1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3170868
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
ONE ASTORIA FEDERAL PLAZA, LAKE SUCCESS, NEW YORK 11042-1085
(Address of principal executive offices) (Zip Code)
(516) 327-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING, APRIL 26, 1996
----------------------- --------------------------------------------
.01 PAR VALUE 10,948,470
------------- ----------
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PART 1 -- FINANCIAL INFORMATION
Page
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Item 1. Financial Statements.
Consolidated Statements of Financial Condition at March 31, 1996 and 2
December 31, 1995.
Consolidated Statements of Operations for the Three Months Ended 3
March 31, 1996 and March 31, 1995.
Consolidated Statement of Stockholders' Equity for the Three Months 4
Ended March 31, 1996.
Consolidated Statements of Cash Flows for the Three Months Ended 5
March 31, 1996 and March 31, 1995.
Notes to Unaudited Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 22
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 (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 22
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K (Not Applicable)
Signatures
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ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
Assets 1996 1995
- - ------ ----------- ------------
Cash and due from banks $ 34,376 $ 33,869
Federal funds sold and repurchase agreements 25,000 100,000
Mortgage-backed and mortgage-related securities
available-for-sale (at estimated fair value) 2,275,801 2,332,822
Other securities available-for-sale (at estimated fair value) 210,754 183,146
Mortgage-backed and mortgage-related securities
held-to-maturity (estimated fair value of $1,377,331
and $1,340,588, respectively) 1,389,510 1,333,644
Other securities held-to-maturity (estimated fair value
of $303,550 and $280,192, respectively) 306,801 281,898
Federal Home Loan Bank of New York stock 32,354 24,975
Loans receivable:
Mortgage loans 2,104,238 1,995,475
Consumer and other loans 59,891 61,663
----------- -----------
2,164,129 2,057,138
Less allowance for loan losses 13,397 13,495
----------- -----------
Loans receivable, net 2,150,732 2,043,643
Real estate owned, net 12,584 17,677
Investments in real estate, net 5,073 5,654
Accrued interest receivable 34,588 35,931
Premises and equipment, net 80,386 80,083
Excess of cost over fair value of net assets acquired
and other intangibles 106,851 109,022
Other assets 43,356 37,738
----------- -----------
Total assets $ 6,708,166 $ 6,620,102
=========== ===========
Liabilities and Stockholders' Equity
- - ------------------------------------
Liabilities:
Deposits:
Savings $ 1,157,938 $ 1,154,777
Money market 372,961 218,653
NOW 173,119 314,288
Certificates of deposit 2,603,271 2,575,703
----------- -----------
Total deposits 4,307,289 4,263,421
Reverse repurchase agreements 1,620,000 1,483,329
Federal Home Loan Bank of New York advances 151,508 221,362
Mortgage escrow funds 29,344 22,585
Accrued expenses and other liabilities 26,763 38,720
----------- -----------
Total liabilities 6,134,904 6,029,417
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value; (5,000,000 shares
authorized; none issued) -- --
Common stock, $.01 par value; (70,000,000 shares authorized: 13,180,852
issued; 10,958,470 and 11,304,970 shares outstanding, respectively) 132 132
Additional paid-in capital 326,970 326,124
Retained earnings - substantially restricted 364,169 351,923
Treasury stock (2,222,382 and 1,875,882 shares, at cost, respectively) (78,354) (60,693)
Net unrealized (losses) gains on securities, net of taxes (3,503) 11,126
Unallocated common stock held by ESOP (26,639) (27,355)
Unearned common stock held by RRPs (9,513) (10,572)
----------- -----------
Total stockholders' equity 573,262 590,685
----------- -----------
Total liabilities and stockholders' equity $ 6,708,166 $ 6,620,102
=========== ===========
See accompanying notes to consolidated financial statements
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ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1996 1995
------------ ----------
Interest income:
Mortgage loans $ 42,524 $ 35,173
Consumer and other loans 1,525 1,560
Mortgage-backed and mortgage-related securities 62,916 52,016
Federal funds sold and repurchase agreements 1,055 2,947
Other securities 7,814 6,187
------------ ------------
Total interest income 115,834 97,883
------------ ------------
Interest expense:
Deposits 46,041 40,775
Borrowed funds 25,059 14,320
------------ ------------
Total interest expense 71,100 55,095
------------ ------------
Net interest income 44,734 42,788
Provision for loan losses 522 1,001
------------ ------------
Net interest income after provision for loan losses 44,212 41,787
------------ ------------
Non-interest income:
Customer service fees 1,623 995
Loan fees 458 355
Gain on sale of securities 762 --
Other 715 636
------------ ------------
Total non-interest income 3,558 1,986
------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 12,429 11,068
Occupancy, equipment and systems 5,805 4,534
Federal deposit insurance premiums 2,464 2,270
Advertising 747 1,576
Other 2,482 2,028
------------ ------------
Total general and administrative 23,927 21,476
Real estate operations, net (3,255) 362
Recovery of real estate losses (1,397) (56)
Amortization of excess of cost over fair value of net assets acquired 2,171 1,611
------------ ------------
Total non-interest expense 21,446 23,393
------------ ------------
Income before income tax expense 26,324 20,380
Income tax expense 11,606 8,786
------------ ------------
Net income $ 14,718 $ 11,594
============ ============
Earnings per common share $ 1.36 $ 1.05
============ ============
Dividends per common share $ 0.20 $ --
============ ============
Weighted average common stock and common stock
equivalents outstanding 10,799,681 11,041,996
See accompanying notes to consolidated financial statements.
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ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
Net
Unrealized
Retained Gains Unallocated Unearned
Addition Earnings (Losses) on Common Common
Common Paid-In Substantially Treasury Securities, Stock Held Stock Held
Stock Capital Restricted Stock Net of Taxes by ESOP by RRP's Total
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $132 $326,124 $ 351,923 $(60,693) $ 11,126 $(27,355) $(10,572) $ 590,685
Net income -- -- 14,718 -- -- -- -- 14,718
Change in unrealized gains (losses)
on securities available-for-sale -- -- -- -- (14,629) -- -- (14,629)
Common stock repurchased
(361,500 shares) -- -- -- (18,151) -- -- -- (18,151)
Cash dividends declared and paid
on common stock -- -- (2,198) -- -- -- -- (2,198)
Treasury stock issued for options
exercised (15,000 shares) -- -- -- 490 -- -- -- 490
Loss on issuance of treasury stock
(15,000 shares) -- -- (274) -- -- -- -- (274)
Tax benefit attributable to vested
RRP shares -- 169 -- -- -- -- -- 169
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock -- 677 -- -- -- 716 1,059 2,452
---- -------- --------- -------- -------- -------- -------- ---------
Balance at March 31, 1996 $132 $326,970 $ 364,169 $(78,354) $ (3,503) $(26,639) $ (9,513) $ 573,262
==== ======== ========= ======== ======== ======== ======== =========
See accompanying notes to consolidated financial statements.
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ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 14,718 $ 11,594
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net deferred loan origination
fees, discounts and premiums (1,275) (2,105)
(Recovery of) provision for loan and real estate losses (875) 945
Depreciation and amortization 1,351 932
Amortization of excess of cost over fair value
of net assets acquired 2,171 1,611
Allocated and earned shares from ESOP and RRPs 2,452 1,882
Decrease in accrued interest receivable 1,679 3,720
Increase in mortgage escrow funds 6,759 7,204
Net changes in other assets, accrued expenses
and other liabilities (5,488) (3,430)
--------- ---------
Total adjustments 6,774 10,759
--------- ---------
Net cash provided by operating activities 21,492 22,353
--------- ---------
Cash flows from investing activities:
Loan originations (98,205) (25,544)
Loan purchases through third parties (40,295) (28,581)
Bulk loan purchases (54,592) (332)
Principal repayments on loans 82,213 52,820
Principal payments on mortgage-backed and mortgage-
related securities 134,680 60,785
Purchases of mortgage-backed and mortgage-related securities (237,484) (32,190)
Purchases of other securities (112,379) (515)
Proceeds from maturities of other securities
and redemption of FHLB-NY stock 50,197 18,298
Proceeds from sale of securities 81,740 521,087
Proceeds from sale of real estate owned 7,387 3,465
Proceeds from sales net of costs and advances
related to investments in real estate 799 64
Proceeds from sales of loans 1,327 100
Purchases of premises and equipment (1,654) (501)
Cash paid for Fidelity net of cash and cash equivalents acquired -- (158,491)
--------- ---------
Net cash (used in) provided by investing activities (186,266) 410,465
--------- ---------
Cash flows from financing activities:
Net increase in deposits 43,743 6,218
Net increase (decrease) in reverse repurchase agreements 136,671 (237,122)
Payments of FHLB of New York advances (70,000) (130,200)
Costs to repurchase common stock (18,151) (4,366)
Cash dividends paid to stockholders (2,198) --
Cash received for options exercised 216 --
--------- ---------
Net cash provided by (used in) financing activities 90,281 (365,470)
--------- ---------
Net (decrease) increase in cash and cash equivalents (74,493) 67,348
Cash and cash equivalents at beginning of period 133,869 209,203
--------- ---------
Cash and cash equivalents at end of period $ 59,376 $ 276,551
========= =========
Supplemental disclosures:
Cash paid during the year:
Interest $ 68,084 $ 52,200
========= =========
Income taxes $1,160 $1,718
========= =========
Additions to real estate owned $2,674 $4,886
========= =========
See accompanying notes to consolidated financial statements.
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ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation (the Company) and its wholly-owned subsidiary,
Astoria Federal Savings and Loan Association (the Association) and the
Association's wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary for a fair presentation of the
Company's financial condition as of March 31, 1996 and December 31, 1995 and
its results of operations, cash flows and stockholders' equity for the three
months ended March 31, 1996 and 1995. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information contained herein have been made. In
preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities of
the consolidated statements of financial condition as of March 31, 1996 and
December 31, 1995 and reported revenues and expenses of the results of
operations for the three month periods ended March 31, 1996 and 1995. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. 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 consolidated financial statements should be read in conjunction with the
December 31, 1995 audited consolidated financial statements, interim financial
statements and notes thereto of the Company.
2. IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans.
SFAS No. 123 established a fair value based method of accounting for
stock-based compensation arrangements with employees, rather than the
intrinsic value based method that is contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
SFAS No. 123 does not require an entity to adopt the new fair value based
method for purposes of preparing its basic financial statements. While the
SFAS No. 123 fair value based method is considered by the FASB to be
preferable to the APB No. 25 method, entities are allowed to continue to use
the APB No. 25 method for preparing its basic financial statements. Entities
not adopting the fair value based method under SFAS No. 123 are required to
present pro forma net income and earnings per share information, in the notes
to the financial statements, as if the fair value based method had been
adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, but may
also be adopted upon the issuance of SFAS No. 123. The disclosure requirements
are effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. Pro forma disclosures
required for entities that elect to continue to measure compensation cost
using the APB No. 25 method must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. Pro forma disclosures for
awards granted in the first fiscal year beginning after December 15, 1994 need
not be included in financial statements for that fiscal year but should be
presented subsequently whenever financial statements for that fiscal year are
presented for comparative purposes with financial statements for a later
fiscal year.
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3. CASH EQUIVALENTS
For the purpose of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold with original maturities of
three months or less, which in the aggregate amounted to $59,376,000 and
$276,551,000 at March 31, 1996 and 1995, respectively.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Astoria Financial Corporation (the "Company") was incorporated on June 14,
1993, and is the holding company of Astoria Federal Savings and Loan Association
(the "Association"). On November 18, 1993, the Association completed its
conversion from a mutual savings and loan association to the stock form of
ownership at which time the Company issued 13,180,852 shares of common stock and
utilized a portion of the proceeds to acquire all of the issued shares of the
Association.
The Company is headquartered in Lake Success, New York and its principal
business currently consists of the operation of its wholly-owned subsidiary, the
Association. The Association's primary business is attracting retail deposits
from the general public and investing those deposits, together with funds
generated from operations, principal repayments and borrowings, primarily in
one-to-four family residential mortgage loans and mortgage-backed and
mortgage-related securities and, to a lesser extent, commercial real estate
loans, multi-family mortgage loans and consumer loans. In addition, the
Association invests in securities issued by the U.S. Government and agencies
thereof and other investments permitted by federal laws and regulations.
The Company's results of operations are dependent primarily on its net
interest income, which is the difference between the interest earned on its
assets, primarily its loans and securities portfolios, and its cost of funds,
which consists of the interest paid on its deposits and borrowings. The
Company's net income also is affected by its provision for loan losses as well
as non-interest income, general and administrative expense, other non-interest
expenses, and income tax expense. General and administrative expense consists
primarily of compensation and benefits, occupancy, equipment and systems
expense, federal deposit insurance premium, advertising and other operating
expenses. Other non-interest expense consists of real estate operations, net,
provision for real estate losses and amortization of excess of cost over fair
value of net assets acquired. The earnings of the Company may also significantly
be affected by general economic and competitive conditions, particularly changes
in market interest rates and yield curves, government policies and actions of
regulatory authorities.
FIDELITY ACQUISITION
After the close of business on January 31, 1995, the Company successfully
completed the acquisition of Fidelity New York F.S.B. ("Fidelity") in a
transaction which was accounted for as a purchase. The cost of the acquisition
was $157.8 million, and, in addition, the Company incurred approximately $21.3
million of acquisition-related costs, of which $3.3 million was for the buyout
of leased data processing equipment. As a result of the acquisition, after the
close of business on January 31, 1995, the Company had approximately $6.4
billion in assets and $4.3 billion in deposits. Subsequent to the acquisition,
the Company restructured the resulting investment portfolio by selling $521.1
million of securities acquired in the acquisition and utilizing the proceeds
from the sale to repay $417.0 million of borrowings. The excess of cost over the
fair value of net assets acquired generated in the transaction was $112.1
million, which is being amortized on a straight line basis over 15 years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings and
principal and interest payments on loans, mortgage-backed and mortgage-related
securities, and other securities. The Company's normal primary uses of funds are
purchases and originations of mortgage loans, and the purchases of
mortgage-backed, mortgage-related and other securities. During the first quarter
of 1995, the Company's primary use of funds was for the acquisition of Fidelity.
During the first quarter of 1996, the Company's purchases and originations of
mortgage loans totaled $186.0 million, of which $94.1 million were purchased,
versus $28.9 million and $25.6 million of purchases and originations,
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respectively, during the first quarter of 1995. The Company's purchases of
mortgage-backed, mortgage-related and other securities during the first quarter
of 1996 totaled $349.9 million of which $180.4 million are classified as
available-for-sale.
The Association is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by the regulations of the Office
of Thrift Supervision (OTS). The minimum required liquidity and short-term
liquidity ratios are currently 5% and 1%, respectively. The Association's
liquidity ratios were 6.78% and 7.09% at March 31, 1996 and December 31, 1995,
respectively, while its short-term liquidity ratios were 2.88% and 2.50% at
March 31, 1996 and December 31, 1995, respectively. In the normal course of its
business, the Association routinely enters into various commitments, primarily
relating to leasing certain of its office facilities and lending commitments.
The Association anticipates that it will have sufficient funds available to meet
its current commitments in the normal course of its business.
Stockholders' equity totaled $573.3 million at March 31, 1996 compared to
$590.7 million at December 31, 1995, reflecting the Company's earnings for the
quarter, the amortization of the unallocated portion of shares held by the
Employee Stock Ownership Plan (ESOP) and the unearned portion of shares held by
the Recognition and Retention Plans (RRPs) and related tax benefit, the effect
of the treasury stock purchases, dividends paid on common stock and the change
in the net unrealized (losses) gains on securities, net of taxes.
During the year ended December 31, 1995, the Company repurchased 735,876 of
its common shares for an aggregate cost of $26.6 million, bringing the
cumulative total of common shares repurchased, through December 31, 1995, to
1,879,918 for an aggregate cost of $60.8 million. An additional five percent
stock repurchase plan to repurchase up to 5% of its then outstanding common
shares of 11,304,970 or 565,248 shares, was approved by the Board of Directors
on December 21, 1995. During the first quarter of 1996, the Company repurchased
361,500 of its common shares at an aggregate cost of $18.2 million.
On March 1, 1996, the Company paid its third consecutive cash dividend equal
to $.20 per share on 11,219,970 shares of common stock outstanding as of the
close of business on February 15, 1996, aggregating $2.2 million. At its Board
of Directors meeting held on April 17, 1996, the Company increased its quarterly
cash dividend to $.22 per share and also declared a two-for-one stock split, in
the form of a 100% stock dividend. The additional shares will be distributed and
the cash dividend is payable, on the total number of shares held before the
stock split, on June 3, 1996 to shareholders of record at the close of business
on May 15, 1996.
On January 26, 1996, the Association paid a $25.0 million cash dividend to
the Company which was primarily used to fund the Company's stock repurchases
during the first quarter of 1996. On March 1, 1996, the Association paid an
additional cash dividend aggregating $2.2 million to the Company. At its Board
of Directors meeting held on April 17, 1996, the Association declared a cash
dividend aggregating $2.4 million, to be payable on June 3, 1996 to its
shareholder of record (the Company) at the close of business on May 15, 1996.
While the payment of the Company's cash dividend is not subject to the
Association's payment of a dividend to the Company, the ability of the Company
to continue to fund the payment of future cash dividends is dependent, to a
degree, upon the Association continuing to declare and pay cash dividends to the
Company.
At the time of conversion, the Association was required to establish a
liquidation account equal to its capital as of June 30, 1993. The liquidation
account will be reduced to the extent that eligible account holders reduce their
qualifying deposits. In the unlikely event of a complete liquidation of the
Association, each eligible account holder will be entitled to receive a
distribution from the liquidation account. As a result of the Fidelity
acquisition, the Association assumed the obligation of Fidelity's liquidation
account. The Association is not permitted to declare or pay dividends on its
capital stock, or repurchase any of its outstanding stock, if the effect thereof
would cause its stockholder's equity to be reduced below the amount required for
the liquidation account or applicable regulatory capital requirements. As of
March 31, 1996, the Association's total capital exceeded the amount of the
combined liquidation accounts, and also exceeded all of its regulatory capital
requirements with tangible and core ratios of 6.19% and a risk-based capital
ratio of 19.03%. The respective minimum regulatory requirements were 1.50%,
3.00% and 8.00%.
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INTEREST RATE SENSITIVITY ANALYSIS
The Company's net interest income, the primary component of its net income,
is subject to substantial risk due to changes in interest rates or changes in
market yield curves, particularly if there is a substantial variation in the
timing between the repricing of its assets and the liabilities which fund them.
Management has established a policy to monitor interest rate sensitivity so that
adjustments to the asset and liability mix, when deemed appropriate, can be made
on a timely basis.
The matching of the repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that same time period.
At March 31, 1996, the Company's net interest-earning assets maturing or
repricing within one year exceeded interest-bearing liabilities maturing or
repricing within the same time period by $1.3 billion, representing a positive
cumulative one-year gap of 19.2% of total assets. This compares to net
interest-earning assets maturing or repricing within one year exceeding
interest-bearing liabilities maturing or repricing within the same time period
by $1.4 billion, representing a positive cumulative one-year gap of 21.7% of
total assets at December 31, 1995. The slight decrease from the December 31,
1995 gap position was due to several factors, including a significant number of
fifteen month certificates of deposit moving to the one-year or less maturity
category as of March 31, 1996. Included in interest-earning assets repricing or
maturing in one year or less are mortgage-backed, mortgage-related and other
securities available-for-sale. The reclassification of these securities to
available-for-sale was made as of December 31, 1995, as permitted by a Special
Report issued by the Financial Accounting Standards Board. If the
reclassification of securities had not occurred, interest-bearing liabilities
maturing or repricing within one year, at March 31, 1996, would have exceeded
net interest-earning assets maturing or repricing within the same time period by
$102.1 million, representing a negative cumulative one-year gap of 1.5% of total
assets.
The Company, from time to time, in an attempt to further reduce volatility
in its earnings caused by changes in interest rates will enter into financial
agreements with third parties to hedge its position. During 1994, the Company,
as part of its overall interest rate risk management strategy, purchased an
interest rate cap with a notional amount of $105.0 million on which the Company
receives a payment, based on the notional amount, equal to the three month LIBOR
in excess of 5% on any reset date for the reset period, and simultaneously sold
an interest rate cap on the same amount pursuant to which the Company makes a
payment, based on the notional amount, equal to the three month LIBOR in excess
of 7% on any reset date for the reset period. These transactions, referred to,
in the aggregate, as a corridor, have been structured to reset quarterly on the
same dates and mature on the same date as a $105.0 million reverse repurchase
agreement bearing interest at the three month LIBOR, which matured on March 15,
1996. During the second quarter of 1995, the Company entered into an interest
rate swap with a notional amount of $50.0 million, the effect of which was to
convert a medium term $50.0 million borrowing, with a variable rate equal to the
three month LIBOR, to a fixed rate borrowing equal to 6.632%, by agreeing,
within the interest rate swap agreement, to pay a fixed rate of interest equal
to 6.632% and receive the three month LIBOR. The agreement matures on April 21,
1997, the same date as the borrowing. Additionally, the Company purchased
various callable debt securities and has entered into callable reverse
repurchase agreements. At March 31, 1996, $226.5 million of debt securities and
$475.0 million of reverse repurchase agreements, set forth in the following
table at their maturity dates, were callable within one year.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1996, which are
anticipated by the Company, using certain assumptions based on its historical
experience and other data available to management, to reprice or mature in each
of the future time periods shown. This table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest income
because the actual repricing dates of various assets and liabilities is subject
to customer discretion and competitive and other pressures. The duration of
mortgage-backed and mortgage-related securities can be significantly impacted by
changes in mortgage prepayment rates. Prepayment rates will vary due to a number
of factors, including the regional economy
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in the area where the underlying mortgages were originated, seasonal factors,
demographic variables, and the assumability of the underlying mortgages.
However, the largest determinant of prepayment rates are prevailing interest
rates and related mortgage refinancing opportunities. Therefore, actual
experience may vary from that indicated. In addition, the available-for-sale
securities may or may not be sold, or effectively repriced, since that activity
is subject to management's discretion.
11
13
At March 31, 1996
--------------------------------------------------------------------
More Than More Than
One Year Three Years
One Year to to More than
or Less Three Years Five Years Five Years Total
--------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (1) $ 800,721 $ 552,558 $ 223,253 $ 493,866 $2,070,398
Consumer and other loans (1) 40,591 10,606 7,265 -- 58,462
Federal funds sold and
repurchase agreements 25,000 -- -- -- 25,000
Mortgage-backed, mortgage-related
and other securities available-for-sale 2,486,555 -- -- -- 2,486,555
Mortgage-backed and mortgage-
related securities held-to-maturity 389,752 230,250 175,948 599,917 1,395,867
Other securities held-to-maturity 87,554 12,340 50,800 188,822 339,516
--------------------------------------------------------------------
Total interest-earning assets 3,830,173 805,754 457,266 1,282,605 6,375,798
Less:
Unearned discount, premium
and deferred fees (2) 4,187 2,889 1,167 2,583 10,826
--------------------------------------------------------------------
Net interest-earning assets 3,825,986 802,865 456,099 1,280,022 6,364,972
--------------------------------------------------------------------
Interest-bearing liabilities:
Savings 196,800 289,408 289,400 382,330 1,157,938
NOW 29,604 26,048 21,312 41,437 118,401
Money market 130,536 111,888 93,240 37,297 372,961
Certificates of deposit 1,604,971 862,438 135,555 307 2,603,271
Borrowed funds 576,508 1,180,000 5,000 10,000 1,771,508
--------------------------------------------------------------------
Total interest-bearing liabilities 2,538,419 2,469,782 544,507 471,371 6,024,079
--------------------------------------------------------------------
Interest sensitivity gap $1,287,567 $(1,666,917) $ (88,408) $ 808,651 $ 340,893
====================================================================
Cumulative interest sensitivity gap $1,287,567 $ (379,350) $(467,758) $ 340,893
====================================================================
Cumulative interest sensitivity gap
as a percentage of total assets 19.19% (5.66)% (6.97)% 5.08%
Cumulative net interest-earning assets
as a percentage of interest-bearing liabilities 150.72% 92.43% 91.58% 105.66%
(1) For purposes of this analysis, mortgage, consumer and other loans exclude
non-performing loans, but are not reduced for the allowance for loan losses.
(2) For purposes of this analysis, unearned discount, premium and deferred fees
are prorated.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Additionally, certain
assets, such as ARM loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of borrowers to service their ARM loans or other loan
obligations may decrease in the event of an interest rate increase. The table
reflects the estimates of management as to periods to repricing at a particular
point in time. Among the factors considered, are current trends and historical
repricing experience with respect to similar products. For example, the Company
has a number of deposit accounts, including savings, NOW and money market
accounts which, subject to certain regulatory exceptions not relevant here, may
be withdrawn at any time. The Company, based upon its historical experience,
assumes that while all customers in these account categories could withdraw
their funds on any given day, they will not do so, even if market interest rates
were to change. As a result, different assumptions may be used at different
points in time.
12
14
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. The
following table sets forth certain information relating to the Company for the
quarters ended March 31, 1996 and 1995. Yields and costs are derived by dividing
income or expense by the average balance of related assets or liabilities,
respectively, for the periods shown, and annualized, except where noted
otherwise. This table should be analyzed in conjunction with management's
discussion of the comparison of operating results for the quarters ended March
31, 1996 and 1995.
QUARTER ENDED MARCH 31,
--------------------------------------------------------------------
1996 1995
------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $2,056,596 $ 42,524 8.27% $1,696,891 $35,173 8.29%
Consumer and other loans 60,701 1,525 10.05% 59,550 1,560 10.48%
Mortgage-backed and mortgage-
related securities (1) 3,677,625 62,916 6.84% 3,062,498 52,016 6.79%
Federal funds sold and
repurchase agreements 77,577 1,055 5.44% 226,010 2,947 5.22%
Other securities (1) 492,579 7,814 6.35% 381,707 6,187 6.48%
---------- -------- ---------- -------
Total interest-earning assets 6,365,078 115,834 7.28% 5,426,656 97,883 7.21%
-------- -------
Non-interest-earning assets 279,356 264,917
---------- ----------
Total assets $6,644,434 $5,691,573
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,151,797 7,285 2.53% $1,184,314 7,494 2.53%
Certificates of deposit 2,577,554 35,261 5.47% 2,380,989 31,188 5.24%
NOW 222,752 1,125 2.02% 213,393 1,083 2.03%
Money market 258,960 2,370 3.66% 160,607 1,010 2.52%
Borrowed funds 1,727,286 25,059 5.80% 1,105,036 14,320 5.18%
---------- ------- ---------- -------
Total interest-bearing liabilities 5,938,349 71,100 4.79% 5,044,339 55,095 4.37%
------- -------
Non-interest-bearing liabilities 116,460 89,143
---------- ----------
Total liabilities 6,054,809 5,133,482
Stockholders' equity 589,625 558,091
---------- ----------
Total liabilities and stockholders' equity $6,644,434 $5,691,573
========== ==========
Net interest income/net interest rate spread (2) $ 44,734 2.49% $42,788 2.84%
======== ===== ======= =====
Net interest-earning assets/net interest margin (3) $ 426,729 2.81% $ 382,317 3.15%
========== ===== ========== =====
Ratio of interest-earning assets to interest-
bearing liabilities 1.07x 1.08x
========= =========
(1) Securities available-for-sale are reported at average amortized cost.
(2) Net interest rate spread represents the difference between the average yield
on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
13
15
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Quarter Ended March 31, 1996
Compared to
Quarter Ended March 31, 1995
---------------------------------
Increase (Decrease)
---------------------------------
Volume Rate Net
-------- ------ -------
(In Thousands)
Interest-earning assets:
Mortgage loans.............................. $ 7,939 $ (588) $ 7,351
Consumer and other loans.................... 153 (188) (35)
Mortgage-backed and mortgage-
related securities....................... 10,515 385 10,900
Federal funds sold and repurchase
agreements............................... (2,712) 820 (1,892)
Other securities............................ 2,450 (823) 1,627
-------- ------- --------
Total.............................. 18,345 (394) 17,951
-------- ------- --------
Interest-bearing liabilities:
Savings..................................... (209) 0 (209)
Certificates of deposit..................... 2,659 1,414 4,073
NOW......................................... 76 (34) 42
Money market................................ 782 578 1,360
Borrowed funds.............................. 8,857 1,882 10,739
-------- ------- --------
Total................................ 12,165 3,840 16,005
-------- ------- --------
Net change in net interest
income................................... $ 6,180 $(4,234) $ 1,946
======== ======= ========
14
16
ASSET QUALITY
One of the Company's key operating objectives has been and continues to be
improving asset quality. Through a variety of strategies, including borrower
workout arrangements and aggressive marketing of owned properties, the Company
has taken an active role in addressing problem and non-performing assets which,
in turn, has helped to build the strength of the Company's financial condition.
Such strategies have resulted in a reduction of non-performing assets of $10.8
million, which was primarily from non-accrual mortgage loans and real estate
owned, net, with reductions of $4.9 million and $5.1 million, respectively. The
following tables show a comparison of delinquent loans and non-performing assets
as of March 31, 1996 and December 31, 1995.
DELINQUENT LOANS
----------------
AT MARCH 31, 1996 AT DECEMBER 31, 1995
------------------------------------ ------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ----------------- ----------------- -----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
One-to-four family...... 118 $7,229 327 $30,370 118 $8,173 366 $33,384
Multi-family............ 5 622 13 1,963 3 336 17 2,851
Commercial real estate . 3 384 20 4,455 3 384 21 4,698
Construction and land... - - 8 1,154 - - 10 2,271
Consumer and other loans 45 291 67 1,435 47 622 65 1,276
--- ------ --- ------- ---- ------- --- -------
Total delinquent loans 171 $8,526 435 $39,377 171 $9,515 479 $44,480
=== ====== === ======= ==== ====== ==== =======
Delinquent loans to total
loans.................. .39% 1.82% 0.46% 2.16%
15
17
NON-PERFORMING ASSETS
AT AT
MARCH 31, DECEMBER 31,
1996 1995
--------- ----------
Non-accrual delinquent mortgage loans ........... $32,540 $37,394
Non-accrual delinquent consumer
and other loans ............................ 1,435 1,276
Mortgage loans delinquent 90 days or more (1) ... 5,402 5,810
------- -------
Total non-performing loans ................. 39,377 44,480
------- -------
Real estate owned, net (2) ...................... 12,584 17,677
Investment in real estate, net (3) .............. 5,073 5,654
------- -------
Total real estate owned and investment
in real estate, net ...................... 17,657 23,331
------- -------
Total non-performing assets .......... $57,034 $67,811
======= =======
Allowance for loan losses to non-performing loans 34.02% 30.34%
Allowance for loan losses to total loans ........ 0.62% 0.65%
(1) Loans delinquent 90 days or more and still accruing interest consist
solely of loans delinquent 90 days or more as to their maturity date but
not their interest payments.
(2) Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is recorded at the lower of cost or fair
value less estimated costs to sell.
(3) Investment in real estate is recorded at the lower of cost or fair value.
16
18
The following table sets forth the composition of the Company's loan
portfolio at March 31, 1996 and December 31, 1995.
At March 31, At December 31,
1996 1995
---------------------- ------------------------
Percent Percent
of of
Amount Total Amount Total
(Dollars in Thousands)
MORTGAGE LOANS:
One-to-four family .............. $ 1,838,882 84.81% $ 1,748,284 84.82%
Multi-family .................... 118,199 5.45 109,944 5.34
Commercial real estate .......... 140,174 6.47 128,668 6.24
Construction .................... 11,085 0.51 12,598 0.61
----------- ------ ----------- ------
Total mortgage loans ......... 2,108,340 97.24 1,999,494 97.01
----------- ------ ----------- ------
CONSUMER AND OTHER LOANS:
Home equity ..................... 37,388 1.72 38,761 1.88
Credit card ..................... 8,103 0.37 8,578 0.42
Passbook ........................ 3,145 0.15 2,915 0.14
Agency for International
Development .................. 1,146 0.05 1,193 0.06
Auto ............................ 821 0.04 955 0.04
Personal ........................ 3,776 0.17 3,708 0.18
Other ........................... 5,518 0.26 5,564 0.27
----------- ------ ----------- ------
Total consumer and other loans 59,897 2.76 61,674 2.99
----------- ------ ----------- ------
Total loans .................. 2,168,237 100.00% 2,061,168 100.00%
----------- ====== ----------- ======
LESS:
Unearned discount, premium and
deferred loan fees, net ...... (4,108) (4,030)
Allowance for loan losses ....... (13,397) (13,495)
----------- -----------
Total loans, net ............. $ 2,150,732 $ 2,043,643
=========== ===========
17
19
SECURITIES PORTFOLIO
The following tables set forth the amortized cost and estimated fair values of
mortgage-backed, mortgage-related and other securities available-for-sale and
held-to-maturity at March 31, 1996 and December 31, 1995.
At March 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
(In Thousands)
AVAILABLE-FOR-SALE:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 252,445 $ 2,931 $ (1,374) $ 254,002
FHLMC certificates 315,792 2,038 (2,493) 315,337
FNMA certificates 54,612 171 (122) 54,661
REMICs:
Agency issuance 1,141,907 4,536 (15,702) 1,130,741
Private issuance 17,673 4 (228) 17,449
Residuals 2,419 16 -- 2,435
Other mortgage-related 497,083 4,698 (605) 501,176
---------- ------- -------- ----------
Total mortgage-backed and
mortgage-related securities 2,281,931 14,394 (20,524) 2,275,801
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 149,722 546 (1,873) 148,395
Equity securities 60,885 1,455 (62) 62,278
Other 73 8 -- 81
---------- ------- -------- ----------
Total other securities 210,680 2,009 (1,935) 210,754
---------- ------- -------- ----------
Total Available-for-Sale $2,492,611 $16,403 $(22,459) $2,486,555
========== ======= ======== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 100,884 $ 4,687 $ (98) $ 105,473
FHLMC certificates 34,433 1,275 (190) 35,518
FNMA certificates 23,965 93 (669) 23,389
CMOs 8,755 94 (45) 8,804
REMICs:
Agency issuance 968,655 3,869 (13,738) 958,786
Private issuance 252,466 10 (7,467) 245,009
Other mortgage-related 352 -- -- 352
---------- ------- -------- ----------
Total mortgage-backed and
mortgage-related securities 1,389,510 10,028 (22,207) 1,377,331
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 245,181 -- (3,241) 241,940
Obligations of states and
political subdivisions 51,587 -- (140) 51,447
Corporate debt securities 10,033 132 (2) 10,163
---------- ------- -------- ----------
Total other securities 306,801 132 (3,383) 303,550
---------- ------- -------- ----------
Total Held-to-Maturity $1,696,311 $10,160 $(25,590) $1,680,881
========== ======= ======== ==========
18
20
At December 31, 1995
--------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
(In Thousands)
AVAILABLE-FOR-SALE:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 156,330 $ 3,082 $ -- $ 159,412
FHLMC certificates 332,109 4,363 (635) 335,837
FNMA certificates 147,016 1,425 (17) 148,424
REMICs:
Agency issuance 1,116,842 9,418 (5,584) 1,120,676
Private issuance 19,788 41 (58) 19,771
Residuals 2,645 -- (15) 2,630
Other mortgage-related 540,565 5,900 (393) 546,072
---------- ------- -------- ----------
Total mortgage-backed and
mortgage-related securities 2,315,295 24,229 (6,702) 2,332,822
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 149,990 1,023 (446) 150,567
Equity securities 30,885 1,719 (101) 32,503
Other 76 -- -- 76
---------- ------- -------- ----------
Total other securities 180,951 2,742 (547) 183,146
---------- ------- -------- ----------
Total Available-for-Sale $2,496,246 $26,971 $ (7,249) $2,515,968
========== ======= ======== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 105,589 $ 4,566 $ (22) $ 110,133
FHLMC certificates 36,503 1,406 (16) 37,893
FNMA certificates 24,613 150 (476) 24,287
CMOs 10,638 119 (46) 10,711
REMICs:
Agency issuance 961,536 9,169 (4,396) 966,309
Private issuance 194,411 412 (3,922) 190,901
Other mortgage-related 354 -- -- 354
---------- ------- -------- ----------
Total mortgage-backed and
mortgage-related securities 1,333,644 15,822 (8,878) 1,340,588
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 220,181 1,022 (2,460) 218,743
Obligations of states and
political subdivisions 51,753 2 (96) 51,659
Corporate debt securities 9,964 -- (174) 9,790
---------- ------- -------- ----------
Total other securities 281,898 1,024 (2,730) 280,192
---------- ------- -------- ----------
Total Held-to-Maturity $1,615,542 $16,846 $(11,608) $1,620,780
========== ======= ======== ==========
19
21
COMPARISON OF FINANCIAL CONDITION AS OF
MARCH 31, 1996 AND DECEMBER 31, 1995
AND OPERATING RESULTS FOR THE QUARTERS ENDED
MARCH 31, 1996 AND 1995
FINANCIAL CONDITION
At March 31, 1996, the Company's total assets were $6.7 billion compared
to $6.6 billion at December 31, 1995. The increase was primarily due to growth
in the mortgage loan portfolio. Mortgage loans originated and purchased during
the first quarter of 1996 totaled $186.0 million, compared to $48.8 million in
the 1995 first quarter. Deposits increased $43.9 million during the first
quarter of 1996 and borrowed funds increased $66.8 million, primarily in the
form of additional reverse repurchase agreements. During the first quarter of
1996, the Company implemented a program which converted its NOW accounts to a
master account consisting of a NOW sub-account and a money market sub-account.
The result of this change was a substantial shift of deposits from NOW accounts
to money markets. While this program has no effect on the Company's depositors,
it is expected to provide additional investable funds to the Company by
substantially reducing the reserve balances required to be maintained at the
Federal Reserve Bank of New York. Stockholders equity decreased $17.4 million
to $573.3 million which reflects the repurchase of 361,500 shares of common
stock during the first quarter, the net change in the market valuation, net of
taxes, of securities available-for-sale and dividends paid, offset by net
income and the amortization relating to ESOP and RRP stock and related tax
benefit.
RESULTS OF OPERATIONS
GENERAL
Earnings per share increased 29.5% from the first quarter of 1995 as
compared to the first quarter of 1996, from $1.05 per share to $1.36,
respectively. Net income for the three months ended March 31, 1996 increased
$3.1 million to $14.7 compared to $11.6 million for the comparable period in
1995. As a result of the increase in net income, return on average equity
increased from 8.31% for the 1995 first quarter to 9.98% for the 1996 first
quarter in addition to an increase on return on average assets from 0.81% for
the 1995 first quarter to 0.89% for the 1996 first quarter. This increase was a
result of increases in net interest income and non-interest income, disposals of
investments in real estate and real estate owned, and a reduction in the
provision for loan losses, offset by an increase in general and administrative
expense. The improvements in net interest income and non-interest income were
primarily due to the Fidelity acquisition after the close of business on January
31, 1995.
NET INTEREST INCOME
Net interest income increased $1.9 million from $42.8 million in the
first quarter of 1995 to $44.7 million in the comparable quarter of 1996. The
increase is due to the 17.3% growth in average interest-earning assets to $6.4
billion from $5.4 billion, reflecting the acquisition of Fidelity as of the
close of business on January 31, 1995 and internal asset growth. This increase
was offset by the decrease in the net interest spread from 2.84% in 1995 to
2.49% in 1996, which was primarily due to higher deposit and borrowing costs
during 1996. The higher cost of funds was due to the significant decay in
passbook savings accounts to higher costing certificates of deposit in 1995, as
well as increased levels of borrowings during 1995 and the first quarter of
1996.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased $479,000, to $522,000 for the first
three months of 1996, compared to $1.0 million for the comparable period in
1995. This decrease reflects the reduction in non-performing loans, from $66.8
million at March 31, 1995 to $44.5 million at December 31, 1995 and $39.4
million at March 31, 1996.
20
22
NON-INTEREST INCOME
Non-interest income was $3.6 million in the current quarter compared to
$2.0 million for the first quarter of 1995. This increase resulted from gains
recognized on sales of securities of $761,800, the full quarterly impact of the
Fidelity acquisition and increased customer service fees. The gains on sales of
securities were the result of the Company selling FNMA mortgage-backed
securities, classified available-for-sale, with principal balances totaling
$78.1 million and related premiums aggregating $3.6 million. These transactions
were completed as part of the Company's strategy to mitigate the prepayment risk
associated with retaining securities with large premium balances.
NON-INTEREST EXPENSE
Non-interest expense decreased $2.0 million, to $21.4 million in the
current quarter, from $23.4 million for the first quarter of 1995. General and
administrative expenses increased from $21.5 million in 1995 to $23.9 million in
1996 due to an increase in compensation, benefits (including a $571,000 increase
in the amortization relating to allocation of ESOP stock) and occupancy expenses
resulting from the full quarterly impact of the Fidelity acquisition. These
increases in general and administrative expense were slightly offset by a
decrease in advertising expense of $829,000 from $1.6 million during the first
quarter of 1995 to $747,000 for the comparable 1996 quarter. The increase in
general and administrative expense was more than offset by an overall decrease
in real estate operations and the recovery of real estate losses of $5.0 million
resulting from gains on dispositions of real estate owned and investments in
real estate.
INCOME TAX EXPENSE
Income tax expense increased $2.8 million, from $8.8 million in 1995 to
$11.6 million in 1996. This increase was due primarily to the increase in income
before income taxes of $5.9 million, from $20.4 million for the first quarter of
1995 to $26.3 million for the first quarter of 1996.
IMPACT OF PROPOSED LEGISLATION
The Balanced Budget Act of 1995 ("Budget Act"), which was approved by
the Congress but vetoed by the President, included provisions that focused on a
recapitalization of the Savings Association Insurance Fund ("SAIF"). Under the
provisions of the Budget Act, all SAIF member institutions would pay a special
assessment to recapitalize the SAIF, and the assessment base for the payments on
FICO bonds would be expanded to include the deposits of both institutions
insured by the SAIF and by the Bank Insurance Fund ("BIF"). The amount of the
special assessment required to recapitalize the SAIF was then estimated to be
approximately 80 basis points of the SAIF assessable deposits. This estimate of
the special SAIF assessment was less than the assessment of 85 to 90 basis
points that had been previously estimated. The special assessment would have
been imposed on the first business day of January, 1996, or on such other date
prescribed by the FDIC no later than 60 days after enactment of the Budget Act,
based on the amount of SAIF deposits on March 31, 1995. The Budget Act would
have also permitted BIF-insured institutions with deposits subject to SAIF
assessments to reduce such SAIF-deposits by 20% in computing the institution's
special assessment. If an 85 or a 90 basis point assessment were assessed
against the Company's deposits as of March 31, 1995, the aggregate special SAIF
assessment would be approximately $36.9 million or $39.1 million, before taxes,
respectively, and an assessment of 80 basis points would be $34.7 million,
before taxes. It is expected that any SAIF special assessment would be
deductible for tax purposes in the year that it is paid.
The Budget Act also provided for the merger of the BIF and SAIF on
January 1, 1998, with such merger being conditioned upon the prior elimination
of the thrift charter. Congressional leaders had also agreed that Congress
should consider and act upon separate legislation to eliminate the thrift
charter as early as possible in 1996. If adopted, such legislation would require
that the Company, as a federal savings association, convert to a different form
of charter. Such a requirement to convert charters could cause the Company to
lose the favorable tax treatment for its bad debt reserves that it currently
enjoys under section 593 of the Internal Revenue Code ("Code") and to have all
or part of its existing bad debt reserve recaptured into income.
21
23
The Budget Act was vetoed by the President. However, the above
described provisions of the Budget Act were not the basis for the President's
veto, and in the past Congressional leaders have indicated that these provisions
may be the basis for future legislation to recapitalize the SAIF. If enacted by
Congress, such legislation would have the effect of reducing the capital of SAIF
member institutions by the after-tax cost of the special SAIF assessment, plus
any related additional tax liabilities. Such legislation would also have the
effect of substantially reducing or eliminating any differential that may
otherwise be required in the premium assessment rates for the BIF and SAIF.
However, although there is strong support for the legislation, its outcome is
uncertain.
Under section 593 of the Internal Revenue Code, thrift institutions
such as the Association, which meet certain definitional tests, primarily
relating to their assets and the nature of their business, are permitted to
establish a tax reserve for bad debts and to make annual additions thereto,
which additions may, within specified limitations, be deducted in arriving at
their taxable income. The Association's deduction with respect to "qualifying
loans," which are generally loans secured by certain interests in real property,
may currently be computed using an amount based on the Association's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the
Association'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. Similar deductions for
additions to the Association's bad debt reserve are permitted under the New York
State Bank Franchise Tax and the New York City Banking Corporation Tax; however,
for purposes of these taxes, the effective allowable percentage under the PTI
method is 32% rather than 8%.
Under pending legislative proposals, section 593 of the Code would be
amended and the Association, as a "large bank" (one with assets having an
adjusted basis of more than $500 million), would be unable to make additions to
its tax bad debt reserve, would be permitted to deduct bad debts only as they
occur and would additionally be required to recapture (that is, take into
income) over a multi-year period, beginning with the Association's taxable year
beginning on January 1, 1996, the excess of the balance of its bad debt reserves
(other than the supplemental reserve) as of December 31, 1995 over the balance
of such reserves as of December 31, 1987, or over a lesser amount if the
Association's loan portfolio has decreased since December 31, 1987. However,
such recapture requirements would be suspended for each of two successive
taxable years beginning January 1, 1996, in which the Association originates a
minimum amount of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding January 1, 1996. In addition, if section 593 of the Code is so
amended, the Association may be required for New York State and New York City
tax purposes to include in its entire net income the excess of its post-December
31, 1987 New York State and New York City reserves for losses on qualifying real
property loans over its reserve for losses on such loans maintained for federal
income tax purposes (the "Excess Reserves"). Accordingly, if the pending
legislative proposals are enacted in their present form, unless further
legislation is adopted in New York, the Association may be required to take its
Excess Reserves into income in computing its New York State and City taxes for
its taxable year beginning January 1, 1996. If section 593 of the Code is so
amended, the Association would incur an additional tax liability of
approximately $3.5 million. At this time, the Company cannot predict whether any
legislative proposal regarding amendments to the Code related to addition to or
recapture of its tax bad debt reserve will be adopted as proposed.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material events occurred with respect to legal proceedings during
the quarter ended March 31, 1996, not previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
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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.
Astoria Financial Corporation
Dated: May 10, 1996 By: /s/ Monte N. Redman
------------------- --------------------------
Monte N. Redman
Senior Vice President and Chief
Financial Officer
Dated: May 10, 1996 By: /s/ Frank E. Fusco
------------------- --------------------------
Frank E. Fusco
First Vice President, Chief Accounting
Officer and Controller
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Exhibit Index
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Exhibit No. Identification of Exhibit
- - ----------- -------------------------
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
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