstanding was 14,912,791 at December 31, 1997. 31 27 3 Securities Investments Securities held to maturity at December 31, 1997 and 1996 are summarized as follows:
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 =============================================================================================== December 31, 1996 - ----------------------------------------------------------------------------------------------- Gross Gross Estimated (in thousands) Cost unrealized gain unrealized loss market value - ----------------------------------------------------------------------------------------------- U.S. Government and agencies $76,121 $25 $(82) $76,064 - ----------------------------------------------------------------------------------------------- FHLB stock 10,372 -- -- 10,372 FNMA stock 2 45 -- 47 - ----------------------------------------------------------------------------------------------- Total stock 10,374 45 -- 10,419 - ----------------------------------------------------------------------------------------------- Total securities $86,495 $70 $(82) $86,483 ===============================================================================================
The following is a summary of the amortized cost and estimated market value of securities held to maturity at December 31, 1997 by remaining term to maturity: December 31, 1997 - -------------------------------------------------------------------------------- U.S. Government Estimated (in thousands) and agencies market value - -------------------------------------------------------------------------------- 1 year or less $66,222 $66,199 Over 1 year to 5 years 12,057 12,146 - -------------------------------------------------------------------------------- Total $78,279 $78,345 ================================================================================ 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, 1997 are summarized as follows:
December 31, 1997 - ----------------------------------------------------------------------------------------------- Gross Gross Estimated (in thousands) Cost unrealized gain unrealized loss market value - ----------------------------------------------------------------------------------------------- Equity $2,509 $108 $-- $2,617 ===============================================================================================
There were no securities available for sale as of December 31, 1996. 32 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 4 Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity at December 31, 1997 and 1996 are summarized as follows:
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 ================================================================================ December 31, 1996 - -------------------------------------------------------------------------------- (in thousands) GNMA FHLMC Total - -------------------------------------------------------------------------------- Principal balance $ 23,517 $ 50,207 $ 73,724 Unamortized premium 52 -- 52 Unamortized discount -- (44) (44) - -------------------------------------------------------------------------------- Mortgage-backed securities, net 23,569 50,163 73,732 Gross unrealized gains 405 351 756 Gross unrealized losses (12) (284) (296) - -------------------------------------------------------------------------------- Estimated market value $ 23,962 $ 50,230 $ 74,192 ================================================================================
The amortized cost and estimated market values 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, 1997 by remaining term to maturity:
December 31, 1997 - -------------------------------------------------------------------------------- Estimated (in thousands) GNMA FHLMC Total Market Value - -------------------------------------------------------------------------------- 1 year or less $ 2,981 $12,112 $15,093 $15,348 Over 1 year to 5 years 17,088 17,600 34,688 35,271 - -------------------------------------------------------------------------------- Total mortgage-backed securities, net $20,069 $29,712 $49,781 $50,619 ================================================================================
There were no sales of mortgage-backed securities held to maturity during the years ended December 31, 1997, 1996, or 1995. 33 29 5 Loans The composition of the loan portfolio as of December 31, 1997 and 1996 is summarized as follows:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Mortgage Loans: 1-4 family $ 224,287 $ 256,904 Multi-family 1,107,374 822,364 Commercial real estate 61,740 63,452 Construction 1,538 1,598 - -------------------------------------------------------------------------------- Total mortgage loans 1,394,939 1,144,318 Less: Net deferred loan origination fees 1,281 1,058 - -------------------------------------------------------------------------------- Mortgage loans, net 1,393,658 1,143,260 - -------------------------------------------------------------------------------- Other Loans: Cooperative apartment 5,041 5,764 Home equity 2,386 2,819 Passbook savings 312 375 Other 3,056 3,317 - -------------------------------------------------------------------------------- Total other loans 10,795 12,275 Less: Unearned discounts 19 24 - -------------------------------------------------------------------------------- Other loans, net 10,776 12,251 Less: Allowance for loan losses 9,431 9,359 - -------------------------------------------------------------------------------- Loans, net $1,395,003 $1,146,152 ================================================================================
The Bank has a diversified loan portfolio as to type and borrower concentration. At December 31, 1997 and 1996, approximately $1.355 billion and $1.106 billion, respectively, of the Bank's mortgage loans were secured by properties located in New York State. Accordingly, a substantial portion of 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"), FNMA, or the State of New York Mortgage Agency ("SONYMA"), and the servicing rights retained. Loans sold to SBLI during the years ended December 31, 1997, 1996, and 1995 amounted to $3.2 million, $300,000, and $400,000, respectively. No loans were sold to FNMA in the years ended December 31, 1997 and 1996; in 1995, loans sold to FNMA amounted to $100,000. No loans were sold to SONYMA during the years ended December 31, 1997 and 1995; in 1996, loans sold to SONYMA totaled $45,000. In 1997, the Bank also originated and sold $13.6 million in multi-family mortgage loans, with the servicing rights retained. In 1996 and 1995, all multi-family mortgage loans originated by the Bank were retained in portfolio. During 1997, 1996, and 1995, the Bank also sold approximately $12,000, $82,000, and $200,000, respectively, in student loans, a substantial portion of said portfolio, to Nellie Mae. Included in other income for the years ended December 31, 1997, 1996, and 1995 were $512,000, $1,000, and $23,000, respectively, related to the net gain (loss) on the sale of these loans. The Bank services mortgage loans for third parties, primarily SBLI, FNMA, and SONYMA. The unpaid principal balance of such serviced loans amounted to $18.0 million, $16.1 million, and $17.4 million, at December 31, 1997, 1996, and 1995, respectively. Custodial escrow balances maintained in connection with such loans amounted to $56,000, $49,000, and $115,000 at the corresponding dates. Commitments to originate first mortgage loans at December 31, 1997 and 1996 amounted to approximately $102.3 million and $32.4 million, respectively, all representing variable rate first mortgage loans. Substantially all of the commitments at December 31, 1997 were expected to close within 90 days and were made at interest rates that float or adjust at periodic intervals. 34 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 6 Allowance for Loan Losses Activity in the allowance for loan losses for the years ended December 31, 1997, 1996, and 1995 is summarized as follows:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Balance, beginning of year $9,359 $ 11,359 $ 11,268 Provisions charged to operations -- -- 150 Reversal of provisions -- (2,000) -- Net recoveries (charge-offs) 72 -- (59) - -------------------------------------------------------------------------------- Balance, end of year $9,431 $ 9,359 $ 11,359 ================================================================================
There were $72,000 in recoveries to the allowance for loan losses during the year ended December 31, 1997. No recoveries were realized during 1996 or 1995. Mortgage loans in foreclosure amounted to approximately $6.1 million, $7.0 million, and $4.9 million at December 31, 1997, 1996, and 1995, respectively, and included loans that have been restructured of approximately $0, $24,000, and $359,000, respectively, at the corresponding dates. 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, 1997, 1996, and 1995 are summarized below:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Interest income that would have been recorded $ 1,040 $ 1,062 $ 869 Interest income recognized (149) (144) (47) - -------------------------------------------------------------------------------- Interest income foregone $ 891 $ 918 $ 822 ================================================================================
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 1997; in 1996, the average balance of impaired loans was $1.2 million. There was no interest income recognized on impaired loans during 1996. 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, 1997 and 1996:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Balance, beginning of year $ 627 $ 774 Transfers in 1,758 730 Sales (1,240) (655) Transfers to real estate held for investment (115) (222) - -------------------------------------------------------------------------------- Balance, end of year $ 1,030 $ 627 ================================================================================
Foreclosed real estate is carried at fair market value. There were no valuation allowances at December 31, 1997 or 1996, and no provisions for the years ended December 31, 1997, 1996, or 1995. 35 31 8 Deposits The following is a summary of weighted average interest rates at December 31, 1997 and 1996 for each type of deposit:
December 31, 1997 - -------------------------------------------------------------------------------- Percent Weighted (in thousands) Amount of Total Average Rate - -------------------------------------------------------------------------------- Non-interest-bearing demand accounts $ 29,186 2.73% 0.00% NOW and Super NOW accounts 21,485 2.01 2.43 Money market accounts 46,409 4.34 2.83 Savings accounts 268,133 25.08 2.40 Certificates of deposit 703,948 65.84 5.50 - -------------------------------------------------------------------------------- Total deposits $1,069,161 100.00% 4.39% ================================================================================ December 31, 1996 - -------------------------------------------------------------------------------- Percent Weighted (in thousands) Amount of Total Average Rate - -------------------------------------------------------------------------------- Non-interest-bearing demand accounts $ 24,999 2.44% 0.00% NOW and Super NOW accounts 18,216 1.78 2.46 Money market accounts 51,227 5.00 2.84 Savings accounts 277,783 27.13 2.42 Certificates of deposit 651,705 63.65 5.40 - -------------------------------------------------------------------------------- Total deposits $1,023,930 100.00% 4.28% ================================================================================
The following is a summary of certificates of deposit at December 31, 1997 by remaining term to maturity and by range of stated interest rates:
December 31, 1997 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% $ 46,165 $-- $-- $-- $ 46,165 3.00% to 3.99% -- -- -- -- -- 4.00% to 4.99% 52,123 442 -- -- 52,565 5.00% to 6.99% 465,951 94,923 24,697 14,692 600,263 7.00% and above 980 1,143 938 1,894 4,955 - -------------------------------------------------------------------------------- Total maturities $565,219 $96,508 $25,635 $16,586 $703,948 ================================================================================
At December 31, 1997 and 1996, the aggregate amount of certificates of deposit of $100,000 or more was approximately $139.7 million and $108.4 million, respectively. 36 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 9 Borrowings In 1997 and 1996, the Company drew upon its line of credit with the Federal Home Loan Bank of New York ("FHLB"), which totaled $481.0 million and $323.3 million at the respective year-ends. At December 31, 1997 and 1996, the outstanding balance was approximately $309.7 million and $81.4 million, with scheduled maturity dates within the next 12 months. The weighted average interest rate for borrowings was 5.76% and 5.49% at the corresponding dates. For the years ended December 31, 1997 and 1996, the weighted average outstanding balance was approximately $189.1 million and $61.2 million, with a weighted average interest rate of 5.68% and 5.59%. The maximum amount of borrowings outstanding at any month-end during the year ending December 31, 1997 was $309.7 million; in the previous twelve-month period, the maximum month-end amount was $88.8 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, 1997. 10 Federal, State, and Local Taxes Federal Income Taxes The components of the net deferred tax asset at December 31, 1997 and 1996 are summarized as follows:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Deferred Tax Assets: Financial statement loan loss allowance $ 4,452 $ 4,489 Accrual for post-retirement benefits 1,942 1,953 Deferred directors' fees 375 357 Accrual for directors' retirement benefit 358 380 Deferred origination fees 605 503 Non-accrual interest 74 203 Organization costs 319 705 Others 1,339 782 - -------------------------------------------------------------------------------- Total deferred tax assets 9,464 9,372 - -------------------------------------------------------------------------------- Deferred Tax Liabilities: Tax reserve in excess of base year reserve (2,591) (4,815) Basis difference of GNMAs (424) (608) Pre-paid pension cost (909) (606) Basis difference of premises and equipment (26) (31) - -------------------------------------------------------------------------------- Total deferred tax liabilities (3,950) (6,060) - -------------------------------------------------------------------------------- Net deferred tax asset $ 5,514 $ 3,312 ================================================================================
The net deferred tax asset at December 31, 1997 and 1996 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 that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. Accordingly, no valuation allowance was deemed necessary for the net deferred tax asset at December 31, 1997 or 1996. However, there can be no assurances about the level of future earnings. 37 33 Income tax expense (benefit) for the years ended December 31, 1997, 1996, and 1995 is summarized as follows:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Federal--current $ 12,673 $10,471 $ 8,500 State and local--current 3,884 4,774 3,718 - -------------------------------------------------------------------------------- Total current 16,557 15,245 12,218 - -------------------------------------------------------------------------------- Federal--deferred (340) 690 (274) State and local--deferred (1,862) 1,820 (207) - -------------------------------------------------------------------------------- Total deferred (2,202) 2,510 (481) - -------------------------------------------------------------------------------- Total income tax expense $ 14,355 $17,755 $ 11,737 ================================================================================
The following is a reconciliation of statutory Federal income tax expense to combined effective income tax expense for the years ended December 31, 1997, 1996, and 1995:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Statutory Federal income tax expense $ 13,167 $ 13,543 $ 11,172 State and local income taxes, net of Federal income tax benefit 1,314 4,286 2,282 Prior-period tax refunds -- -- (723) Other, net (126) (74) (994) - -------------------------------------------------------------------------------- Total income tax expense $ 14,355 $ 17,755 $ 11,737 ================================================================================
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 ("reserve method"). The reserve method was used in preparing the income tax returns for 1995 and 1994. 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 No. 109, 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 an approximate $7.4 million tax loan loss reserve which could be recognized as taxable income and create a current and/or deferred tax liability of up to $2.6 million, under current income tax rates, if one of the following occurs: (a) the Bank's retained earnings represented by this reserve are used for purposes other than to absorb losses from bad debts, including excess dividends or distributions in liquidation; (b) the Bank redeems its stock; (c) the Bank fails to meet the definition provided by the Code for a Bank; or (d) there is 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, 1997, 1996, and 1995. 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. 38 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 11 Commitments and Contingencies Lease Commitments At December 31, 1997, the Company was obligated under eight non-cancellable 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, 1997, the Company had entered into several non-cancellable 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. As of December 31, 1997, 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 - -------------------------------------------------------------------------------- 1998 $ 864 $ 434 1999 716 440 2000 736 431 2001 661 397 2002 467 356 2003 and thereafter 1,835 3,418 - -------------------------------------------------------------------------------- Total minimum future rentals $5,279 $5,476 ================================================================================
Rental expense under these leases, included in occupancy and equipment expense, was approximately $399,000, $333,000, and $264,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Rental income on bank-owned properties, netted in occupancy and equipment expense, was approximately $1.026 million, $947,000, and $910,000, for the years ended December 31, 1997, 1996, and 1995, respectively. Legal Proceedings In the normal course of the Company's business, there are various outstanding legal proceedings. In the opinion of management, after 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. 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. The Bank performs its pension valuation to coincide with the year-end of the pension plan (September 30th). The Bank estimates that its pension status was not materially different at December 31, 1997 or 1996. The components of net pension expense as determined by the Plan's actuary at the most recent September 30th valuation dates are as follows:
September 30, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost--benefits earned during the period $ 492 $ 504 $ 429 Interest cost on projected benefit obligation 940 926 904 Actual return on plan assets (2,248) (1,380) (1,900) Net amortization and deferral 1,177 366 1,077 - -------------------------------------------------------------------------------- Net pension expense $ 361 $ 416 $ 510 ================================================================================
39 35 A comparison of accumulated plan benefit obligation and plan net assets as of the most recent actuarial valuation follows:
September 30, - ------------------------------------------------------------------------------------ (in thousands) 1997 1996 - ------------------------------------------------------------------------------------ Actuarial Present Value of Benefit Obligation: Accumulated Benefit Obligation (ABO): Vested $(11,327) $ (9,990) Non-vested (141) (264) - ------------------------------------------------------------------------------------ Total ABO $(11,468) $(10,254) ==================================================================================== Projected benefit obligation $(13,769) $(12,473) Plan assets at fair value (primarily investment trust funds) 14,756 12,875 - ------------------------------------------------------------------------------------ Excess of plan assets under projected benefit obligation 987 402 Unrecognized transition asset being amortized over 10.46 years -- (64) Amount contributed during fourth quarter 596 -- Unrecognized loss 268 849 Unrecognized past service liability 75 93 - ------------------------------------------------------------------------------------ Pre-paid pension cost $ 1,926 $ 1,280 ====================================================================================
The discount rate used in determining the actuarial value of the projected benefit obligation for the Bank's plan was 7.25% and 7.75% for 1997 and 1996, respectively. The rate of increase in future compensation levels was 5.0% and 5.5% for 1997 and 1996; the expected long-term rate of return on assets was 8.0% for both years. 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 temporarily 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, 1997, 1996, or 1995. 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. At December 31, 1997 and 1996, this plan maintained $0 and $1.0 million, respectively, of trust-held assets. The remaining balances in the deferred compensation plan at December 31, 1997 and 1996 of $758,000 and $752,000, 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. The following table sets forth the plan's funded status and amounts recognized in the Bank's consolidated financial statements at December 31, 1997 and 1996. 40 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 ================================================================================ Accumulated Post-Retirement Benefit Obligation (APBO)
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Retirees and spouses $(2,350) $(3,546) Actives fully eligible to retire (126) (79) Actives not yet fully eligible to retire (678) (1,000) - -------------------------------------------------------------------------------- Total APBO (3,154) (4,625) - -------------------------------------------------------------------------------- Funded status (3,154) (4,625) Unrecognized net loss (648) 887 Unrecognized prior service cost (312) (376) - -------------------------------------------------------------------------------- Accrued post-retirement benefit cost $(4,114) $(4,114) ================================================================================
The net periodic post-retirement cost for the years ended December 31, 1997 and 1996 was as follows:
December 31, - -------------------------------------------------------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Service cost $ 74 $ 110 Interest cost 217 333 Net amortization of prior service cost (119) (4) - -------------------------------------------------------------------------------- Total expense $ 172 $ 439 ================================================================================
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997; the rate was assumed to decrease gradually to 5% for 2002 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1997 by $253,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the fiscal year ending December 31, 1997 by $29,000. The discount rate used in determining the accumulated post-retirement benefit obligation was 7.25% as of December 31, 1997 and 7.75% as of December 31, 1996. The rate of increase in future compensation levels was 5.0% and 5.5% as of December 31, 1997 and 1996, respectively. 13 Stock-related Plans Option Plans The Board of Directors of the Company adopted the following stock option plans: Stock Option Plan Under the Stock Option Plan, 1,278,225 stock options (as adjusted for the four 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 affiliate, the Bank. Each option entitles the holder to purchase one share of the Company's common stock at an exercise price equal to $5.56 per share, which is the initial public offering price, as adjusted for the four 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 41 37 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 ($5.56) and the fair market value of the underlying shares of common stock. In 1997, 95,680 options granted under the Stock Option Plan were exercised; 70,776 options were exercised in 1996; and 10,519 options were exercised in 1995. 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. The number of vested options exercisable at December 31, 1997 was 824,832. Stock Option Plan for Outside Directors ("Directors' Option Plan") Each member of the Board of Directors who was not an officer or employee of the Company or the Bank was granted non-statutory options on November 23, 1993 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 688,275 shares (as adjusted for the four stock splits) of the common stock of the Company at an exercise price equal to $5.56 per share, which is the initial public offering price as adjusted to reflect the 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. For the years ended December 31, 1997, 1996, and 1995, respectively, 116,999, 80,021, and 44,597 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. 1997 Stock Option Plan On February 18, 1997, the Bank established the 1997 Stock Option Plan under which options to purchase 465,750 shares were granted on that date to participants. The maximum number of shares available for grants under this plan is 787,500. Each option entitles the holder to purchase one share of the Company's common stock at an exercise price equal to $23.45 per share, as adjusted for the two stock splits in 1997. There were no options exercised during 1997 under the 1997 Stock Option Plan. The number of vested options exercisable at December 31, 1997 was 465,750. 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 3,097,240 shares (as adjusted for the four 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 20 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, 1997, the loan had an outstanding balance of $13.3 million and a fixed interest rate of 6.0%. Interest expense for the obligation was $900 thousand for the year ended December 31, 1997. 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 $1.8 million for the year ended December 31, 1997. Dividends and investment income received on ESOP shares used for debt service amounted to $1.4 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 were 193,470 and 307,017 for the periods ended December 31, 1997 and 1996, respectively. At December 31, 1997, there were 2,021,401 shares remaining for future allocation, with a market value of $81.9 million. The Bank recognizes compensation expense based on the average market price during the year at the date of allocation of the common stock for the ESOP Plan. The Company recorded compensation expense for the ESOP Plan of $3.2 million, $2.3 million, and $1.8 million for the years ended December 31, 1997, 1996, and 1995, respectively. 42 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 38 The Bank also established a Supplemental Employee Retirement Plan ("SERP"), which provides additional unfunded, non-qualified benefits to certain participants of the ESOP in the form of common stock. At December 31, 1997, 1996, and 1995, this plan maintained $1.3 million, $1.2 million, and $102,000, respectively, of trust-held assets, based upon the cost of assets at the time of purchase. Trust-held assets consist entirely of Company common stock and represented 136,025, 53,084, and 12,202 shares at December 31, 1997, 1996, and 1995, 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 $32,000 for the years ended December 31, 1997, 1996, and 1995, 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 983,250 shares (as adjusted for the four 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 of stockholders' equity. Awards vested at a rate of 33-1/3% 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 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, 837,181 shares of common stock were vested at December 31, 1997. 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 RRP Plan of $716,000, $1.1 million, and $1.1 million for the years ended December 31, 1997, 1996, and 1995, respectively. 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, 1997 and 1996:
December 31, 1997 1996 - --------------------------------------------------------------------------------------------- (in thousands) Value Fair Value Value Fair Value - --------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 22,733 $ 22,733 $ 21,045 $ 21,045 Securities held to maturity 94,936 95,067 86,495 86,483 Mortgage-backed securities held to maturity 49,781 50,619 73,732 74,192 Securities available for sale 2,617 2,617 -- -- Loans, net 1,395,003 1,485,896 1,146,152 1,185,853 Financial Liabilities: Deposits $1,069,161 $1,071,738 $1,023,930 $1,028,386 FHLB borrowings 309,664 309,664 81,393 81,393 Mortgagors' escrow 10,690 10,690 7,356 7,356 =============================================================================================
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 Held to Maturity, 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. 43 39 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. As such, 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. FHLB Borrowings The carrying value of borrowings approximates fair value in the financial statements, as these instruments are short-term. Other Receivables and Payables The estimated 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, 1997 or 1996. 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 1997, the Bank declared dividends to its parent aggregating $16.0 million, which did not exceed net profits for 1996 through 1997. 44 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 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, 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) 1997 1996 - -------------------------------------------------------------------------------- Assets Cash $ 757 $ 339 Money market investments 57 62 Investment in and advances to Queens County Savings Bank 169,701 211,028 - -------------------------------------------------------------------------------- Total assets 170,515 $211,429 ================================================================================ Liabilities and Stockholders' Equity Stockholders' equity $170,515 $211,429 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $170,515 $211,429 ================================================================================
================================================================================ Condensed Statements of Income
Years Ended December 31, - ------------------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------- Interest income from Queens County Savings Bank $ 2,358 $ 3,786 $ 5,273 Other interest income 17 8 3 Dividends from Queens County Savings Bank 16,000 38,000 -- - ------------------------------------------------------------------------------------------- Total income 18,375 41,794 5,276 Operating expense 256 273 233 - ------------------------------------------------------------------------------------------- Income before income tax and equity in undistributed earnings 18,119 41,521 5,043 Income tax expense 151 150 163 - ------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of Queens County Savings Bank 17,968 41,371 4,880 Equity in undistributed earnings of Queens County Savings Bank 5,296 (20,432) 15,303 - ------------------------------------------------------------------------------------------- Net income $23,264 $ 20,939 $20,183 ===========================================================================================
45 41 ================================================================================ Condensed Statements of Cash Flows
Years Ended December 31, - ------------------------------------------------------------------------------------------------ (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 23,264 $ 20,939 $ 20,183 Equity in undistributed earnings of the Bank not provided for (5,296) 20,432 (15,303) Increase in other liabilities -- -- (73) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 17,968 41,371 4,807 ================================================================================================ Cash Flows From Investing Activities: Payments for investments in and advances to subsidiaries (17,831) (42,761) (11,362) Repayment from investments in and advances to subsidiaries 75,284 35,231 17,921 - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 57,453 (7,530) 6,559 ================================================================================================ Cash Flows From Financing Activities: Purchase of Treasury stock (68,086) (28,825) (9,963) Dividends paid (8,135) (5,669) (1,632) Exercise of stock options 1,213 837 306 - ------------------------------------------------------------------------------------------------ Net cash used in financing activities (75,008) (33,657) (11,289) - ------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 413 184 77 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 401 217 140 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 814 $ 401 $ 217 ================================================================================================
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 47) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 leverage capital (as defined) to average assets (as defined). Management believes that, as of December 31, 1997, the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, 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 that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table on the following page. 46 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 42
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 ==================================================================================================================
To Be Well Capitalized For Capital Under Prompt Corrective As of December 31, 1996 Actual Adequacy Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ Total capital (to risk-weighted assets) $137,044 17.38% $63,091 (>/-)8.0% $78,868 (>/-)10.0% Tier 1 capital (to risk-weighted assets) 127,685 16.19 31,545 (>/-)4.0 47,318 (>/-)6.0 Tier 1 leverage capital (to average assets) 127,685 9.65 39,681 (>/-)3.0 66,135 (>/-)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. 18 Quarterly Financial Data (Unaudited) Selected quarterly financial data for the fiscal years ended December 31, 1997 and 1996 follows:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $16,110 $15,611 $15,490 $15,187 $14,863 $14,406 $14,443 $13,808 (Reversal of) provision for loan losses -- -- -- -- -- -- (2,000) -- Other operating income 1,149 336 515 304 861 628 470 486 Operating expense 7,095 6,785 6,692 6,512 6,547 5,733 5,533 5,457 - ------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 10,164 9,162 9,313 8,979 9,177 9,301 11,380 8,837 Income tax expense 4,769 3,767 3,972 1,847 5,364 3,699 5,115 3,578 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 5,395 $ 5,395 $ 5,341 $ 7,132 $ 3,813 $ 5,602 $ 6,265 $ 5,259 =============================================================================================================================== Diluted earnings per common share(1) $0.39 $0.39 $0.38 $0.45 $0.25 $0.35 $0.38 $0.31 =============================================================================================================================== Cash dividends declared per common share(1) 0.20 0.17 0.13 0.11 0.11 0.11 0.083 0.067 =============================================================================================================================== Average common shares and equivalents outstanding(1) 13,895 14,004 14,129 15,712 15,389 15,927 16,649 16,942 =============================================================================================================================== Stock price per common share(1): High $40.50 $36.17 $32.00 $26.45 $21.95 $16.92 $16.33 $14.67 Low 34.75 29.67 23.78 20.11 16.39 15.63 14.33 13.00 Close 40.50 34.54 30.33 24.39 21.06 16.56 16.33 14.67 ===============================================================================================================================
(1) Reflects shares issued as a result of a 4-for-3 stock split on August 22, 1996 and 3-for-2 stock splits on April 10, 1997 and October 1, 1997. 47 43 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 1997, 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 is properly discharging its 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, 1998 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, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York January 20, 1998 48 QUEENS COUNTY BANCORP, INC. 1997 ANNUAL REPORT EX-23 4 CONSENT OF KPMG PEAT MARWICK, LLP 1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Queens County Bancorp, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 33-85684 and 33-85682) on Form S-8 of Queens County Bancorp, Inc. of our report dated January 20, 1998, related to the consolidated statements of condition of the Queens County Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 Annual Report on Form 10-K of Queens County Bancorp, Inc. New York, New York March 17, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 16,733 0 6,000 0 2,617 144,717 145,686 1,404,434 9,431 1,603,269 1,069,161 309,664 53,929 0 0 0 206 170,309 1,603,269 108,868 8,593 273 117,734 44,585 55,336 62,398 0 18 24,761 37,619 23,264 0 0 23,264 1.71 1.60 8.40 6,121 1,571 0 0 9,359 0 72 9,431 9,431 0 9,431
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