1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 Commission File Number 0-22278 QUEENS COUNTY BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE 06-1377322 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 38-25 Main Street, Flushing, New York 11354 (Address of principal executive offices) (Registrant's telephone number, including area code) 718: 359-6400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No 10,155,055 Number of shares outstanding at August 8, 1997
2 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY FORM 10-Q THREE MONTHS ENDED JUNE 10, 1997 <TABLE> <CAPTION> INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- <S> <C> <C> Item 1. FINANCIAL STATEMENTS Consolidated Statements of Condition as of June 30, 1997 (unaudited) and December 31, 1996 1 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1997 and 1996 (unaudited) 2 Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 1997 (unaudited) 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (unaudited) 4 Notes to Unaudited Consolidated Financial Statements 5 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS 25 Item 2. CHANGES IN SECURITIES 25 Item 3. DEFAULTS UPON SENIOR SECURITIES 25 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 25 HOLDERS Item 5. OTHER INFORMATION 25 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURES 26 EXHIBITS 27 </TABLE>
3 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 (in thousands) (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Cash and due from banks $ 15,211 $ 14,045 Money market investments 11,850 7,000 Securities held to maturity (estimated market value of $71,033 and $86,483, respectively) 70,971 86,495 Mortgage-backed securities held to maturity (estimated market value of $62,427 and $74,192, respectively) 61,732 73,732 Mortgage loans: 1-4 family 242,000 256,903 Multi-family 967,451 822,364 Commercial real estate 60,299 63,452 Construction 948 1,598 -------------------- ---------------------- Total mortgage loans 1,270,698 1,144,317 Other loans 11,533 12,276 Less: Unearned loan fees (1,402) (1,082) Allowance for loan losses (9,431) (9,359) -------------------- ---------------------- Loans, net 1,271,398 1,146,152 Premises and equipment, net 10,961 11,077 Deferred tax asset, net 5,757 3,312 Other assets 19,026 16,843 -------------------- ---------------------- Total assets $ 1,466,906 $ 1,358,656 ==================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: NOW and money market accounts $ 66,082 $ 69,443 Savings accounts 274,312 277,783 Certificates of deposit 664,967 651,705 Non-interest-bearing accounts 25,758 24,999 -------------------- ---------------------- Total deposits 1,031,119 1,023,930 -------------------- ---------------------- Official checks outstanding 20,649 26,729 FHLB borrowings 217,010 81,393 Accounts payable and accrued expenses 930 1,169 Mortgagors' escrow 15,298 7,356 Other liabilities 8,013 6,650 -------------------- ---------------------- Total liabilities 1,293,019 1,147,227 -------------------- ---------------------- Stockholders' equity: Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) -- -- Common stock at par $0.01 (30,000,000 shares authorized; 13,764,816 shares issued; 10,180,765 and 11,445,154 shares outstanding at June 30, 1997 and December 31, 1996, respectively) 138 92 Paid-in capital in excess of par 120,091 116,607 Retained earnings (substantially restricted) 161,615 154,886 Less:Treasury stock (3,584,051 and 2,319,901 shares, respectively) (90,597) (42,397) Unallocated common stock held by ESOP (14,169) (14,820) Common stock held by SERP and Deferred Compensation Plans (2,003) (1,411) Unearned common stock held by RRPs (1,188) (1,528) -------------------- ---------------------- Total stockholders' equity 173,887 211,429 -------------------- ---------------------- Total liabilities and stockholders' equity $ 1,466,906 $ 1,358,656 ==================== ====================== </TABLE> See accompanying notes to financial statements 1
4 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> FOR THE FOR THE THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (in thousands, except per share data) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME: Mortgage and other loans $26,250 $ 22,608 $51,039 $ 44,310 Securities held to maturity 1,107 1,019 2,271 2,072 Mortgage-backed securities held to maturity 1,007 1,353 2,099 2,783 Money market investments 78 85 138 414 ------- -------- ------- -------- Total interest income 28,442 25,065 55,547 49,579 ------- -------- ------- -------- INTEREST EXPENSE: NOW and money market accounts 447 511 917 1,054 Savings accounts 1,646 1,694 3,279 3,399 Certificates of deposit 8,778 7,596 17,396 15,241 FHLB borrowings 2,071 809 3,258 1,620 Mortgagors' escrow 10 12 20 15 ------- -------- ------- -------- Total interest expense 12,952 10,622 24,870 21,329 ------- -------- ------- -------- Net interest income 15,490 14,443 30,677 28,250 (Reversal of) provision for loan losses -- (2,000) -- (2,000) ------- -------- ------- -------- Net interest income after reversal of provision for loan losses 15,490 16,443 30,677 30,250 ------- -------- ------- -------- OTHER OPERATING INCOME: Fee income 301 416 580 773 Other 214 54 239 183 ------- -------- ------- -------- Total other operating income 515 470 819 956 ------- -------- ------- -------- OPERATING EXPENSE: Compensation and benefits 4,685 3,775 9,233 7,532 Occupancy and equipment 631 600 1,300 1,220 General and administrative 1,183 1,120 2,322 2,099 Other 193 38 349 139 ------- -------- ------- -------- Total operating expense 6,692 5,533 13,204 10,990 ------- -------- ------- -------- Income before income taxes 9,313 11,380 18,292 20,216 Income tax expense 3,972 5,115 5,819 8,693 ------- -------- ------- -------- Net income $ 5,341 $ 6,265 $12,473 $ 11,523 ======= ======== ======= ======== Net income per common share(a) $ 0.55 $ 0.55 $ 1.21 $ 1.01 </TABLE> (a) Reflects shares issued as a result of a 3-for-2 stock split on April 10, 1997 and a 4-for-3 stock split on August 22, 1996. See accompanying notes to financial statements 2
5 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 (in thousands) (unaudited) - -------------------------------------------------------------------------- <S> <C> COMMON STOCK (PAR VALUE: $0.01): Balance at beginning of period $ 92 Shares issued 46 --------- Balance at end of period 138 PAID-IN CAPITAL IN EXCESS OF PAR: Balance at beginning of period 116,607 Shares issued and fractional shares (51) Tax benefit effect on stock plans 1,240 Common stock acquired by SERP 592 Allocation of ESOP stock 1,703 --------- Balance at end of period 120,091 --------- RETAINED EARNINGS: Balance at beginning of period 154,886 Net income 12,473 Dividends paid on common stock (3,390) Exercise of stock options (97,864 shares) (2,354) --------- Balance at end of period 161,615 --------- TREASURY STOCK: Balance at beginning of period (42,397) Purchase of Treasury stock (1,389,291 shares) (53,155) Common stock acquired by SERP 592 Exercise of stock options (97,864 shares) 4,363 --------- Balance at end of period (90,597) --------- EMPLOYEE STOCK OWNERSHIP PLAN: Balance at beginning of period (14,820) Allocation of ESOP stock 651 --------- Balance at end of period (14,169) --------- SERP AND DEFERRED COMPENSATION PLANS: Balance at beginning of year (1,411) Common stock acquired by SERP (592) --------- Balance at end of period (2,003) --------- RECOGNITION AND RETENTION PLANS: Balance at beginning of period (1,528) Earned portion of RRPs 340 --------- Balance at end of period (1,188) --------- Total stockholders' equity $ 173,887 ========= </TABLE> See accompanying notes to financial statements 3
6 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, (in thousands) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,473 $ 11,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 466 360 (Reversal of) provision for loan losses -- (2,000) Amortization of premiums, net 100 235 Amortization (accretion) of net deferred loan origination fees 320 (160) Net gain on redemption of securities and mortgage-backed securities (1) (2) Net (gain) loss on sale of foreclosed real estate (43) 2 Earned portion of RRPs 340 542 Earned portion of ESOP 2,354 1,924 Changes in assets and liabilities: (Increase) decrease in other assets (2,183) 2,338 (Increase) decrease in deferred income taxes (2,445) 1,063 Decrease in accounts payable and accrued expenses (239) (782) Decrease in official checks outstanding (6,080) (10,298) Increase (decrease) in other liabilities 1,363 (1,017) ----------------- ----------------- Total adjustments (6,048) (7,795) ----------------- ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,425 3,728 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from redemption of mortgage-backed securities held to maturity 20,995 8,371 Proceeds from maturity of securities held to maturity 30,000 42,000 Purchase of securities held to maturity (23,570) (41,968) Net increase in loans (126,632) (86,718) Proceeds from sale of loans and foreclosed real estate 1,104 478 Purchase of premises and equipment, net (350) (323) ----------------- ----------------- NET CASH USED IN INVESTING ACTIVITIES (98,453) (78,160) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in mortgagors' escrow 7,942 3,634 Net increase in deposits 7,189 44,902 Net increase in FHLB borrowings 135,617 26,619 Cash dividends paid and options exercised, net (5,744) (3,180) Purchase of Treasury stock, net of stock options exercised and shares acquired by SERP (46,960) (12,468) ----------------- ----------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 98,044 59,507 Net increase (decrease) in cash and cash equivalents 6,016 (14,925) Cash and cash equivalents at beginning of period 21,045 38,990 ----------------- ----------------- Cash and cash equivalents at end of period $ 27,061 $ 24,065 ================= ================= Supplemental information: Cash paid for: Interest $24,864 $21,328 Income taxes 2,576 8,575 Transfers to foreclosed real estate from loans -- 184 Transfers to real estate held for investment from foreclosed real estate 115 598 </TABLE> See accompanying notes to financial statements 4
7 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Queens County Savings Bank (the "Bank"). The statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the periods presented. The results of operations for the three and six months ended June 30, 1997 are not necessarily indicative of the results of operations that may be expected for all of 1997. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Shareholders and SEC Form 10-K. NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting method prescribed in APB Opinion No. 25 must make a pro forma disclosure of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in this statement had been applied. SFAS No. 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995, though this statement may be adopted on issuance. The disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995 or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. Pro forma disclosures required for entities that elect to continue to measure compensation cost using APB Opinion No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. 5
8 In the first quarter of 1997, the Company initiated a stock option plan, which meets the criteria of SFAS No. 123. The Bank is applying APB Opinion No. 25 and related interpretations in its accounting for this plan; accordingly, no compensation cost has been recognized. Pro forma disclosures of net income and earnings per share reflecting the fair value-based method of accounting as defined in SFAS No. 123 will be made in the Company's 1997 annual report. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities, based on consistent application of a financial components approach focusing on control. Under this approach, after a transfer of financial assets, an entity recognizes said assets when control has been surrendered, and derecognizes liabilities when they have been extinguished. In addition, SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that consist of secured borrowings. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 delays the effective date of certain provisions of SFAS No. 125 until after December 31, 1997. SFAS No. 125, as amended by SFAS No. 127, is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after either December 31, 1996 or December 31, 1997, depending on the transaction, and is to be applied prospectively. Earlier or retroactive application is not permitted. SFAS No. 125 has had no impact, nor is it expected to have an impact, on the Company's financial statements. EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128 simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share." It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods with earlier application not permitted. SFAS No. 128 requires restatement of all prior-period EPS data presented. The Company is currently evaluating the effects of SFAS No. 128. 6
9 DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 is effective for financial statements issued for periods ending after December 15, 1997 and will have no impact on the Company's financial statements when it becomes effective. 7
10 QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Queens County Bancorp, Inc. (the "Company") is the holding company for Queens County Savings Bank (the "Bank"), the first savings bank chartered by the State of New York in the New York City Borough of Queens. The primary business of the Bank is gathering deposits from its customers in Queens and Nassau County and investing these funds in the origination of residential mortgage loans throughout metropolitan New York. Acting under the Board of Directors' January 21, 1997 share repurchase authorization, the Company accelerated its repurchase of shares of Queens County Bancorp stock in the second quarter of the year. Including 375,392 shares repurchased in the first quarter, the number of shares repurchased in the six months ended June 30, 1997 totaled 1,389,291, representing an investment of $53.2 million in the Company. The number of shares repurchased has been adjusted to reflect the 3-for-2 stock split which occurred at the close of business on April 10, 1997. On July 16, 1997, the Board of Directors announced an additional 500,000 share repurchase authorization, bringing the number of shares still available for repurchase to 733,735 at that date. The 733,735 represented 7.21% of shares outstanding on the day the announcement was made. Also in July, the Board of Directors declared a $0.25 per share quarterly cash dividend, representing a 25% increase from the dividend paid in May. The dividend will be paid on the 15th of August to shareholders of record on August 1st. BALANCE SHEET SUMMARY The Company recorded total assets of $1.5 billion at June 30, 1997, up $108.3 million, or 8.0%, from the level recorded at December 31, 1996. The increase in assets was driven by significant mortgage loan production: the mortgage loan portfolio grew $126.4 million, or 11.1%, to $1.3 billion, triggered by a $145.1 million, or 17.6%, rise in multi-family mortgage loans. Mortgage originations totaled $140.0 million in the second quarter; of these, $135.5 million were secured by multi-family properties. The balance of the mortgage loan portfolio at the close of the second quarter consisted of $242.0 million in loans secured by one-to-four family homes, $60.3 million in commercial real estate loans, and $948,000 in construction loans. Also in the asset mix were other loans of $11.5 million; securities held to maturity ("securities") of $71.0 million; mortgage-backed securities held to maturity ("mortgage backed securities") of $61.7 million; and money market investments of $11.9 million. The allowance for loan losses rose to $9.4 million, reflecting recoveries of $72,000 stemming from the disposition of non-performing loans. The allowance represented 111.17% of non-performing loans at June 30, 1997, and 0.74% of loans, net at that date. Non-performing loans totaled $8.5 million, or 0.67% 8
11 of loans, net, while foreclosed real estate equaled $1.4 million at quarter's end. Non-performing assets thus equaled $9.9 million, representing 0.68% of total assets, down from $10.3 million, or 0.76%, at December 31st. Deposits rose $7.2 million to $1.0 billion at June 30, 1997, largely reflecting a $13.3 million increase in certificates of deposit ("CDs") to $665.0 million, representing 64.5% of total deposits at that date. To provide additional funding for the significant rise in loan production, the Company drew on its Federal Home Loan Bank of New York ("FHLB") line of credit. As a result, FHLB borrowings totaled $217.0 million at the end of the quarter, up from $81.4 million at year-end 1996. Stockholders' equity declined to $173.9 million, representing 11.85% of total assets and a book value of $19.83 per share (based on 8,769,024 shares outstanding, after excluding the Company's unallocated ESOP shares). The level of stockholders' equity reflects the allocation of $53.2 million toward the repurchase of 1,389,291 shares under the Company's stock repurchase program. The impact of this expenditure was offset by net income of $12.5 million less dividends paid and options exercised of $6.4 million, and by the addition of $5.1 million in non-cash expenses relating to the amortization and appreciation of shares in the Company's stock-related benefit plans and associated tax benefits. As further indication of its capital strength, the Bank continued to exceed the minimum regulatory capital requirements and to fulfill the requirements for classification as a well-capitalized institution under the FDIC Improvement Act ("FDICIA"). LOANS Fueled by a record $140.0 million in mortgage loan originations in the second quarter, the mortgage loan portfolio grew to $1.3 billion at June 30, 1997, up $126.4 million from the level recorded at year-end 1996. The 11.1% increase stemmed entirely from a $145.1 million, or 17.6%, rise in multi-family mortgage loans outstanding to $967.5 million. Multi-family mortgage loans accounted for 76.1% of mortgage loans outstanding at the close of the quarter, and $189.1 million, or 94.8%, of originations year-to-date. The majority of the Company's multi-family mortgage loans are originated for terms of ten years at a rate of interest that adjusts to a point over prime in each of years six through ten of the mortgage. In years one through five, the loan may feature either a fixed rate of interest or a rate that steps up annually by 50 basis points. At June 30, 1997, 95.7% of multi-family mortgage loans featured adjustable rates of interest, including $439.3 million in loans, the interest rates of which are scheduled to step up over the next twelve months. Specifically, $96.1 million, $111.3 million, $141.6 million, and $90.3 million in loans, respectively, will reprice upward over the next four quarters. The decisive growth in the portfolio of multi-family mortgages has corresponded with a steady decline in the portfolio of other mortgage loans. At June 30, 1997, one-to-four family mortgage loans represented $242.0 million, or 19.1%, of mortgage loans outstanding, down $14.9 million after originations of $7.2 million in the first six months of the year. Also included in the mortgage loan portfolio at quarter's end were $60.3 million in commercial real estate loans (down $3.2 million from the year-earlier level after originations of $2.9 million) and $948,000 in construction loans (down $650,000 after originations of $280,000). In addition to mortgage loans, the Company originates a modest volume of consumer loans. At June 30, 1997, this portfolio totaled $11.5 million, down from $12.3 million at year-end 1996. 9
12 With $109.9 million in mortgage loans in the pipeline at the close of the quarter, the Company is well on track to exceed the record $303.1 million in mortgage originations achieved in the twelve months ended December 31, 1996. Despite increased competition for product in the multi-family real estate market, management believes that its presence in this market may continue to expand. However, the Company's ability to originate these and other types of loans could be adversely impacted by such factors as a marked increase in interest rates, a significant increase in competition, or a decline in loan demand. ASSET QUALITY The Company's asset quality, which has been viewed as consistently stellar, experienced additional improvement in the second quarter of the year. Besides recording no charge-offs for the eighth consecutive quarter, the Company recovered $26,000, bringing to $72,000 the total balance of funds recovered following the disposition of non-performing loans in the first six months of the year. The allowance for loan losses thus rose to $9.4 million, representing 111.17% of non-performing loans and 0.74% of loans, net, at June 30th. As evidence of the real extent of the coverage provided by the loan loss allowance, the $9.4 million allowance is equivalent to 661.37% of net accumulated charge-offs for the ten years ended June 30, 1997. Further improvement was found in the level of non-performing loans which totaled $8.5 million, or 0.67% of loans, net, at the close of the quarter, down from $8.8 million, or 0.75% of loans, net at March 31, 1997, and from $9.7 million, or 0.84% of loans, net, at December 31st. Included in the June 30, 1997 amount were 48 non-accrual mortgage loans of $7.0 million and 28 loans 90 days or more delinquent totaling $1.5 million. Foreclosed real estate, consisting of 5 properties, totaled $1.4 million, as compared to $1.5 million at March 31, 1997 and $627,000 at December 31, 1996. Non-performing assets thus amounted to $9.9 million, or 0.68% of total assets, as compared to $10.3 million at the end of both March and December, representing 0.75% and 0.76% of total assets, respectively, at the corresponding dates. With the exception of two foreclosed commercial real estate parcels totaling $1.3 million, the Company's non-performing assets were all secured by one-to-four family residences at June 30, 1997. The Company also maintains a portfolio of real estate investments, included in "other assets"on the balance sheet. At quarter's end, the Company had ten such investments, totaling $1.0 million, which were providing an 8.0% rate of return to the Bank. For additional information, see the Asset Quality Analysis that follows and the discussion of the loan loss provision beginning on page 18 of this report. 10
13 <TABLE> <CAPTION> ASSET QUALITY ANALYSIS At or For the At or For the Six Months Ended Year Ended June 30, December 31, 1997 1996 (dollars in thousands) (unaudited) - ---------------------------------------------------------------------------------------- <S> <C> <C> ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period $9,359 $ 11,359 Loan recoveries 72 -- Reversal of loan losses -- (2,000) ------ -------- Balance at end of period $9,431 $ 9,359 ====== ======== NON-PERFORMING ASSETS AT PERIOD-END: Non-accrual mortgage loans $6,997 $ 6,861 Loans 90 days or more delinquent and still accruing interest 1,486 2,798 ------ -------- Total non-performing loans $8,483 $ 9,659 Foreclosed real estate 1,420 627 ------ -------- Total non-performing assets $9,903 $ 10,286 ====== ======== RATIOS: Non-performing loans to loans, net 0.67% 0.84% Non-performing assets to total assets 0.68 0.76 Allowance for loan losses to non-performing loans 111.17 96.90 Allowance for loan losses to loans, net 0.74 0.82 Allowance for loan losses to net accumulated charge-offs for the past 10 years 661.37 625.00 </TABLE> SECURITIES HELD TO MATURITY AND MONEY MARKET INVESTMENTS As a matter of policy, the Company limits its securities investments to short-term U.S. Treasuries and FNMA securities, and typically rolls over said securities upon maturity. The balance of the portfolio consists of stock in the Federal Home Loan Bank. Reflecting management's emphasis on mortgage loan origination during the second quarter of 1997, the Company's portfolio of securities declined to $71.0 million at June 30th from $86.5 million at year-end 1996. U.S. Treasuries comprised $46.0 million of the Company's portfolio at the close of the second quarter, while FNMA securities comprised $13.3 million. The average maturity of the Company's securities portfolio was 11 months. In addition, the market value of the Company's securities equaled 100.1% and 100.6% of carrying value, respectively, at June 30, 1997 and December 31, 1996. Money market investments, consisting entirely of Federal funds sold, totaled $11.9 million at the close of the second quarter, up from $7.0 million at year-end 1996. 11
14 MORTGAGE-BACKED SECURITIES HELD TO MATURITY The balance of mortgage-backed securities declined to $61.7 million at June 30, 1997 from $73.7 million at December 31, 1996. Continuing a downward trend that began three years ago, the $12.0 million decline reflects both prepayments and the absence of any new investments in such assets since the first quarter of 1994. As a matter of policy, all of the Company's mortgage-backed securities are held to maturity; the average maturity of these securities was 2.5 years at June 30th. The market value of the Company's mortgage-backed securities amounted to 101.1% and 100.0% of carrying value, respectively, at June 30, 1997 and December 31, 1996. FUNDING SOURCES The Company's funding has primarily stemmed from deposits, loan interest and principal payments, and the interest and maturity of its securities and mortgage-backed securities. In the past six months, management has increasingly leveraged the balance sheet, using FHLB borrowings to finance the significant level of loan growth. At June 30, 1997, the Company recorded deposits of $1.0 billion, up $7.2 million from the level recorded at year-end 1996. The increase was prompted by a $13.3 million rise in CDs to $665.0 million (representing 64.5% of total deposits) and supported by a $759,000 increase in non-interest-bearing accounts to $25.8 million. These increases occurred in tandem with a $3.5 million drop in savings accounts to $274.3 million and a $3.4 million decrease in NOW and money market accounts to $66.1 million. The increasing concentration of CDs among the Company's deposits extends a trend that has continued since the first quarter of 1996. The stability of interest rates has proved a strong incentive for customers to invest their funds in longer-term, higher yielding depository accounts. In the Bank's experience, the vast majority of maturing CDs have been rolled over: in the twelve months ended June 30, 1997, the retention rate on maturing CDs was 89.7%. CDs scheduled to mature within twelve months of the close of the quarter totaled $521.8 million and, while no assurances can be made, it is management's belief that the majority will again be renewed with the Bank. The Bank's ability to maintain and attract deposits was enhanced with the relocation of a customer service center to a full-service branch office on July 7, 1997. Located in the Murray Hill section of Queens, the new branch offers ample on-site parking, extended evening and Saturday hours, and an ATM. Previously operated by Chase Bank, the office is within the Bank's traditional market and has already been well received by its customer base. As indicated above, the Company has increasingly drawn on its FHLB line of credit to provide additional funding in times of substantial loan demand. FHLB borrowings thus rose to $217.0 million at the close of the second quarter from $81.4 million at year-end 1996. The higher cost of funds incurred through the use of FHLB advances has been more than offset by the yields on the loans they have been utilized to fund. Accordingly, management anticipates drawing further on this line of credit to support greater loan production in the quarter ahead. 12
15 INTEREST RATE SENSITIVITY Given the extent to which changes in market interest rates may influence net interest income, one of management's primary objectives is managing the Company's interest rate risk. This is achieved by matching the maturities and repricing dates of the Company's interest-earning assets with the maturities and repricing dates of its interest-bearing liabilities. In order to enhance this match, management has traditionally emphasized the origination of adjustable rate mortgage loans on multi-family properties and one-to-four family houses, and has confined its other investments to short-term securities with an average maturity of under one year. On the liability side of the balance sheet, management has closely monitored the pricing of its depository products and has limited its use of FHLB borrowings to times when market conditions have been particularly conducive to a high level of loan origination activity. While the majority of the Company's mortgage loans feature an annual rate adjustment, the majority of multi-family mortgage originations over the past four quarters have featured a fixed rate of interest for the first five years of the loan. At the same time, the Company has increasingly utilized CDs and FHLB borrowings as its primary sources of funding. As a result, the gap between the Company's interest rate sensitive assets and interest rate sensitive liabilities repricing within a one-year period was a negative 1.96% at June 30, 1997. The presence of a negative gap indicates that more liabilities than assets will be subject to repricing as a result of changes in interest rates. LIQUIDITY AND CAPITAL POSITION Liquidity To ensure that its liquid resources are sufficient to fund its operations and obligations, the Company maintains a portfolio of highly liquid money market investments in the form of Federal funds sold, and invests in short-term securities with a maturity of less than one year. Federal funds sold, together with cash and due from banks, are the Company's most liquid assets, and totaled $27.1 million, collectively, at June 30, 1997. Securities, as stated previously, totaled $61.7 million, including $46.0 million in U.S. Treasuries and $13.3 million in FNMA securities with a combined average maturity of 11 months. In addition to the funding that stems from its deposits, the Company derives funding from principal and interest payments on loans and proceeds from maturing securities and mortgage-backed securities. Still additional funding has been provided through the Bank's FHLB line of credit, which totaled $440.1 million at June 30th. Another $8.8 million was available through a Federal Reserve Bank of New York line of credit, and $10.0 million more through a line of credit with a money center bank. The Bank's cash flows are derived from operating, investing, and financing activities. In the six months ended June 30, 1997, the net cash provided by operating activities increased to $6.4 million from $3.7 million in the year-earlier six months. The difference stemmed primarily from a $2.2 million increase in other assets as compared to a $2.3 million decrease in the year-earlier period. 13
16 The net cash used in investing activities rose to $98.5 million from $78.2 million in the six months ended June 30, 1996. The $20.3 million difference primarily reflects a $126.6 million net increase in loans, versus $86.7 million in the year-earlier period, together with a $12.6 million increase in proceeds from the redemption of mortgage-backed securities to $21.0 million. These increases were partially offset by a $12.0 million reduction in the proceeds from maturing securities to $30.0 million and an $18.4 million decline in funds utilized to purchase securities to $23.6 million. The net cash provided by financing activities increased as well, to $98.0 million from $59.5 million in the first six months of 1996. The $38.5 million increase primarily stemmed from a net increase of $135.6 million in FHLB borrowings, versus $26.6 million in the year-earlier period. In addition, the Company expended $47.0 million to purchase Treasury stock, net of exercised stock options, up from $12.5 million in the prior six-month period. These increases were somewhat offset by a net increase in deposits of $7.2 million, down from $44.9 million in the first six months of 1996. Capital At June 30, 1997, the Company recorded stockholders' equity of $173.9 million, representing 11.85% of total assets, as compared to $211.4 million, or 15.56%, at year-end 1996. The 1997 amount reflects the allocation of $53.2 million for the purchase of 1,389,291 shares under the Company's stock repurchase program. Of the 1.5 million shares authorized for repurchase in January 1997 (as adjusted for the subsequent 3-for-2 stock split and options exercised through the end of the quarter), 235,851 shares remained available for repurchase at June 30th. Reflecting activity through July 15th, this number was increased to 733,735 with the Board of Directors' authorization on that date to repurchase up to an additional 500,000 shares. Also included in stockholders' equity at quarter's end was net income of $12.5 million less dividends paid and options exercised of $6.4 million, and $5.1 million relating to the amortization and appreciation of allocated shares in the Company's stock related benefit plans and the tax benefits associated therewith. Book value per share equaled $19.83 per share at the close of the current quarter, based on 8,769,024 shares, the number of shares outstanding after excluding 1,411,741 in unallocated ESOP shares. The following regulatory capital analysis depicts the extent to which the Bank's regulatory capital ratios exceeded the minimum Federal requirements at June 30, 1997. REGULATORY CAPITAL ANALYSIS (Bank Only) <TABLE> <CAPTION> At June 30, 1997 ---------------- Risk-Based Capital ------------------ (dollars in thousands) Leverage Capital Tier 1 Total ---------------- ------ ----- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- <S> <C> <C> <C> <C> <C> <C> Total savings bank equity $143,149 10.32% $143,149 16.46% $152,579 17.55% Regulatory capital requirement 41,631 3.00 34,778 4.00 69,556 8.00 -------- ----- -------- ----- -------- ----- Excess $101,518 7.32% $108,371 12.46% $ 83,023 9.55% -------- ----- -------- ----- -------- ----- </TABLE> 14
17 In addition, the Bank continued to exceed the requirements for classification as a well-capitalized institution. As defined by FDICIA, said institution has a ratio of leverage capital to adjusted total assets of 5.00% or more; a ratio of Tier 1 risk-based capital to risk-weighted assets of 6.00% or more; and a ratio of total risk-based capital to risk-weighted assets of 10.0% or more. The Company is also required to meet minimum regulatory capital requirements on a consolidated basis which are imposed by the Federal Reserve Board and are similar to the requirements imposed on the Bank. At June 30, 1997, the Company exceeded all applicable regulatory capital requirements on a consolidated basis. COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996 NET INCOME The Company recorded earnings of $5.3 million, or $0.55 per share, in the three months ended June 30, 1997. In the year-earlier quarter, the Company's earnings reflected the reversal of $2.0 million from the allowance for loan losses and related tax consequences, and equaled $6.3 million, or $0.55 per share. The Company's cash earnings, meanwhile, rose to $8.2 million from $7.5 million, representing a 27.3% increase in cash earnings per share to $0.84 from $0.66. Cash earnings are determined by adding back to reported earnings the non-cash expenses related to the amortization and appreciation of allocated shares in the Company's stock-related benefit plans and the associated tax benefits. In the second quarter of 1997, such non-cash expenses totaled $2.9 million; in the year-earlier quarter, they totaled $1.3 million. The difference between the Company's cash and reported earnings is more clearly delineated when comparing the resultant returns on average assets and stockholders' equity ("ROA" and "ROE"). On the basis of reported earnings, the Company's ROA was 1.54% in the current second quarter, while its ROE was 12.67%. When these measures are determined on the basis of cash earnings, the improvement is dramatic, with ROA rising to 2.36% and ROE rising to 19.44%. In addition, the Company's efficiency ratio, which was 41.81% on the basis of reported earnings, improves to 29.10% when cash earnings are factored in. In the second quarter of 1997, the Company's earnings were primarily driven by a $1.0 million increase in net interest income, a $45,000 increase in other operating income, and a $1.1 million reduction in income tax expense. Net interest income rose to $15.5 million, accompanied by an interest rate spread of 3.97% (consistent with the year-earlier level) and a net interest margin of 4.60% (down from 4.74%). While the increased use of borrowings contributed to a $2.3 million rise in interest expense to $13.0 million, the record level of mortgage originations fueled a $3.3 million increase in interest income to $28.4 million. Other operating income, meanwhile, rose to $515,000, while income tax expense declined to $4.0 million. The latter decline was triggered by a $2.1 million drop in pre-tax income to $9.3 million from $11.4 million, reflecting the $2.0 million reversal from the allowance for loan losses in the second quarter of 1996. These favorable factors combined to exceed the benefit of the $2.0 million reversal in the year-earlier second quarter and a $1.2 million increase in operating expense to $6.7 million in the current three-month period. The higher 1997 amount reflects a $910,000 increase in compensation and benefits expense to $4.7 million, including $2.0 million in non-cash expenses stemming from the amortization and appreciation of shares in the Company's stock-related benefit plans. 15
18 INTEREST INCOME The Company derives interest income from its portfolio of interest-earning assets, primarily comprised of mortgage and other loans. The balance of the Company's interest-earning assets consists of securities, mortgage-backed securities, and money market investments. In the three months ended June 30, 1997, interest income totaled $28.4 million, representing a $3.3 million increase from $25.1 million in the year-earlier three months. The 13.5% increase reflects a $129.5 million rise in the average balance of interest-earning assets to $1.3 billion, supported by a 21-basis point rise in the average yield to 8.44%. Average mortgage and other loans generated $26.3 million, or 92.3%, of total interest income for the quarter, up from $22.6 million, or 90.2%, in the year-earlier three months. In addition to a $153.2 million rise in the average balance to $1.3 billion, the 16.1% increase in interest income derived from these interest-earning assets stemmed from an 11-basis point rise in the average yield to 8.71%. Reflecting the significant level of mortgage loan production, the average balance of mortgage and other loans represented 89.4% of interest-earning assets for the quarter, up from 86.3% in the second quarter of 1996. Average securities meanwhile, provided $1.1 million in interest income, up $88,000 from the level provided in the year-earlier three months. While the average balance of securities fell $988,000 to $72.3 million, this decline was offset by a 56-basis point rise in the average yield to 6.12%. Average securities represented 5.4% of the quarter's interest-earning assets, down from 6.0% in the second quarter of 1996. Reflecting a declining average balance and yield, the interest income provided by mortgage-backed securities dropped to $1.0 million from $1.4 million in the three months ended June 30, 1996. Specifically, the average balance of these interest-earning assets fell $22.0 million to $65.0 million while the yield on these interest-earning assets fell 2 basis points to 6.20%. Average mortgage-backed securities represented 4.8% of average interest-earning assets, as compared to the year-earlier 7.1%. Average money market investments provided $78,000 in interest income, as compared to $85,000 in the second quarter of 1996. The modest decline was the net effect of a $711,000 reduction in the average balance to $5.9 million and a 14-basis point rise in the average yield to 5.30%. INTEREST EXPENSE The Company's interest expense stems primarily from the interest paid on its depository products and, to a lesser extent, from the interest paid on its FHLB borrowings and mortgagors' escrow accounts. Interest expense rose $2.3 million to $13.0 million in the current second quarter, fueled by a $160.0 million rise in average interest-bearing liabilities to $1.2 billion and a 21-basis point increase in the average cost of funds to 4.47%. The increases stemmed primarily from a rise in the average balances of CDs and FHLB borrowings, each of which were accompanied by higher funding costs. CDs remained the favored form of depository account in the current second quarter. The average balance of CDs rose $85.3 million to $650.6 million, representing 55.9% of average interest-bearing liabilities and generating 67.8% of total second quarter 1997 interest expense. The interest expense stemming from CDs rose $1.2 million to $8.8 million, reflecting the higher average balance, which was accompanied by a one-basis point jump in cost to 5.41%. 16
19 Savings accounts furnished $1.6 million in interest expense in the current second quarter, down from $1.7 million in the second quarter of 1996. The reduction stemmed from a $9.3 million decline in the average balance of savings accounts to $275.9 million, while the cost of these funds held steady at 2.39%. Savings accounts represented 23.7% and 28.4%, respectively, of average interest-bearing liabilities in the current and year-earlier quarter, and 12.7% and 15.9%, respectively, of total interest expense. NOW & money market accounts contributed $447,000 in interest expense in the current second quarter, as compared to $511,000 in the year-earlier three months. The reduction was due to a $6.6 million decline in the average balance to $68.1 million, accompanied by a 12-basis point drop in the average cost to 2.63%. NOW & money market accounts represented 5.9% and 7.4% of average interest-bearing liabilities in the three months ended June 30, 1997 and 1996, and 3.4% and 4.8%, respectively, of total interest expense. In the second quarter of 1997, the Company increasingly accessed its FHLB line of credit to support its record production of mortgage loans. As a result, the average balance of borrowings rose $87.5 million to $146.4 million, representing 12.6% of average interest-bearing liabilities, up from the year-earlier 5.9%. Reflecting the higher average balance and a 15-basis point rise in the average cost to 5.67%, the interest expense stemming from FHLB borrowings rose to $2.1 million from $809,000 in the second quarter of 1996. FHLB borrowings thus represented 16.0% of total interest expense in the current second quarter, as compared to 7.6% in the year-earlier three months. Mortgagors' escrow, meanwhile, provided interest expense of $10,000, down from $12,000 in the second quarter of 1996. The reduction was the net effect of a 7-basis point drop in the average cost of these funds to 0.18%, and a $3.1 million increase in the average balance to $22.3 million. NET INTEREST INCOME Net interest income is the Company's principal source of income; its level is influenced significantly by the volume of the Company's interest-earning assets and interest-bearing liabilities, and by the spread between the yield on such assets and the cost of such liabilities. In the second quarter of 1997, the Company's earnings were boosted by a $1.1 million rise in net interest income to $15.5 million from $14.4 million in the year-earlier three months. While interest expense rose $2.3 million in the current second quarter, this increase was exceeded by the $3.4 million rise in interest income, which was supported by the growing balance of interest-earning assets and the higher yields provided by the Company's loan and securities portfolios. In addition to increasing from the year-earlier quarter, net interest income rose from $15.2 million in the first quarter of 1997. While consistent with the level recorded in the year-earlier quarter, the interest rate spread rose 10 basis points to 3.97% from 3.87% in the trailing three-month period. At 4.60%, the Company's net interest margin contracted 4 and 14 basis points, respectively, from the trailing and year-earlier quarters. Despite the increased use of borrowings to fund its loan production, the Company anticipates that its net interest income will continue to rise. While higher cost liabilities tend to pressure spreads and margins, the benefit of such funding is reflected in the growing balance of higher-yielding interest-earning assets and the interest income they have produced. This said, it should be cautioned that the level of net interest income could be adversely impacted by a more significant increase in interest rates than is currently anticipated, and by factors that could hamper the Company's ability to originate loans. Among these would be a downturn in the real estate market and a substantial increase in competition for both funding and loans. 17
20 <TABLE> <CAPTION> NET INTEREST INCOME ANALYSIS (dollars in thousands) Three Months Ended June 30, --------------------------- 1997 1996 ------------------- ------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Assets: Interest-earning assets: Mortgage and other loans, net $1,204,850 $ 26,250 8.71% $1,051,651 $ 22,608 8.60% Securities held to maturity 72,311 1,107 6.12 73,299 1,019 5.56 Mortgage-backed securities held to maturity 64,997 1,007 6.20 86,995 1,353 6.22 Money market investments 5,883 78 5.30 6,594 85 5.16 ---------- ---------- ------ ---------- -------- ------ Total interest-earning assets 1,348,041 28,442 8.44% 1,218,539 25,065 8.23% Non-interest-earning assets 39,733 40,667 -------- ------ Total assets $1,387,774 $1,259,206 ========== ========== Liabilities and stockholders' equity: Interest-bearing liabilities: NOW and money market accounts $ 68,076 $ 447 2.63% $ 74,701 $ 511 2.75% Savings accounts 275,877 1,646 2.39 285,179 1,694 2.39 Certificates of deposit 650,636 8,778 5.41 565,334 7,596 5.40 FHLB borrowings 146,424 2,071 5.67 58,903 809 5.52 Mortgagors' escrow 22,281 10 0.18 19,148 12 0.25 ---------- ---------- ------ ---------- -------- ------ Total interest-bearing liabilities 1,163,294 12,952 4.47% 1,003,265 10,622 4.26% Non-interest-bearing deposits 26,351 ---------- 23,154 -------- Other liabilities 29,468 21,716 ---------- ---------- Total liabilities 1,219,113 1,048,135 Stockholders' equity 168,661 211,071 ---------- ---------- Total liabilities and stockholders' equity $1,387,774 $1,259,206 ========== ========== Net interest income/interest rate spread $ 15,490 3.97% $ 14,443 3.97% ========= ======= ======== ====== Net interest-earning assets/net interest margin $ 184,747 4.60 $ 215,274 4.74 ========== ======= ========== ====== Ratio of interest-earning assets to interest-bearing liabilities 115.88 121.46 ======= ====== </TABLE> PROVISION FOR LOAN LOSSES The second quarter of 1997 was the eighth consecutive quarter in which the Company suspended its provision for loan losses, and its eighth consecutive quarter without any charge-offs being recorded. Reflecting these achievements, and the recovery of $72,000 following the disposition of non-performing loans, the allowance for loan losses rose to $9.4 million, representing 111.17% of non-performing loans and 0.74% of loans, net, at the current quarter's end. In the year-earlier quarter, the Company recovered $2.0 million from the allowance for loan losses, which resulted in a $750,000 boost to net income. 18
21 Non-performing assets declined to $9.9 million at the close of the second quarter, from $10.3 million at both March 31, 1997 and December 31, 1996. Included in the June 30, 1997 amount were $8.5 million in non-performing loans, representing 0.67% of loans, net, and $1.4 million in foreclosed real estate. The allowance for loan losses is reviewed on a regular basis. Such review includes an analysis of several factors, including the level of coverage provided given the current and prospective quality of the loan portfolio. Given the current quality of its assets and the coverage provided by the loan loss allowance, the Company will likely continue its suspension of the loan loss provision in the quarter ahead. However, a significant change in the quality of the Company's assets or a significant downturn in the real estate market could result in loan loss provisions again being made. For more information regarding asset quality and the allowance for loan losses, see the discussion and analysis on page 10 of this report. OTHER OPERATING INCOME In the second quarter of 1997, the Company recorded other operating income of $515,000, up from $470,000 in the second quarter of 1996. The $45,000 increase reflects a $160,000 rise in other income to $214,000, offsetting a $115,000 decline in fee income to $301,000. OPERATING EXPENSE Operating expense consists primarily of compensation and benefits expense, together with occupancy and equipment and general and administrative ("G&A") expenses. In the quarters ended June 30, 1997 and 1996, operating expense totaled $6.7 million and $5.5 million, respectively, representing 1.93% and 1.76% of average assets in the corresponding periods. The higher amount in 1997 reflects a $910,000 increase in compensation and benefits expense to $4.7 million, including $2.0 million in non-cash expenses related to the amortization and appreciation of shares held in the Company's stock-related benefit plans. The price of a share of Company stock rose 85.7% to $45.50 at June 30, 1997 from $24.50 per share (as adjusted for the stock splits on August 22, 1996 and April 10, 1997) at June 30, 1996. The impact of these non-cash expenses is especially evident when the Company's efficiency ratio is considered. On the basis of reported earnings, the efficiency ratio equaled 41.81% in the three months ended June 30, 1997. On the basis of cash earnings, which exclude these non-cash expenses, the Company's efficiency ratio improves to 29.10%. Together with the related tax benefit of $823,000, the total impact on the balance sheet of the Company's non-cash expenses was $2.9 million, all of which was added back to capital at June 30th. Lesser increases were recorded in occupancy and equipment expense, which rose $31,000 to $631,000; G&A expense, which rose $63,000 to $1.2 million; and other operating expenses, which rose $155,000 to $193,000. The number of full-time equivalent employees at the close of the quarter was 283. 19
22 INCOME TAX EXPENSE Income tax expense, including Federal, state, and local income taxes, declined to $4.0 million in the current second quarter from $5.1 million in the second quarter of 1996. The $1.1 million decline was triggered by a $2.1 million reduction in pre-tax income to $9.3 million from $11.4 million in the year-earlier three months. As previously indicated, the decline in pre-tax income reflects the reversal of $2.0 million from the allowance for loan losses in the second quarter of 1996. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 EARNINGS SUMMARY The Company recorded earnings of $12.5 million, or $1.21 per share, in the six months ended June 30, 1997, up from $11.5 million, or $1.01 per share, for the comparable period in 1996. The 1997 amount includes the reversal of $1.3 million in income tax charges during the first quarter, while the 1996 figure reflects the reversal of $2.0 million from the allowance for loan losses and related tax consequences in the second quarter of the year. Earnings per share for both periods reflect a 3-for-2 stock split on April 10, 1997 and a 4-for-3 stock split on August 22, 1996. The Company's cash earnings rose to $17.5 million from the year-earlier $14.0 million, representing a 40.2% increase in cash earnings per share to $1.71 from $1.22. These increases reflect both the leveraging of the Company's balance sheet between June 30, 1996 and June 30, 1997 and the accretive effect of its share repurchases. On the basis of cash earnings, the Company's ROA and ROE were 2.57% and 18.99%, respectively, for the current six-month period, as compared to 2.24% and 13.20% for the year-earlier six months. The efficiency ratio improved, as well, to 29.77% from 30.62%. The Company's 1997 earnings were substantially augmented by a $2.4 million increase in net interest income to $30.7 million and by a $2.9 million reduction in income tax expense to $5.8 million. The rise in net interest income was the net effect of a $6.0 million increase in interest income to $55.5 million and a $3.5 million increase in interest expense to $24.9 million. The rise in interest income stemmed from significant growth in the average balance and yield of interest-earning assets, while the higher level of interest expense reflects an increased concentration of higher-cost CDs and FHLB borrowings. The Company's interest rate spread rose 3 basis points to 3.92% for the period, while its net interest margin narrowed 5 basis points to 4.62%. The decline in income tax expense reflects a decline in pre-tax income to $18.3 million from $20.2 million in the year-earlier period, combined with the first quarter 1997 reversal of $1.3 million in income tax charges. These favorable factors combined to exceed a $2.2 million rise in operating expense to $13.2 million and a $137,000 decline in other operating income to $819,000. The higher level of operating expense primarily stemmed from an increase in compensation and benefits expense to $9.2 million, including $3.8 million in non-cash expenses related to the amortization and appreciation of allocated shares in the Company's stock-related benefit plans. The provision for loan losses continued to be suspended in the first six months of 1997. 20
23 INTEREST INCOME The Company's interest income rose to $55.5 million in the first six months of 1997 from $49.6 million in the first six months of 1996. The $6.0 million, or 12.0%, increase reflects both a $120.2 million, or 9.9%, rise in average interest-earning assets to $1.3 billion and a 16-basis point rise in the average yield to 8.36%. The rise in interest income was substantially driven by the higher level of interest income derived from average mortgage and other loans. The average balance of such assets increased $149.4 million, or 14.5%, to $1.2 billion and generated a yield of 8.65%, up 5 basis points. Accordingly, average mortgage and other loans provided $51.0 million in interest income, up $6.7 million, or 15.2%, from the year-earlier amount. In the six months ended June 30, 1997, average mortgage and other loans represented 88.8% of average interest-earning assets and generated 91.9% of total interest income for the period. The rise in interest income in the current six-month period also reflects an increase in the average balance and yield on securities. Specifically, the average balance of securities rose $2.4 million to $75.2 million, while the yield grew 35 basis points to 6.04%. As a result, the interest income provided by average securities rose $199,000 to $2.3 million, representing 4.1% of interest income for the current six- month period. Average securities represented 5.7% of average interest-earning assets, as compared to 6.0% in the first six months of 1996. The increased interest income provided by these average interest-earning assets substantially exceeded declines in the interest income provided by the Company's average money market investments and mortgage-backed securities. Average money market investments provided $138,000 in year-to-date interest income, down from $414,000 in the first six months of 1996. The average balance fell $10.6 million to $5.3 million, while the yield on these assets dropped 3 basis points to 5.17%. Average mortgage-backed securities, meanwhile, generated $2.1 million in interest income, down $684,000 from $2.8 million in the year-earlier six months. The decrease reflects a $21.0 million reduction in the average balance to $68.1 million (representing 5.1% of average interest-earning assets), and an 8-basis point decrease in the yield on these assets to 6.17%. INTEREST EXPENSE The Company recorded interest expense of $24.9 million in the first six months of 1997 and $21.3 million in the first six months of 1996. The $3.6 million increase stemmed from a $135.1 million rise in the average balance of interest-bearing liabilities to $1.1 billion, together with a 13-basis point rise in the cost of funds to 4.44%. The bulk of these increases stemmed from the rising average balances of CDs and FHLB borrowings. In the six months ended June 30, 1997 and 1996, average CDs generated interest expense of $17.4 million and $15.2 million, respectively. The $2.2 million increase was the net effect of a $91.2 million rise in the average balance to $649.9 million, and a 9-basis point drop in the cost of these funds to 5.40%. Average CDs represented 57.6% of average interest-bearing liabilities in the current six-month period, and generated 70.0% of interest expense. 21
24 FHLB borrowings generated interest expense of $3.3 million, up from $1.6 million in the first six months of 1996. The average balance rose $58.4 million to $116.7 million, and generated a cost of 5.63%, up 4 basis points. As a result, average FHLB borrowings represented 10.3% of average interest-bearing liabilities in the current period, as compared to the year-earlier 5.9%. Similarly, the interest expense stemming from FHLB borrowings represented 13.1% of interest expense in the period, up from the year-earlier 7.6%. The rise in interest expense was partly offset by declines in the levels provided by the Company's average savings accounts and NOW and money market accounts. The interest expense generated by average savings accounts declined $120,000 to $3.3 million, reflecting a $9.8 million decrease in the average balance to $275.5 million, as the cost of these funds remained constant at 2.40%. Average savings accounts represented 24.4% of average interest-bearing liabilities in the current period, and provided 13.2% of total interest expense. The interest expense generated by average money market investments dropped $137,000 to $917,000, as the average balance of these liabilities fell $6.7 million to $68.7 million and the cost of funds fell 12 basis points to 2.69%. Average NOW and money market accounts represented 6.1% of average interest-bearing liabilities and generated a modest 3.7% of interest expense. Mortgagors' escrow contributed $20,000 to total interest expense, up from the year-earlier $15,000, reflecting a $2.0 million increase in the average balance to $18.6 million and a 4-basis point increase in the cost to 0.22%. NET INTEREST INCOME In the first six months of 1997, the Company's earnings were fueled by net interest income of $30.7 million, up from $28.3 million in the year-earlier six months. The $2.4 million increase was the net effect of a $6.0 million rise in interest income to $55.5 million and a $3.6 million rise in interest expense to $24.9 million. The growth in net interest income was accompanied by a 3-basis point rise in interest rate spread to 3.92%, and by a 5-basis point drop in net interest margin to 4.62%. - continued - 22
25 <TABLE> <CAPTION> NET INTEREST INCOME ANALYSIS (dollars in thousands) Six Months Ended June 30, ----------------------------- 1997 1996 ------------------- -------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Assets: Interest-earning assets: Mortgage and other loans, net $1,180,222 $ 51,039 8.65% $1,030,787 $ 44,310 8.60% Securities held to maturity 75,217 2,271 6.04 72,864 2,072 5.69 Mortgage-backed securities held to maturity 68,053 2,099 6.17 89,083 2,783 6.25 Money market investments 5,340 138 5.17 15,910 414 5.20 ---------- ---------- ------ ---------- -------- ------ Total interest-earning assets 1,328,832 55,547 8.36% 1,208,644 49,579 8.20% Non-interest-earning assets 38,335 40,640 ---------- --------- Total assets $1,367,167 $1,249,284 ========== ========== Liabilities and stockholders' equity: Interest-bearing liabilities: NOW and money market accounts $ 68,650 $ 917 2.69% $ 75,326 $ 1,054 2.81% Savings accounts 275,500 3,279 2.40 285,349 3,399 2.40 Certificates of deposit 649,885 17,396 5.40 558,644 15,241 5.49 FHLB borrowings 116,683 3,258 5.63 58,260 1,620 5.59 Mortgagors' escrow 18,583 20 0.22 16,613 15 0.18 ---------- ---------- ------ ---------- -------- ------ Total interest-bearing liabilities 1,129,301 24,870 4.44% 994,192 21,329 4.31% Non-interest-bearing deposits 25,543 ---------- 22,855 -------- Other liabilities 27,565 20,300 ---------- ---------- Total liabilities 1,182,409 1,037,347 Stockholders' equity 184,758 211,937 ---------- ---------- Total liabilities and stockholders' equity $1,367,167 $1,249,284 ========== ========== Net interest income/interest rate spread $ 30,677 3.92% $ 28,250 3.89% ========== ====== ======== ====== Net interest-earning assets/net interest margin $ 199,531 4.62 $ 214,452 4.67 ========= ====== ========== ====== Ratio of interest-earning assets to interest-bearing liabilities 117.67 121.57 ====== ====== </TABLE> PROVISION FOR LOAN LOSSES As indicated in the second quarter discussion, the provision for loan losses has been suspended since the second quarter of 1995. In the six months ended June 30, 1996, the Bank recovered $2.0 million from the loan loss allowance, which resulted in a $750,0000 contribution to net income in said period. For a further discussion of the provision and allowance for loan losses, see the discussions on pages 10 and 18 of this report. 23
26 OTHER OPERATING INCOME The Company recorded other operating income of $819,000 in the six months ended June 30, 1997, as compared to $956,000 in the six months ended June 30, 1996. The $137,000 decline was the net effect of a $193,000 decrease in fee income to $580,000 and a $56,000 rise in other income to $239,000. OPERATING EXPENSE In the six months ended June 30, 1997 and 1996, the Company recorded operating expense of $13.2 million, or 1.93% of average assets, and $11.0 million, or 1.76% of average assets, respectively. The 1997 increase primarily stemmed from a $1.7 million increase in compensation and benefits expense to $9.2 million, including $3.8 million in non-cash expenses related to the amortization and appreciation of shares in the Company's stock-related benefit plans. Together with $1.3 million in related tax benefits, the $3.8 million was added back to capital at June 30th. On the basis of cash earnings, the ratio of operating expense to average assets improves to 1.37% for the current period from 1.43% in the year-earlier six months. The balance of the rise in 1997 operating expense stemmed from more modest increases, as occupancy and equipment expense rose $80,000 to $1.3 million; G&A expense rose $223,000 to $2.3 million, and other operating expenses rose $210,0000 to $349,000. Despite the rise in operating expense, the Company's 1997 efficiency ratio continued to reflect management's focus on cost containment, equaling 41.92% on the basis of reported earnings and 29.77% when cash earnings are factored in. INCOME TAX EXPENSE Income tax expense declined to $5.8 million in the current six-month period from $8.7 million in the first six months of 1996. The $2.9 million reduction was triggered by a $2.0 million drop in pre-tax income to $18.3 million from $20.2 million, combined with the reversal of $1.3 million in income tax charges in the first quarter of 1997. SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain forward-looking statements which are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact the Company's earnings in future periods. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation and regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products, and services. 24
27 QUEENS COUNTY BANCORP, INC. PART 2 - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is sometimes involved in routine legal proceedings, none of which management deems to be material to the financial condition of the Company. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION On July 15, 1997, the Board of Directors of Queens County Bancorp authorized the repurchase of up to an additional 500,000 shares of Company stock under its Stock Repurchase Program, bringing to 733,735 the number of shares still available for repurchase on July 16, 1997, the date the authorization was announced. In addition, the Board of Directors increased the quarterly cash dividend 25% to 25 cents per share. The dividend will be paid on August 15, 1997 to shareholders of record on August 1st. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: Regulation S-K Exhibits No. 10.1: Form of Company Employment Agreement No. 10.2: Form of Bank Employment Agreement No. 11: Statement re: Computation of Per Share Earnings (b) Form 8-K Not applicable. 25
28 SIGNATURES Pursuant to the requirements 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) DATE: August 8, 1997 BY: /s/ Joseph R. Ficalora ---------------------- Joseph R. Ficalora Chairman, President, and Chief Executive Officer (Duly Authorized Officer) DATE: August 8, 1997 BY: /s/ Robert Wann --------------- Robert Wann Senior Vice President, Comptroller, and Chief Financial Officer (Principal Financial Officer)
29 EXHIBIT INDEX No. 10.1: Form of Company Employment Agreement No. 10.2: Form of Bank Employment Agreement No. 11: Statement re: Computation of Per Share Earnings