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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 September 30, 1997
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 of 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, October 31, 1997
.01 Par Value 26,416,252
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PART 1 -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Consolidated Statements of Financial Condition at September 30, 1997 and 2
December 31, 1996.
Consolidated Statements of Operations for the Three and Nine 3
Months Ended September 30, 1997 and September 30, 1996.
Consolidated Statement of Stockholders' Equity for the Nine Months 4
Ended September 30, 1997.
Consolidated Statements of Cash Flows for the Nine Months Ended 5
September 30, 1997 and September 30, 1996.
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk (Not Applicable)
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds (Not Applicable)
Item 3. Defaults Upon Senior Securities (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 31
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
Signatures 33
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ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
Assets 1997 1996
------------- -----------
Cash and due from banks $ 96,537 $ 18,923
Federal funds sold and repurchase agreements 67,000 56,000
Mortgage-backed and mortgage-related securities
available-for-sale (at estimated fair value) 1,706,366 2,100,376
Other securities available-for-sale (at estimated fair value) 154,098 196,286
Mortgage-backed and mortgage-related securities
held-to-maturity (estimated fair value of $1,287,498
and $1,309,007, respectively) 1,284,780 1,321,613
Other securities held-to-maturity (estimated fair value
of $942,449 and $637,338, respectively) 937,490 639,402
Federal Home Loan Bank of New York stock 35,800 32,354
Loans receivable:
Mortgage loans 3,316,674 2,593,307
Consumer and other loans 48,743 58,109
----------- -----------
3,365,417 2,651,416
Less allowance for loan losses 14,464 14,089
----------- -----------
Loans receivable, net 3,350,953 2,637,327
Real estate owned and investments in real estate, net 10,111 12,129
Accrued interest receivable 44,348 43,976
Premises and equipment, net 84,435 83,424
Excess of cost over fair value of net assets acquired
and other intangibles 93,937 100,267
Other assets 38,508 30,686
----------- -----------
Total assets $ 7,904,363 $ 7,272,763
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings $ 1,104,506 $ 1,134,038
Money market 643,477 461,813
NOW 116,064 142,492
Certificates 2,695,645 2,774,750
----------- -----------
Total deposits 4,559,692 4,513,093
Reverse repurchase agreements 2,401,106 1,845,000
Federal Home Loan Bank of New York advances 235,403 266,514
Mortgage escrow funds 37,854 26,520
Accrued expenses and other liabilities 60,524 32,807
----------- -----------
Total liabilities 7,294,579 6,683,934
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value; (5,000,000 shares
authorized; none issued) -- --
Common stock, $.01 par value; (70,000,000 shares authorized: 26,361,704
issued; 20,665,877 and 21,472,886 shares outstanding, respectively) 264 264
Additional paid-in capital 341,109 330,398
Retained earnings - substantially restricted 416,840 379,876
Treasury stock (5,695,827 and 4,888,818 shares, at cost, respectively) (130,465) (91,188)
Net unrealized gains on securities, net of taxes 8,258 156
Unallocated common stock held by ESOP (22,247) (24,489)
Unearned common stock held by RRPs (3,975) (6,188)
----------- -----------
Total stockholders' equity 609,784 588,829
----------- -----------
Total liabilities and stockholders' equity $ 7,904,363 $ 7,272,763
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Interest income:
Mortgage loans $ 62,376 $ 49,031 $ 171,761 $ 136,517
Consumer and other loans 1,297 1,519 4,147 4,560
Mortgage-backed and mortgage-related securities 52,238 61,543 167,699 187,119
Federal funds sold and repurchase agreements 1,351 470 6,198 2,418
Other securities 19,713 14,153 51,655 33,178
------------ ------------ ------------ ------------
Total interest income 136,975 126,716 401,460 363,792
------------ ------------ ------------ ------------
Interest expense:
Deposits 49,783 49,330 146,277 142,459
Borrowed funds 37,100 29,782 106,190 82,171
------------ ------------ ------------ ------------
Total interest expense 86,883 79,112 252,467 224,630
------------ ------------ ------------ ------------
Net interest income 50,092 47,604 148,993 139,162
Provision for loan losses 895 958 2,809 3,522
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 49,197 46,646 146,184 135,640
------------ ------------ ------------ ------------
Non-interest income:
Customer service and loan fees 2,623 2,378 7,601 6,705
Net gain on sales of securities and loans 3,179 52 4,695 1,321
Other 927 944 2,565 2,345
------------ ------------ ------------ ------------
Total non-interest income 6,729 3,374 14,861 10,371
------------ ------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 13,622 12,237 39,907 36,843
Occupancy, equipment and systems 5,990 5,815 17,907 17,512
Federal deposit insurance premiums 716 2,517 2,288 7,436
Advertising 604 693 2,664 2,786
Other 3,159 2,610 9,210 7,896
------------ ------------ ------------ ------------
Total general and administrative 24,091 23,872 71,976 72,473
Real estate operations, net 85 176 276 (2,740)
Provision for (recovery of) real estate losses 96 (202) 387 (1,534)
Amortization of excess of cost over fair value
of net assets acquired 2,110 2,171 6,330 6,513
SAIF recapitalization assessment -- 28,545 -- 28,545
------------ ------------ ------------ ------------
Total non-interest expense 26,382 54,562 78,969 103,257
------------ ------------ ------------ ------------
Income (loss) before income tax expense (benefit) 29,544 (4,542) 82,076 42,754
Income tax expense (benefit) 12,652 (1,320) 34,543 19,548
------------ ------------ ------------ ------------
Net income (loss) $ 16,892 $ (3,222) $ 47,533 $ 23,206
============ ============ ============ ============
Primary earnings (loss) per share $ 0.81 $ (0.17) $ 2.25 $ 1.12
============ ============ ============ ============
Fully diluted earnings (loss) per share $ 0.81 $ (0.17) $ 2.24 $ 1.12
============ ============ ============ ============
Dividends per common share $ 0.15 $ .11 $ 0.41 $ .32
============ ============ ============ ============
Primary weighted average common shares and equivalents 20,924,539 19,446,410 21,092,003 20,713,185
Fully diluted weighted average common shares and equivalents 20,968,411 19,446,410 21,211,393 20,746,062
See accompanying notes to consolidated financial statements.
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ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Net
Unrealized
Retained Gains Unallocated
Additional Earnings on Common
Common Paid-In Substantially Treasury Securities, Stock Held
Stock Capital Restricted Stock Net of Taxes by ESOP
--------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 264 $ 330,398 $ 379,876 $ (91,188) $ 156 $ (24,489)
Net income -- -- 47,533 -- -- --
Change in unrealized gains
on securities available-for-sale- -- -- -- -- 8,102 --
Common stock repurchased
(1,059,497 shares) -- -- -- (44,278) -- --
Cash dividends declared
on common stock -- -- (8,343) -- -- --
Exercise of stock options and
related tax benefit -- 2,954 (2,226) 5,001 -- --
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax
benefit -- 7,757 -- -- -- 2,242
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 $ 264 $ 341,109 $ 416,840 $(130,465) $ 8,258 $ (22,247)
========= ========= ========= ========= ========= =========
Unearned
Common
Stock Held
by RRP's Total
------------------------
Balance at December 31, 1996 $ (6,188) $ 588,829
Net income -- 47,533
Change in unrealized gains
on securities available-for-sale- -- 8,102
Common stock repurchased
(1,059,497 shares) -- (44,278)
Cash dividends declared
on common stock -- (8,343)
Exercise of stock options and
related tax benefit -- 5,729
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax
benefit 2,213 12,212
--------- ---------
Balance at September 30, 1997 $ (3,975) $ 609,784
========= =========
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 47,533 $ 23,206
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net deferred loan origination
fees, discounts and premiums (5,395) (4,921)
Provision for loan and real estate losses 3,196 1,988
Depreciation and amortization 4,664 4,194
Net gain on sales of securities and loans (4,695) (1,321)
Amortization of excess of cost over fair value
of net assets acquired 6,330 6,513
Allocated and earned shares from ESOP and RRPs 9,834 7,686
Increase in accrued interest receivable (372) (6,242)
Increase in mortgage escrow funds 11,334 6,715
Net changes in other assets, accrued expenses
and other liabilities 18,702 21,089
--------- ---------
Net cash provided by operating activities 91,131 58,907
--------- ---------
Cash flows from investing activities:
Loan originations (908,933) (500,530)
Loan purchases through third parties (145,399) (225,364)
Bulk loan purchases -- (60,410)
Principal repayments on loans 314,944 266,281
Principal payments on mortgage-backed, mortgage-
related and other securities held-to-maturity 171,590 134,077
Principal payments on mortgage-backed, mortgage-
related and other securities available-for-sale 325,538 323,546
Purchases of mortgage-backed and mortgage-related securities
held-to-maturity -- (87,069)
Purchases of mortgage-backed and mortgage-related securities
available-for-sale (282,190) (249,642)
Purchases of other securities held-to-maturity (431,905) (415,482)
Purchases of other securities available-for-sale (23,694) (36,167)
Proceeds from sale of securities and loans 454,839 90,552
Proceeds from sale of real estate owned and investments
in real estate 6,884 13,602
Purchases of premises and equipment, net of proceeds from sale (5,675) (6,755)
--------- ---------
Net cash used in investing activities (524,001) (753,361)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 46,224 257,352
Net increase in reverse repurchase agreements 556,106 353,518
Proceeds from FHLB of New York advances -- 135,000
Payments of FHLB of New York advances (31,000) (90,000)
Costs to repurchase common stock (44,278) (29,055)
Cash dividends paid to stockholders (8,343) (6,841)
Cash received for options exercised, net of loss on
issuance of treasury stock 2,775 244
Cash received from sale of unallocated RRP stock -- 147
--------- ---------
Net cash provided by financing activities 521,484 620,365
--------- ---------
Net increase (decrease) in cash and cash equivalents 88,614 (74,089)
Cash and cash equivalents at beginning of period 74,923 133,869
--------- ---------
Cash and cash equivalents at end of period $ 163,537 $ 59,780
========= =========
Supplemental disclosures:
Cash paid during the year:
Interest $ 249,243 $ 224,068
========= =========
Income taxes $ 1,189 $ 26,065
========= =========
Additions to real estate owned $ 5,999 $ 7,730
========= =========
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 (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial condition as of
September 30, 1997 and December 31, 1996, its results of operations for the
three and nine months ended September 30, 1997 and 1996, and its cash flows and
stockholders' equity for the nine months ended September 30,1997. 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 September 30, 1997 and
December 31, 1996 and amounts of revenues and expenses of the results of
operations for the three and nine month periods ended September 30, 1997 and
1996. The results of operations for the three and nine months ended September
30, 1997 are not necessarily indicative of the results of operations to be
expected for the remainder 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. Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation.
These consolidated financial statements should be read in conjunction with the
December 31, 1996 audited consolidated financial statements, interim financial
statements and notes thereto of the Company.
2. EARNINGS (LOSS) PER SHARE
Primary and fully diluted earnings per common share ("EPS") are computed by
dividing net income by the weighted-average number of common stock and common
stock equivalents outstanding during the year.
For the primary EPS calculation, the weighted-average number of shares of common
stock and common stock equivalents outstanding includes the average number of
shares of common stock outstanding adjusted for the weighted average number of
unallocated shares held by the Employee Stock Ownership Plan ("ESOP") and the
Recognition and Retention Plans ("RRPs") and the dilutive effect of unexercised
stock options using the treasury stock method.
For the fully diluted EPS calculation, the weighted average number of shares of
common stock and common stock equivalents include the same components as for the
primary earnings per share calculation; however, the maximum dilutive effect for
unexercised stock options is computed using the period-end market price of the
Company's common stock if it is higher than the average market price used in
calculating primary earnings per share.
The effect for unexercised stock options were not assumed in the calculation of
loss per common share because the effect would have been antidilutive.
3. IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 specifies the computation, presentation, and disclosure
requirements for EPS for entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion No. 15 ("APB No. 15").
It replaces the presentation of primary EPS with a presentation of basic EPS and
the presentation of fully diluted EPS with a presentation of diluted EPS. Basic
EPS is computed by dividing net income by the
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weighted average number of common 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 then shared in the earnings of the
entity. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires the restatement of all prior-period
EPS data presented. Upon adoption of SFAS No. 128, the change from primary EPS
to basic EPS will result in a modest increase in this EPS presentation, but will
not result in a material change in the EPS presentation from fully diluted to
diluted EPS.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires
that all items that are components of "comprehensive income" be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as "the change in equity
[net assets] of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." Companies will be required to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of prior
periods presented. As the requirements of SFAS No. 130 are disclosure-related,
its implementation will have no impact on the Company's financial condition or
results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 requires that enterprises report certain financial and
descriptive information about operating segments in complete sets of financial
statements of the Company and in condensed financial statements of interim
periods issued to shareholders. It also requires that a Company report certain
information about their products and services, geographic areas in which they
operate, and their major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. As the requirements of SFAS No. 131 are
disclosure-related, its implementation will have no impact on the Company's
financial condition or results of operations.
4. 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 $163,537,000 and $59,780,000
at September 30, 1997 and 1996, respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, changes in general, economic and market, and
legislative and regulatory conditions, and the development of an interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments.
GENERAL
Astoria Financial Corporation (the "Company") is the holding company of
Astoria Federal Savings and Loan Association (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 borrowed funds, primarily in one-to-four
family residential
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mortgage loans, 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 federal agencies and other securities.
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 is also affected by its provision for loan losses as well
as non-interest income, general and administrative expense, other non-interest
expense, and income tax expense. General and administrative expense consists of
compensation and benefits, occupancy, equipment and systems expense, federal
deposit insurance premiums, advertising and other operating expenses. Other
non-interest expense generally 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 are also significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates and U.S. Treasury yield curves, government policies and
actions of regulatory authorities.
THE GREATER ACQUISITION
Following the close of business on September 30, 1997, the Company
successfully completed the acquisition of The Greater New York Savings Bank
("Greater"), and its merger ("the Merger") into the Association, in a
transaction which was accounted for as a purchase. According to the terms of the
merger agreement, the aggregate consideration to be paid to stockholders of
Greater's common stock consisted of 0.50 of a share of the Company's common
stock per share of Greater's common stock for 75% of the shares of Greater's
common stock and $19.00 in cash per share of Greater's common stock for the
remaining 25% of the shares of Greater's common stock. Accordingly, each share
of the Greater common stock has been converted in the merger into the right to
receive: (i) 0.50 of a share of the Company's common stock, (ii) $19.00 in cash,
or (iii) a combination of cash and a fraction of a share of the Company's common
stock. The actual consideration received by a stockholder for shares of the
Greater common stock depended on certain election, allocation and proration
procedures. Such election, allocation and proration procedures resulted in
shareholders of Greater, who elected to receive shares, receiving 0.3861358
shares of the Company's common stock and $4.33 in cash for each share of
Greater's common stock. All other remaining shareholders of Greater received
$19.00 in cash for each share of Greater's common stock. The outstanding shares
of the 12% Noncumulative Preferred Stock, Series B, of Greater has been
converted into a newly-created series of preferred stock of the Company with
substantially identical, and no less favorable terms. The Company issued
2,000,000 shares of such stock as part of the consideration of the Merger.
The total consideration of the Merger was valued at approximately $400
million. As a result of the Merger, after the close of business on September 30,
1997, the Company had assets of approximately $10.3 billion, deposits of
approximately $6.2 billion, net loans of approximately $4.0 billion and
stockholders equity of approximately $893 million. The excess of cost over fair
value of net assets acquired generated in the transaction is currently estimated
to be approximately $165 million, which will be amortized on a straight line
basis over 15 years. As of the completion of the Merger, the Association
continued to exceed each of its capital requirements.
Subsequent to the close of the Merger, the Company restructured the
resulting securities portfolio by selling approximately $240 million of
securities acquired in the Merger and utilized the proceeds from the sale
primarily to repay approximately $170 million of borrowings. The Company has
also entered into contracts for the sale of approximately $223 million of real
estate assets and loans acquired from the Greater. These sales transactions are
expected to close in the fourth quarter of 1997.
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") SPECIAL ASSESSMENT
During the quarter ended September 30, 1996, final legislative action was
taken by Congress and the President to recapitalize the SAIF. As a result of the
legislation, the Company recorded a one-time special assessment to recapitalize
the SAIF for $16.9 million, net of taxes, during the quarter. The special
assessment was calculated at 65.7 basis points of the Company's March 31, 1995
deposit insurance assessment base. As a result of this non-recurring
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special assessment, the Company had a net loss of $3.2 million for the three
months ended September 30, 1996. The legislation also provided for a significant
reduction in the annual deposit insurance premiums which the Association pays.
INFORMATION SERVICES YEAR 2000 PROJECT
The Company has initiated a project to ensure that its computer systems
are addressed for problems associated with the year 2000 date change. Based upon
the project's current status, the Company believes that the costs associated
with ensuring year 2000 compliance will not materially affect the Company's
future operating results or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is cash provided by investing
activities and includes principal and interest payments on loans and
mortgage-backed, mortgage-related and other securities. During the nine months
ended September 30, 1997 and 1996, principal payments on loans, mortgage-backed
and mortgage-related and other securities totaled $812.1 million and $723.9
million, respectively. Additionally, during the nine months ended September 30,
1997, the Company received $454.8 million of funds from the sale of securities
and loans, of which $437.6 was received in the second quarter of 1997 from the
sale of securities. The Company's other sources of funds are provided by
operating and financing activities. Net cash provided from operating activities
during the nine months ended September 30, 1997 and 1996 totaled $91.1 million
and $58.9 million, respectively, of which $47.5 million and $23.2 million,
respectively, represented net income of the Company. Net cash provided by
financing activities during the nine months ended September 30, 1997 and 1996
totaled $521.5 million and $620.4 million, respectively, primarily due to the
net increases in borrowings and deposits during the nine months ended September
30, 1997 and 1996 which totaled $571.3 million and $655.9 million, respectively.
The Company's primary uses of funds in its investing activities are for the
purchase and origination of loans and the purchase of mortgage-backed,
mortgage-related and other securities. During the nine months ended September
30, 1997 and 1996, the Company's purchases and originations of loans totaled
$1.1 billion and $786.3 million, respectively, and purchases of mortgage-backed,
mortgage-related and other securities totaled $737.8 million and $788.4 million,
respectively.
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 5.18% and 8.60% at September 30, 1997 and December 31,
1996, respectively, while its short-term liquidity ratios were 3.59% and 3.76%
at September 30, 1997 and December 31, 1996, respectively.
In the normal course of its business, the Association routinely enters
into various commitments, primarily relating to the origination and purchase of
loans and the leasing of certain office facilities. The Association anticipates
that it will have sufficient funds available to meet its current commitments in
the normal course of its business. On October 1, 1997, the Company funded the
cash portion of the consideration with respect to the Merger in the amount of
$74.4 million, which was provided from its normal cash flows. Approximately $13
million of an estimated $40 million of transaction costs remain to be paid.
Stockholders' equity totaled $609.8 million at September 30, 1997 compared
to $588.8 million at December 31, 1996, reflecting the Company's earnings for
the nine months, the amortization of the unallocated portion of shares held by
the ESOP and the unearned portion of shares held by the RRPs and related tax
benefit, the effect of treasury stock purchases, the effect of exercises of
stock options and related tax benefit, dividends paid on common stock and the
change in the net unrealized gains on securities, net of taxes.
Tangible stockholders' equity (stockholders' equity less the excess of
cost over fair value of net assets acquired ("goodwill")) totaled $515.8 million
at September 30, 1997 compared to $488.6 million at December 31, 1996. This
increase reflects the change in the Company's stockholders' equity noted above,
plus the reduction in the balance of
9
11
goodwill. Tangible equity is a critical measure of a company's ability to
repurchase shares, pay dividends and continue to grow. The Association is
subject to various capital requirements which affect its classification for
safety and soundness purposes, as well as for deposit insurance purposes. These
requirements utilize tangible equity as a base component, rather than equity as
defined by generally accepted accounting principles ("GAAP"). Although reported
earnings and return on equity are traditional measures of a company's
performance, management believes that the growth in tangible equity, or "cash
earnings" is also a significant measure of a company's performance. Cash
earnings include reported earnings plus the non-cash charges for goodwill
amortization and amortization relating to certain employee stock plans and
related tax benefit. These items have either been previously charged to equity,
as in the case of ESOP and RRP charges, through contra-equity accounts, or do
not affect tangible equity, such as the market appreciation of allocated ESOP
shares, for which the operating charge is offset by a credit to additional
paid-in capital, and goodwill amortization, for which the related intangible
asset has already been deducted in the calculation of tangible equity.
Management believes that cash earnings and cash returns on average tangible
equity reflect the Company's ability to generate tangible capital that can be
leveraged for future growth. See pages 26 through 28.
On November 26, 1996, the Board of Directors of the Company approved the
Company's fifth stock repurchase plan authorizing the purchase, at the
discretion of management, of up to 2,500,000 shares of the Company's outstanding
common stock, over a two year period, in open-market or privately negotiated
transactions. During the first nine months of 1997, the Company repurchased
1,059,497 common shares of the Company's common stock for an aggregate cost of
$44.3 million, bringing the total number of common shares purchased under this
plan to 1,134,497 shares at an aggregate cost of $46.9 million. At September 30,
1997, the Company's cumulative total of treasury shares (net of reissues for
stock options exercised) was 5,695,827 shares at an aggregate cost of $130.5
million. As a result of the Merger, the Company issued 5,785,920 shares of its
common stock of which 5,695,827 were treasury shares.
On September 2, 1997, the Company paid a quarterly cash dividend equal to
$0.15 per share on shares of common stock outstanding as of the close of
business on August 15, 1997, aggregating $3.1 million. On October 15, 1997, the
Company declared a quarterly cash dividend of $0.15 per share payable on
December 1, 1997 to shareholders of record as of the close of business on
November 17, 1997, aggregating $4.0 million. Additionally, on October 15, 1997,
the Company paid its first quarterly cash dividend equal to $0.75 per share on
shares of its newly-created, 12% Noncumulative Preferred Stock, Series B,
aggregating $1.5 million.
At the time of conversion from mutual to stock form of ownership, the
Association was required to establish a liquidation account equal to its capital
as of June 30, 1993. As part of the acquisition of Fidelity New York, F.S.B.
("Fidelity"), the Association established a similar liquidation account equal to
the remaining liquidation account balance previously maintained by Fidelity.
Additionally, as part of the Greater merger, the Association established a
liquidation account equal to the remaining liquidation account balance
previously maintained by Greater. These liquidation accounts 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. 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
September 30, 1997, 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 5.82% and a risk-based capital
ratio of 15.62%. The respective minimum regulatory requirements were 1.50%,
3.00% and 8.00%.
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. The Company seeks to manage this risk by monitoring and controlling the
variation in repricing intervals between its assets and liabilities.
The matching of the repricing characteristics of assets and liabilities
may be analyzed by examining the extent to
10
12
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, either by contractual terms or based upon certain
assumptions made by management, within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to mature or
reprice within that same time period.
At September 30, 1997, 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 $399.5 million, representing a positive
cumulative one-year gap of 5.1% 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 $1.3 billion, representing a positive cumulative one-year gap of 17.9% of
total assets at December 31, 1996. Included in interest- earning assets
repricing or maturing in one year or less are mortgage-backed, mortgage-related
and other securities classified available-for-sale. If those securities, at
September 30, 1997, were classified according to repricing periods based on
their estimated prepayments and maturities, interest-bearing liabilities
maturing or repricing within one year would have exceeded net interest-earning
assets maturing or repricing within the same time period by $706.1 million,
representing a negative cumulative one-year gap of 8.9% of total assets. Using
this method, at December 31, 1996, interest-bearing liabilities maturing or
repricing within one year would have exceeded net interest-earning assets
maturing or repricing within the same time period by $31.7 million, representing
a negative cumulative one-year gap of 0.44% of total assets.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, 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. Callable features of
certain assets and liabilities, in addition to the foregoing, may cause actual
experience to vary from that indicated. The table includes $853.6 million of
callable debt securities, classified according to their maturity dates, which
are primarily within the more than five year maturity category. Of such debt
securities, $457.0 million are callable within one year. The table also includes
$2.3 billion of callable borrowings, classified according to their maturity
dates, of which $115.0 million mature within one year or less, $1.2 billion
mature between one to three years and $950.0 million mature between three to
five years. Of such borrowings, $1.2 billion are callable within one year. 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 September 30, 1997
-------------------------------------------------------------------------------
More Than More Than
One Year Three Years
One Year to to More Than
or Less Three Years (1) Five Years Five Years (1) Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (2) $ 859,030 $ 745,703 $ 680,752 $ 1,001,790 $ 3,287,275
Consumer and other loans (2) 39,344 8,596 -- -- 47,940
Federal funds sold and
repurchase agreements 67,000 -- -- -- 67,000
Mortgage-backed, mortgage-related
and other securities available-for-sale 1,860,464 -- -- -- 1,860,464
Mortgage-backed and mortgage-
related securities held-to-maturity 353,019 175,977 145,729 614,041 1,288,766
Other securities held-to-maturity 56,740 11,600 51,900 853,812 974,052
-------------------------------------------------------------------------------
Total interest-earning assets 3,235,597 941,876 878,381 2,469,643 7,525,497
Less:
Unearned discount, premium
and deferred fees (3) (362) 167 207 (1,168) (1,156)
-------------------------------------------------------------------------------
Net interest-earning assets 3,235,235 942,043 878,588 2,468,475 7,524,341
-------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 170,400 288,000 240,000 406,106 1,104,506
NOW 20,186 13,457 13,457 20,187 67,287
Money manager 58,495 58,495 38,997 38,997 194,984
Money market 340,409 20,307 20,307 25,121 406,144
Certificates of deposit 1,710,142 667,941 317,562 -- 2,695,645
Borrowed funds 536,107 1,139,999 950,403 10,000 2,636,509
-------------------------------------------------------------------------------
Total interest-bearing liabilities 2,835,739 2,188,199 1,580,726 500,411 7,105,075
-------------------------------------------------------------------------------
Interest sensitivity gap $ 399,496 $(1,246,156) $ (702,138) $ 1,968,064 $ 419,266
===============================================================================
Cumulative interest sensitivity gap $ 399,496 $ (846,660) $(1,548,798) $ 419,266
===============================================================================
Cumulative interest sensitivity gap
as a percentage of total assets 5.05% (10.71)% (19.59)% 5.30%
Cumulative net interest-earning assets
as a percentage of interest-bearing liabilities 114.09% 83.15% 76.55% 105.90%
(1) For purposes of this analysis, $457.0 million of debt securities and $1.2
billion of borrowings, which are callable within one year, are classified
above according to their contractual maturity dates (primarily in the more
than five year category for debt securities and more than one year to
three year category for borrowings).
(2) For purposes of this analysis, mortgage, consumer and other loans exclude
non-performing loans, but are not reduced for the allowance for loan
losses.
(3) For purposes of this analysis, unearned discount, premium and deferred
fees are prorated.
12
14
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 and
call features 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 accounts, money market and money manager 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. The
majority of the certificates of deposit projected to mature within the next
year, have original terms of one and one-half to two and one-half years. The
Company has and will continue to offer competitive market rates for products
with these terms; therefore, the Company expects a significant amount of the
balance to be renewed.
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 tables set
forth certain information relating to the Company for the quarters and nine
months ended September 30, 1997 and 1996. 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 and nine
months ended September 30, 1997 and 1996.
13
15
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 September 30, 1997 and 1996. 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
September 30, 1997 and 1996.
QUARTER ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $3,156,929 $ 62,376 7.90% $2,434,385 $ 49,031 8.01%
Consumer and other loans 50,946 1,297 10.18 57,530 1,519 10.50
Mortgage-backed and mortgage-
related securities (1) 3,051,817 52,238 6.85 3,576,226 61,543 6.85
Federal funds sold and
repurchase agreements 96,673 1,351 5.59 35,025 470 5.34
Other securities (1) 1,092,467 19,713 7.22 820,576 14,153 6.86
---------- ---------- ---------- ----------
Total interest-earning assets 7,448,832 136,975 7.36 6,923,742 126,716 7.28
---------- ----------
Non-interest-earning assets 293,919 269,072
---------- ----------
Total assets $7,742,751 $7,192,814
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,109,565 7,018 2.53 $1,139,701 7,248 2.53
Certificates of deposit 2,698,008 37,457 5.55 2,794,543 38,416 5.47
NOW 69,440 217 1.25 72,475 368 2.02
Money manager 195,840 612 1.25 187,884 954 2.02
Money market 381,191 4,479 4.70 241,581 2,344 3.86
Borrowed funds 2,480,516 37,100 5.98 2,061,569 29,782 5.75
---------- ---------- ---------- ----------
Total interest-bearing liabilities 6,934,560 86,883 5.01 6,497,753 79,112 4.84
---------- ----------
Non-interest-bearing liabilities 204,063 129,767
---------- ----------
Total liabilities 7,138,623 6,627,520
Stockholders' equity 604,128 565,294
---------- ----------
Total liabilities and stockholders' equity $7,742,751 $7,192,814
========== ==========
Net interest income/net interest rate spread (2) $ 50,092 2.35% $ 47,604 2.44%
========== ===== ========== =====
Net interest-earning assets/net interest margin (3) $ 514,272 2.69% $ 425,989 2.74%
========== ===== ========== =====
Ratio of interest-earning assets to interest-
bearing liabilities 1.07x 1.07x
========== ==========
(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.
14
16
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
nine months ended September 30, 1997 and 1996. 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 nine months ended
September 30, 1997 and 1996.
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $2,894,462 $ 171,761 7.91% $2,243,190 $ 136,517 8.13%
Consumer and other loans 55,010 4,147 10.05 59,031 4,560 10.32
Mortgage-backed and mortgage-
related securities (1) 3,287,240 167,699 6.80 3,633,587 187,119 6.88
Federal funds sold and
repurchase agreements 149,439 6,198 5.53 59,918 2,418 5.39
Other securities (1) 981,062 51,655 7.02 661,830 33,178 6.70
---------- ---------- ---------- ----------
Total interest-earning assets 7,367,213 401,460 7.27 6,657,556 363,792 7.30
---------- ----------
Non-interest-earning assets 245,165 270,833
---------- ----------
Total assets $7,612,378 $6,928,389
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,122,411 21,298 2.53 $1,150,543 21,832 2.53
Certificates of deposit 2,715,815 111,245 5.46 2,677,189 110,015 5.49
NOW 71,063 666 1.25 127,603 1,933 2.02
Money manager 196,083 1,838 1.25 133,631 2,025 2.02
Money market 330,524 11,230 4.53 232,865 6,654 3.82
Borrowed funds 2,415,988 106,190 5.86 1,904,540 82,171 5.76
---------- ---------- ---------- ----------
Total interest-bearing liabilities 6,851,884 252,467 4.91 6,226,371 224,630 4.82
---------- ----------
Non-interest-bearing liabilities 166,316 127,341
---------- ----------
Total liabilities 7,018,200 6,353,712
Stockholders' equity 594,178 574,677
---------- ----------
Total liabilities and stockholders' equity $7,612,378 $6,928,389
========== ==========
Net interest income/net interest rate spread (2) $ 148,993 2.36% $ 139,162 2.48%
========== ===== ========== =====
Net interest-earning assets/net interest margin (3) $ 515,329 2.70% $ 431,185 2.79%
========== ===== ========== =====
Ratio of interest-earning assets to interest-
bearing liabilities 1.08x 1.07x
========== ==========
(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.
15
17
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 September 30, 1997 Nine Months Ended September 30, 1997
Compared to Compared to
Quarter Ended September 30, 1996 Nine Months Ended September 30, 1996
Increase (Decrease) Increase (Decrease)
---------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In Thousands)
Interest-earning assets:
Mortgage loans .................. $ 14,034 $ (689) $ 13,345 $ 39,010 $ (3,766) $ 35,244
Consumer and other loans ........ (175) (47) (222) (298) (115) (413)
Mortgage-backed and mortgage-
related securities ............ (9,305) -- (9,305) (17,309) (2,111) (19,420)
Federal funds sold and repurchase
agreements .................... 858 23 881 3,715 65 3,780
Other securities ................ 4,799 761 5,560 16,813 1,664 18,477
-------- -------- -------- -------- -------- --------
Total ......................... 10,211 48 10,259 41,931 (4,263) 37,668
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings ......................... (230) -- (230) (534) -- (534)
Certificates of deposit ......... (1,459) 500 (959) 1,766 (536) 1,230
NOW ............................. (15) (136) (151) (681) (586) (1,267)
Money manager ................... 38 (380) (342) (953) 766 (187)
Money market .................... 1,551 584 2,135 3,172 1,404 4,576
Borrowed funds .................. 6,115 1,203 7,318 22,561 1,458 24,019
-------- -------- -------- -------- -------- --------
Total ...................... 6,000 1,771 7,771 25,331 2,506 27,837
-------- -------- -------- -------- -------- --------
Net change in net interest
income ............................. $ 4,211 $ (1,723) $ 2,488 $ 16,600 $ (6,769) $ 9,831
======== ======== ======== ======== ======== ========
16
18
ASSET QUALITY
One of the Company's key operating objectives has been and continues to be
to obtain and maintain a high level of asset quality. Through a variety of
strategies, including, but not limited to, borrower workout arrangements and
aggressive marketing of owned properties, the Company has been proactive in
addressing problem and non-performing assets which, in turn, has helped to build
the strength of the Company's financial condition. Such strategies, as well as
the Company's concentration on one-to-four family mortgage lending and
maintaining sound credit standards for new loan originations, have resulted in a
reduction in non-performing assets of $8.9 million, from $45.6 million at
December 31, 1996 to $36.7 million at September 30, 1997, which was primarily
from non-performing loans. The following tables show a comparison of delinquent
loans as of September 30, 1997 and December 31, 1996.
Delinquent Loans
--------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
-------------------------------------------- --------------------------------------------
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 ...... 75 $ 4,708 224 $20,218 73 $ 3,901 276 $25,098
Multi-family ............ 4 914 18 2,583 6 1,226 13 3,651
Commercial real estate .. -- -- 9 2,768 2 823 13 3,301
Construction and land ... -- -- 2 238 -- -- 4 251
Consumer and other
loans.................. 20 272 35 803 52 337 92 1,159
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent
loans................ 99 $ 5,894 288 $26,610 133 $ 6,287 398 $33,460
======= ======= ======= ======= ======= ======= ======= =======
Delinquent loans to total
loans ................. 0.18% 0.79% 0.24% 1.26%
17
19
The following table sets forth information regarding non-performing assets. In
addition to the non-performing loans, the Company has approximately $5.9 million
and $6.3 million of potential problem loans at September 30, 1997 and December
31, 1996, respectively. Such loans are 60-89 days delinquent as shown on page
17.
NON-PERFORMING ASSETS
AT AT
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN THOUSANDS)
Non-accrual delinquent mortgage loans (1) ....... $20,648 $24,905
Non-accrual delinquent consumer
and other loans ............................ 803 1,159
Mortgage loans delinquent 90 days or more (2) ... 5,159 7,396
------- -------
Total non-performing loans ................. 26,610 33,460
------- -------
Real estate owned, net (3) ...................... 5,323 7,421
Investment in real estate, net (4) .............. 4,788 4,708
------- -------
Total real estate owned and investment
in real estate, net ..................... 10,111 12,129
------- -------
Total non-performing assets ................ $36,721 $45,589
======= =======
Allowance for loan losses to non-performing
loans....................................... 54.36% 42.11%
Allowance for loan losses to total loans ........ 0.43% 0.53%
(1) Mortgage loans secured by other than one-to-four family properties
represent 5.4% and 3.8% of the balance of non-accrual delinquent mortgage
loans at September 30, 1997 and December 31, 1996, respectively.
(2) 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, and are primarily secured by multi-family and
commercial loans.
(3) 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.
(4) Investment in real estate is recorded at the lower of cost or fair value.
18
20
The following table sets forth the Company's change in allowance for loan,
investments in real estate and REO losses.
(Dollars in Thousands)
ALLOWANCE FOR LOAN LOSSES:
Balance at December 31, 1996 ...... $ 14,089
Provision charged to
operations..................... 2,809
Charge-offs:
One-to-four family ....... (1,760)
Multi-family ............. (1,088)
Commercial ............... (38)
Consumer and other ....... (622)
--------
Total charge-offs ... (3,508)
--------
Recoveries:
One-to-four family ....... 444
Commercial ............... 513
Consumer and other ....... 117
--------
Total recoveries ..... 1,074
--------
Total net charge-offs ......... (2,434)
--------
Balance at September 30, 1997 ..... $ 14,464
========
Ratio of net charge-offs during the year to average loans outstanding during the period 0.04%
Ratio of allowance for loan losses to total loans at end of the period 0.43
Ratio of allowance for loan losses to non-performing loans at end of the period 54.36
ALLOWANCE FOR INVESTMENTS
IN REAL ESTATE AND REO LOSSES:
Balance at December 31, 1996 .... $ 2,045
Provision charged to
operations..................... 387
Charge-offs ................... (874)
Recoveries .................... 45
-------
Balance at September 30, 1997 ... $ 1,603
=======
The following table sets forth the Company's allocation of the allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable. The portion of the allowance for loan losses allocated to each
loan category does not represent the total available for future losses which may
occur within the loan category since the total loan loss reserve is a valuation
reserve applicable to the entire loan portfolio.
At September 30, 1997
---------------------------
% of Loans
In Category to
Amount Total Loans
------- --------------
One-to-four family $ 9,124 86.78%
Multi-family 1,610 6.75
Commercial 2,923 4.77
Construction 181 0.25
Consumer and other loans 626 1.45
------- ------
Total allowances $14,464 100.00%
======= ======
19
21
The following table sets forth the composition of the Company's loan portfolio
at September 30, 1997 and December 31, 1996.
At September 30, At December 31,
1997 1996
----------------------- ----------------------
Percent Percent
of of
Amount Total Amount Total
----------- ------- ----------- -------
(Dollars in Thousands)
MORTGAGE LOANS:
One-to-four family $ 2,917,408 86.78% $ 2,259,409 85.18%
Multi-family .................... 226,784 6.75 166,836 6.29
Commercial real estate .......... 160,438 4.77 158,100 5.96
Construction .................... 8,452 0.25 10,129 0.38
----------- ------ ----------- ------
Total mortgage loans ......... 3,313,082 98.55 2,594,474 97.81
----------- ------ ----------- ------
CONSUMER AND OTHER LOANS:
Home equity ..................... 32,288 0.96 34,895 1.32
Passbook ........................ 4,495 0.13 4,022 0.15
Credit card...................... -- -- 8,431 0.32
Other ........................... 11,960 0.36 10,761 0.40
----------- ------ ----------- ------
Total consumer and other
loans....................... 48,743 1.45 58,109 2.19
----------- ------ ----------- ------
Total loans ........................ 3,361,825 100.00% 2,652,583 100.00%
=========== ====== =========== ======
LESS:
Unearned discount, premium and
deferred loan fees, net ...... 3,592 (1,167)
Allowance for loan losses ....... (14,464) (14,089)
----------- -----------
Total loans, net.............. $ 3,350,953 $ 2,637,327
=========== ===========
20
22
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 September 30, 1997 and December 31, 1996.
At September 30, 1997
---------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ----------
(In Thousands)
AVAILABLE-FOR-SALE:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 212,092 $ 3,908 $ (8) $ 215,992
FHLMC certificates 288,317 3,119 (573) 290,863
FNMA certificates 40,143 240 (155) 40,228
REMICs:
Agency issuance 828,314 198 (7,816) 820,696
Private issuance 13,277 63 (19) 13,321
Other mortgage-related 316,999 8,595 (328) 325,266
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities 1,699,142 16,123 (8,899) 1,706,366
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 83,300 -- (656) 82,644
Equity securities 63,567 7,887 -- 71,454
---------- ---------- ---------- ----------
Total other securities 146,867 7,887 (656) 154,098
---------- ---------- ---------- ----------
Total Available-for-Sale $1,846,009 $ 24,010 $ (9,555) $1,860,464
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 75,330 $ 4,143 $ -- $ 79,473
FHLMC certificates 22,869 990 (5) 23,854
FNMA certificates 20,305 98 (275) 20,128
CMOs 4,084 64 (3) 4,145
REMICs:
Agency issuance 935,290 4,949 (5,114) 935,125
Private issuance 226,655 471 (2,600) 224,526
Other mortgage-related 247 -- -- 247
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities 1,284,780 10,715 (7,997) 1,287,498
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
government and agencies 877,003 6,027 (1,061) 881,969
Obligations of states and
political subdivisions 50,476 -- (49) 50,427
Corporate debt securities 10,011 43 (1) 10,053
---------- ---------- ---------- ----------
Total other securities 937,490 6,070 (1,111) 942,449
---------- ---------- ---------- ----------
Total Held-to-Maturity $2,222,270 $ 16,785 $ (9,108) $2,229,947
========== ========== ========== ==========
21
23
At December 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 $ 235,751 $ 2,256 $ (1,319) $ 236,688
FHLMC certificates 262,044 1,338 (1,785) 261,597
FNMA certificates 46,364 69 (319) 46,114
REMICs:
Agency issuance 1,142,349 4,225 (11,952) 1,134,622
Private issuance 14,307 -- (146) 14,161
Residuals 1,457 924 (102) 2,279
Other mortgage-related 398,014 7,340 (439) 404,915
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities 2,100,286 16,152 (16,062) 2,100,376
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 129,066 57 (1,458) 127,665
Equity securities 66,959 1,662 -- 68,621
---------- ---------- ---------- ----------
Total other securities 196,025 1,719 (1,458) 196,286
---------- ---------- ---------- ----------
Total Available-for-Sale $2,296,311 $ 17,871 $ (17,520) $2,296,662
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates $ 86,733 $ 3,795 $ (73) $ 90,455
FHLMC certificates 28,189 1,021 (16) 29,194
FNMA certificates 22,044 75 (611) 21,508
CMOs 6,450 61 (60) 6,451
REMICs:
Agency issuance 936,692 2,315 (12,912) 926,095
Private issuance 241,154 125 (6,326) 234,953
Other mortgage-related 351 -- -- 351
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities 1,321,613 7,392 (19,998) 1,309,007
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 578,293 1,810 (3,813) 576,290
Obligations of states and
political subdivisions 51,063 -- (81) 50,982
Corporate debt securities 10,046 22 (2) 10,066
---------- ---------- ---------- ----------
Total other securities 639,402 1,832 (3,896) 637,338
---------- ---------- ---------- ----------
Total Held-to-Maturity $1,961,015 $ 9,224 $ (23,894) $1,946,345
========== ========== ========== ==========
22
24
COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
AND OPERATING RESULTS FOR THE QUARTERS ENDED AND NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
FINANCIAL CONDITION
Total assets increased $631.6 million, to $7.9 billion at September
30,1997, from $7.3 billion at December 31, 1996. This increase was primarily due
to the growth in the mortgage loan and other securities portfolios. During the
nine months ended September 30, 1997, gross mortgage loans originated and
purchased totaled $1.0 billion, of which $882.3 million were originations and
$144.6 million were purchases. This compares to $478.9 million and $284.4
million of originations and purchases, respectively, for the nine months ended
September 30, 1996. Other securities held-to-maturity increased $298.1 million,
to $937.5 million at September 30,1997, from $639.4 million at December 31,
1996. The growth in these portfolios was funded primarily through medium-term
(generally with maturities of two to four years) reverse repurchase agreements,
which increased $556.1 million to $2.4 billion at September 30, 1997, from $1.8
billion at December 31, 1996. Additional funding sources, during the nine months
ended September 30, 1997, included proceeds from various sales of securities and
loans totaling $454.8 million. During the second quarter of 1997, the Company
restructured its securities portfolio through the disposition of mortgage-backed
and mortgage-related securities available-for-sale totaling $435.3 million.
During the quarter ended September 30, 1997, the Company sold its $8.1 million
credit card portfolio recognizing a net gain of $1.0 million.
Stockholders' equity increased to $609.8 million at September 30, 1997,
from $588.8 million at December 31, 1996, which reflects net income of $47.5
million, the amortization relating to the allocation of ESOP stock and earned
portion of RRP stock and related tax benefit of $12.2 million, the effect of
stock options exercised and related tax benefit of $5.7 million and the change
in unrealized gains on securities, net of taxes, of $8.1 million, offset by the
repurchases of common stock of $44.3 million and dividends paid of $8.3 million.
RESULTS OF OPERATIONS
GENERAL
Net income, excluding the one-time, after-tax, SAIF recapitalization
assessment of $16.9 million for the 1996 period, increased $3.2 million, or
23.5% to $16.9 million for the three months ended September 1997 from $13.7
million for the three months ended September 1996. Earnings per share for the
third quarter of 1997 increased to $0.81 per share, or 24.6%, from $0.65 for the
comparable 1996 period, excluding the SAIF recapitalization assessment. The
return on average assets for the third quarter of 1997 increased to 0.87% from
0.76%, excluding the SAIF recapitalization assessment, for the comparable 1996
period. The return on average equity for the third quarter of 1997 increased to
11.18% from 9.59%, excluding the SAIF recapitalization assessment, for the
comparable 1996 period. The return on average tangible equity for the third
quarter of 1997 increased to 13.27% from 11.72%, excluding the SAIF
recapitalization assessment, for the comparable 1996 period.
For the nine months ended September 30, 1997, net income increased $7.4
million or 18.5%, to $47.5 million, from $40.1 million for the nine months ended
September 30, 1996, excluding the one-time, after-tax, SAIF recapitalization
assessment of $16.9 million for the 1996 period. Earnings per share for the nine
months ended September 30, 1997 increased to $2.24 per share, or 18.5%, from
$1.89, excluding the SAIF recapitalization assessment, for the comparable 1996
period. The return on average assets for the nine months ended September 30,
1997 increased to 0.83% from 0.77%, excluding the SAIF recapitalization
assessment, for the comparable 1996 period. The return on average equity for the
nine months ended September 30, 1997 increased to 10.67% from 9.27%, excluding
the SAIF recapitalization assessment, for the comparable 1996 period. The return
on average tangible equity for the nine months ended September 30, 1997
increased to 12.75% from 11.36%, excluding the SAIF recapitalization assessment,
for the comparable 1996 period.
Net income, including the SAIF recapitalization assessment for the 1996
period, increased $20.1 million, to $16.9
23
25
million for the three months ended September 30, 1997, from a net loss of $3.2
million for the three months ended September 30, 1996. For the nine months ended
September 30, 1997, net income increased $24.3 million to $47.5 million, from
$23.2 million for the nine months ended September 30, 1996. For the three months
ended September 30, 1997, earnings per share increased to $0.81 as compared to a
loss per share of $0.17 for the comparable 1996 period. For the nine months
ended September 30, 1997, earnings per share increased to $2.24 as compared to
$1.12 per share for the nine months ended September 30, 1996. Return on average
assets increased to 0.87% for the 1997 third quarter from a negative 0.18% for
the 1996 third quarter and increased to 0.83% for the nine months ended
September 30, 1997 from 0.45% for the nine months ended September 30, 1996.
Return on average equity increased to 11.18% for the 1997 third quarter from a
negative 2.28% for the 1996 third quarter and increased to 10.67% for the nine
months ended September 30, 1997 from 5.38% for the nine months ended September
30, 1996. Return on average tangible equity increased to 13.27% for the 1997
third quarter from a negative 2.79% for the 1996 third quarter and increased to
12.75% for the nine months ended September 30, 1997 from 6.60% for the nine
months ended September 30, 1996.
NET INTEREST INCOME
Net interest income for the three months ended September 30, 1997
increased $2.5 million, or 5.2%, to $50.1 million, from $47.6 million for the
three months ended September 30, 1996. The increase is due to continued growth
in net average interest-earning assets, from $426.0 million for the third
quarter of 1996 to $514.3 million for the third quarter of 1997. The net
interest spread decreased from 2.44% for the third quarter of 1996 to 2.35% for
the third quarter of 1997. This decrease resulted from the combined effect of an
increase in the yield on average interest-earning assets of 8 basis points, from
7.28% for the third quarter of 1996 to 7.36% for the third quarter of 1997, and
an increase in the cost of interest-bearing liabilities of 17 basis points, from
4.84% for the third quarter of 1996 to 5.01% for the third quarter of 1997. This
decrease in spread, was partially offset with a $525.1 million increase in
average interest-earning assets from $6.9 billion for the third quarter of 1996
to $7.4 billion for the third quarter of 1997, primarily reflecting increases in
the average balances of mortgage loans and other securities. These increases
were funded through additional borrowings, which are generally higher-costing
than the Company's other sources of funds, and resulted in a decrease in net
interest margin from 2.74% for the third quarter of 1996 to 2.69% for the third
quarter of 1997.
While long term rates have declined from the prior year, short term rates
have not followed the same decline. As a result, the average yields on mortgage
loans decreased 11 basis points from 8.01% for the third quarter of 1996 to
7.90% for the third quarter of 1997. Additionally, the average yield on consumer
and other loans decreased 32 basis points from 10.50% for the third quarter of
1996 to 10.18% for the third quarter of 1997. Meanwhile, the average yield on
federal funds and repurchase agreements increased 25 basis points from 5.34% for
the third quarter of 1996 to 5.59% for the third quarter of 1997. The average
yield on other securities increased 36 basis points from 6.86% for the third
quarter of 1996 to 7.22% for the third quarter of 1997. The Company purchased
long-term U.S. Government and agency notes held-to-maturity with non-callable
features between one to three years. These purchases were funded with borrowings
which have moderately extended terms to maturity. These purchases of other
securities and additional borrowings have contributed to the noted increases in
the yield on average interest-earning assets and cost of funds over the
comparable periods.
Net interest income for the nine months ended September 30, 1997 increased
$9.8 million, or 7.1%, to $149.0 million, from $139.2 million for the nine
months ended September 30, 1996. The increase is due to the growth in net
average interest-earning assets, from $431.2 million for the 1996 nine month
period to $515.3 million for the 1997 nine month period. The net interest spread
decreased from 2.48% for the 1996 nine month period to 2.36% for the 1997 nine
month period. This decrease resulted from the combined effect of a decrease in
the yield on average interest-earning assets of 3 basis points, from 7.30% for
the 1996 nine month period to 7.27% for the 1997 nine month period, while the
cost of interest-bearing liabilities increased 9 basis points, from 4.82% for
the 1996 nine month period to 4.91% for the 1997 nine month period. The net
interest margin decreased from 2.79% for the 1996 nine month period to 2.70% for
the 1997 nine month period, which was the result of the decrease in net interest
spread, offset by a $709.7 million increase in average interest-earning assets
from $6.7 billion for the 1996 nine month period to $7.4 billion for the 1997
nine month period. The increase in average interest-earning assets was primarily
24
26
reflected in increases in the average balances of mortgage loans and other
securities. These increases were generally funded by additional borrowings and
are somewhat reflective of the third quarter changes discussed above. However,
the decline in long term rates from 1996 had a stronger impact on the Company's
average yield on interest earning assets for the nine months ended September 30,
1997, as compared to the prior period, as the Company has continued to emphasize
the organization of mortgage loans, which generally are longer-term in nature
than securities. This is reflected in the 22 basis point decrease in the average
yield on mortgage loans from 8.13% for the nine months ended September 30, 1996
to 7.91% for the nine months ended September 30, 1997. Additionally, the
Company's strategies to purchase higher-yielding U.S. Government and agency
notes and to incur borrowings with extended terms to maturity, primarily were
transacted during the second and third quarters of 1997. As a result, the
average yield on other securities increased 32 basis points from 6.70% for the
nine months ended September 30,1996 to 7.02% for the nine months ended September
30, 1997. The average yield on federal funds and repurchase agreements increased
14 basis points from 5.39% for the nine months ended September 30, 1996 to 5.53%
for the nine months ended September 30, 1997.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $895,000 for the third quarter of 1997 and
$958,000 for the comparable period in 1996. For the nine months ended September
30, 1997 and 1996, provision for loan losses was $2.8 million and $3.5 million,
respectively. The allowance for loan losses increased from $14.1 million at
December 31, 1996 to $14.5 million at September 30, 1997, which reflected both
the growth in the mortgage portfolio, offset by the decline in non-performing
loans during the nine months ended September 30, 1997. Non-performing loans
decreased from $33.5 million at December 31, 1996 to $26.6 million at September
30, 1997. The reduction in non-performing loans continued to improve the
Company's percentage of allowance for loan losses to non-performing loans from
42.11% at December 31, 1996 to 54.36% at September 30, 1997. Net charge offs for
the quarter and nine months ended September 30, 1997 were $1.4 million and $2.4
million, respectively as compared to $269,000 and $3.0 million for the quarter
and nine months ended September 30, 1996. For further discussion on
non-performing loans, see "Asset Quality".
NON-INTEREST INCOME
For the quarter ended September 30, 1997 non-interest income, exclusive of
net gain on sales of securities and loans of $3.2 million, was $3.6 million as
compared to $3.3 million, exclusive of net gain on sales of securities and loans
of $52,000, for the quarter ended September 30, 1996. For the 1997 nine month
period non-interest income, exclusive of net gain on sales of securities and
loans of $4.7 million, increased 12.3% to $10.2 million from $9.1 million,
exclusive of net gain on sales of securities and loans of $1.3 million, for the
1996 nine month period. The increases are primarily in customer service and loan
fees, which totaled $2.6 million and $7.6 million for the three and nine months
ended September 30, 1997, respectively, compared to $2.4 million and $6.7
million for the three and nine months ended September 30, 1996, respectively.
During the quarter ended September 30, 1997, the Company recorded a gain
on the sale of its credit card portfolio of $1.0 million and $2.1 million
relating to the satisfaction of a former problem loan.
NON-INTEREST EXPENSE
Non-interest expense for the quarter ended September 30, 1997 was $26.4
million which reflects a slight increase from $26.0 million, exclusive of the
SAIF recapitalization assessment of $28.5 million, for the quarter ended
September 30, 1996. For the nine months ended September 30, 1997 non-interest
expense was $79.0 million as compared to $80.0 million for the same period in
1996, exclusive of the SAIF recapitalization assessment of $28.5 million and
$5.3 million of non-recurring recoveries from gains on dispositions of real
estate owned and investments in real estate.
General and administrative expense increased to $24.1 million for the
three months ended September 30, 1997 from $23.9 million for the comparable 1996
three month period. For the 1997 nine month period, general and administrative
expense decreased to $72.0 million from $72.5 million for the comparable 1996
nine month period.
25
27
The Company's federal deposit insurance premium decreased during the three and
nine months ended September 30, 1997 by $1.8 million and $5.1 million,
respectively, as compared to the three and nine months ended September 30, 1996
as a result of the 1996 legislation to recapitalize the SAIF. These decreases
were offset by increases in compensation and benefits of $1.4 million and $3.1
million, respectively, for the three and nine months ended September 30, 1997 as
compared to their respective 1996 periods. The increases in compensation and
benefits were primarily due to an increase in the amortization relating to the
allocation of ESOP stock, which increased $1.3 million and $3.2 million,
respectively, for the three and nine month periods ended September 30, 1997, as
compared to the respective prior year periods. These increases are a result of
the higher average fair market value of the Company's stock during the periods.
The Company's percentage of general and administrative expense to average assets
improved from 1.33% for the quarter ended September 30, 1996 to 1.24% for the
quarter ended September 30, 1997, and improved from 1.39% to 1.26% for the nine
months ended September 30, 1996 and 1997, respectively. The Company's efficiency
ratio also improved from 46.88% for the quarter ended September 30, 1996 to
44.91% for the quarter ended September 30, 1997. For the nine months ended
September 30, 1996 and 1997, the Company's efficiency ratio improved from 48.90%
to 45.22%, respectively.
INCOME TAX EXPENSE
Income tax expense increased to $12.7 million for the three months ended
September 30, 1997 from a tax benefit of $1.3 million for the same period in
1996, which resulted primarily from the SAIF recapitalization assessment in
1996. For the nine months ended September 30, 1997, income tax expense was $34.5
million, representing an effective tax rate of 42.1%, as compared to $19.5
million, representing an effective tax rate of 45.7%, for the 1996 nine month
period. The reduction in the Company's effective tax rate was primarily
attributed to certain tax benefits associated with a subsidiary of the
Association.
CASH EARNINGS
Management believes that cash earnings and cash returns on average
tangible equity reflect the Company's ability to generate tangible capital that
can be leveraged for future growth. Cash earnings for the three months ended
September 30, 1997 increased $4.7 million to $23.4 million from $18.7 million,
exclusive of the after-tax SAIF recapitalization assessment of $16.9 million,
for the three months ended September 30, 1996. For the nine month period ended
September 30, 1997 cash earnings increased $11.2 million to $66.1 million from
$54.9 million, exclusive of the after-tax SAIF recapitalization assessment of
$16.9 million, for the 1996 nine month period.
The cash returns on average tangible equity for the three and nine months
ended September 30, 1997 were 18.41% and 17.72%, respectively, which improved
from the comparable periods in 1996, which were 16.09% and 15.56%, respectively,
exclusive of the after-tax SAIF recapitalization assessment of $16.9 million.
The cash returns on average assets for the three and nine months ended September
30, 1997 were 1.21% and 1.16%, respectively, which also improved from the
comparable periods in 1996, which were 1.04% and 1.06%, respectively, exclusive
of the after-tax SAIF recapitalization assessment of $16.9 million. The
Company's cash efficiency ratio improved from 41.15% for the quarter ended
September 30, 1996 to 36.65% for the quarter ended September 30, 1997. The cash
efficiency ratio also improved from 43.28% for the nine months ended September
30, 1996 to 37.55% for the nine months ended September 30, 1997.
Presented below are the Company's Consolidated Schedules of Cash Earnings
for the three months and nine months ended September 30, 1997 and 1996.
26
28
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULES OF CASH EARNINGS
(In Thousands, Except Share Data)
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------------------------------------- ----------------------------------
Reported Cash Report
Earnings Adjustments Earnings Earnings Adjustments
------------ ------------ ------------ ------------ ------------
Total interest income $ 136,975 -- $ 136,975 $ 126,716 --
Total interest expense 86,883 -- 86,883 79,112 --
----------- ------------ ------------ ------------ ------------
Net interest income 50,092 -- 50,092 47,604 --
Provision for loan losses 895 -- 895 958 --
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 49,197 -- 49,197 46,646 --
------------ ------------ ------------ ------------ ------------
Total non-interest income 6,729 -- 6,729 3,374 --
------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 13,622 (4,431)(1) 9,191 12,237 (2,918)(1)
Other general and administrative 10,469 -- 10,469 11,635 --
------------ ------------ ------------ ------------ ------------
Total general and administrative 24,091 (4,431) 19,660 23,872 (2,918)
Real estate operations, net 85 -- 85 176 --
Provision for (recovery of) real
estate losses 96 -- 96 (202) --
Amortization of excess of cost
over fair value of net assets
acquired 2,110 (2,110)(2) 2,171 (2,171)(2) --
SAIF recapitalization assessment -- -- -- 28,545 --
------------ ------------ ------------ ------------ ------------
Total non-interest expense 26,382 (6,541) 19,841 54,562 (5,089)
------------ ------------ ------------ ------------ ------------
Income (loss) before income
tax expense (benefit) 29,544 6,541 36,085 (4,542) 5,089
Income tax expense (benefit) 12,652 -- 12,652 (1,320) --
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 16,892 $ 6,541 $ 23,433 $ (3,222) $ 5,089
============ ============ ============ ============ ============
Primary earnings (loss) per share $ 0.81 $ 0.31 $ 1.12 $ (0.17) $ 0.27
============ ============ ============ ============ ============
Fully diluted earnings (loss)
per share $ 0.81 $ 0.31 $ 1.12 $ (0.17) $ 0.27
============ ============ ============ ============ ============
Primary weighted average common
stock and common
stock equivalents 20,924,539 19,446,410(3)
Fully diluted weighted average common
stock and common
stock equivalents 20,968,411 19,466,410(3)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (4) $ 13,652 $ 5,089
============ ============
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes(4), (5) $ 0.65 $ 0.24
============ ============
Three Months
Ended
September 30,
1996
-------------
Cash
Earnings
------------
Total interest income $ 126,716
Total interest expense 79,112
------------
Net interest income 47,604
Provision for loan losses 958
------------
Net interest income after
provision for loan losses 46,646
------------
Total non-interest income 3,374
------------
Non-interest expense:
General and administrative:
Compensation and benefits 9,319
Other general and administrative 11,635
------------
Total general and administrative 20,954
Real estate operations, net 176
Provision for (recovery of) real
estate losses (202)
Amortization of excess of cost
over fair value of net assets
acquired --
SAIF recapitalization assessment 28,545
------------
Total non-interest expense 49,473
------------
Income (loss) before income
tax expense (benefit) 547
Income tax expense (benefit)
------------
NET INCOME (LOSS) $ 1,867
============
Primary earnings (loss) per share $ 0.10
============
Fully diluted earnings (loss)
per share $ 0.10
============
Primary weighted average common
stock and common
stock equivalents
Fully diluted weighted average common
stock and common
stock equivalents
- -------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (4) $ 18,741
============
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes(4), (5) $ 0.89
============
(1) Non-cash amortization expense relating to allocation of ESOP stock and
earned portion of RRP stock, and related tax benefit.
(2) Non-cash amortization expense of excess of cost over fair value of net
assets acquired (goodwill).
(3) Common stock equivalents are excluded for loss periods as they are
antidilutive.
(4) Excluding SAIF recapitalization assessment of $16,874,000, net of taxes.
(5) Based on common stock and common stock equivalents of 20,985,571, which
includes dilutive effect of equivalents.
27
29
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULES OF CASH EARNINGS
(In Thousands, Except Share Data)
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------------------------------------ ----------------------------------
Reported Cash Report
Earnings Adjustments Earnings Earnings Adjustments
------------ ------------ ------------ ------------ ------------
Total interest income $ 401,460 -- $ 401,460 $ 363,792 --
Total interest expense 252,467 -- 252,467 224,630 --
------------ ------------ ------------
Net interest income 148,993 -- 148,993 139,162 --
Provision for loan losses 2,809 -- 2,809 3,522 --
------------ ------------ ------------
Net interest income after
provision for loan losses 146,184 -- 146,184 135,640 --
------------ ------------ ------------
Total non-interest income 14,861 -- 14,861 10,371 --
------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 39,907 (12,212)(1) 27,695 36,843 (8,324)(1)
Other general and administrative 32,069 -- 32,069 35,630 --
------------ ------------ ------------ ------------ ------------
Total general and administrative 71,976 (12,212) 59,764 72,473 (8,324)
Real estate operations, net 276 -- 276 (2,740) --
Provision (recovery of) for real
estate losses 387 -- 387 (1,534) --
Amortization of excess of cost
over fair value of net assets
acquired 6,330 (6,330)(2) -- 6,513 (6,513)(2)
SAIF recapitalization assessment -- -- -- 28,545 --
------------ ------------ ------------ ------------ ------------
Total non-interest expense 78,969 (18,542) 60,427 103,257 (14,837)
------------ ------------ ------------ ------------ ------------
Income before income tax expense 82,076 18,542 100,618 42,754 14,837
Income tax expense 34,543 -- 34,543 19,548 --
------------ ------------ ------------ ------------ ------------
NET INCOME $ 47,533 $ 18,542 $ 66,075 $ 23,206 $ 14,837
============ ============ ============ ============ ============
Primary earnings per share $ 2.25 $ 0.88 $ 3.13 $ 1.12 $ 0.72
============ ============ ============ ============ ============
Fully diluted earnings
per share $ 2.24 $ 0.88 $ 3.12 $ 1.12 $ 0.71
============ ============ ============ ============ ============
Primary weighted average common
stock and common
stock equivalents 21,092,003 20,713,185(3)
Fully diluted weighted average common
stock and common
stock equivalents 21,211,393 20,746,062(3)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (4) $ 40,080 $ 14,837
============ ============
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes (4), (5) $ 1.89 $ 0.70
============ ============
Nine Months
Ended
September 30,
1996
-------------
Cash
Earnings
------------
Total interest income $ 363,792
Total interest expense 224,630
------------
Net interest income 139,162
Provision for loan losses 3,522
------------
Net interest income after
provision for loan losses 135,640
------------
Total non-interest income 10,371
------------
Non-interest expense:
General and administrative:
Compensation and benefits 28,519
Other general and administrative 35,630
------------
Total general and administrative 64,149
Real estate operations, net (2,740)
Provision (recovery of) for real
estate losses (1,534)
Amortization of excess of cost
over fair value of net assets
acquired --
SAIF recapitalization assessment 28,545
------------
Total non-interest expense 88,420
------------
Income before income tax expense 57,591
Income tax expense 19,548
------------
NET INCOME $ 38,043
============
Primary earnings per share $ 1.84
============
Fully diluted earnings
per share $ 1.83
============
Primary weighted average common
stock and common
stock equivalents
Fully diluted weighted average common
stock and common
stock equivalents
- --------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (4) $ 54,917
============
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes (4), (5) $ 2.59
============
(1) Non-cash amortization expense relating to allocation of ESOP stock and
earned portion of RRP stock, and related tax benefit.
(2) Non-cash amortization expense of excess of cost over fair value of net
assets acquired (goodwill).
(3) Common stock equivalents are excluded for loss periods as they are
antidilutive.
(4) Excluding SAIF recapitalization assessment of $16,874,000, net of taxes.
(5) Based on common stock and common stock equivalents of 21,226,238, which
includes dilutive effect of equivalents.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 21, 1995, the Association commenced an action, Astoria Federal
Savings and Loan Association v. United States, No. 95-468C, in the United
States Court of Federal Claims against the United States seeking in excess of
$250 million in damages arising from the breach of an assistance agreement
entered into by the Association's predecessor in interest, Fidelity, in
connection with its acquisition in October 1984 of Suburbia Federal Savings and
Loan Association, and the government's subsequent enactment and implementation
of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in
1989. The case was stayed by the court throughout most of 1996 awaiting the
decision of the United States Supreme Court in U.S. v. Winstar Corp. 116
S.Ct.2432 (1996) which held the government liable for breach of contract to the
Plaintiffs in three similar cases and remanded such cases to the Court of
Federal Claims to ascertain damage, and while a case management order was
finalized in October 1996 which established procedures for a more efficient
prosecution of the approximately 125 similar cases pending before the court. In
November 1996, the Association moved for partial summary judgment against the
government on the issues of whether Fidelity had a contract with the government
and whether the enactment of FIRREA was contrary to the terms of such contract.
The government contested such motion and cross-moved for summary judgment with
respect to dismiss the Association's contract claims. (The Association's
complaint also asserts claims based on promissory estoppel, failure of
consideration and frustration of purpose, and a taking of the Association's
property without just compensation in violation of the Fifth Amendment to the
United States Constitution.)
On August 7 and 8, 1997, the United States Court of Federal Claims heard
oral arguments on 11 common issues raised by the government in the various
partial summary judgment motions filed by the Plaintiffs in the goodwill cases
and 4 specific summary judgment motions, not including the Association's. Among
the common issues raised that impact the Association's case, were questions
related to the effect of termination provisions contained in the assistance or
other agreements executed by the government and Plaintiffs, whether application
of the "unmistakability" doctrine precludes recovery, whether the government's
promise to allow goodwill to be amortized over a specified period allowed such
goodwill to be treated as regulatory capital for a like period, and whether,
even if the acquisition would have rendered the resulting institution
immediately insolvent, i.e., out of capital compliance, but for the government's
promise regarding regulatory capital treatment of goodwill, there is still no
capital contract if either (i) the acquiror would have been willing to bear the
risk that the government could at any time have declared the institution
insolvent or (ii) the transaction also includes a government promise not to
seize the institution for a specified period due to any acquisition-related
failure to meet applicable net worth requirements. Management believes that as a
matter of law these issues were substantially raised and resolved by the United
States Supreme Court in the Winstar Case. Both the Association's motion and a
ruling on the common issues remains pending before the United States Court of
Federal Claims.
While management is confident that it will be successful in the pursuit of
its motion and intends to aggressively pursue its claim against the government,
no assurance can be given as to the result of such claim or the timing of the
recovery, if any, with respect thereto. The costs incurred with respect to this
litigation to date are not material to the Association's results of operations.
Based upon the current scheduling by the Court pursuant to the case
management order, the Association does not expect to commence significant
discovery in its case until 1999.
On April 3, 1997, a purported class action (the "Action") was commenced in
the Supreme Court of the State of New York (Kings County) entitled Leonard
Minzer et ano. v. Gerard C. Keegan, et al. (Index No. 11456/1997) against
Greater and its directors and certain executive officers. The suit alleges,
among other things, that the directors and executive officers of Greater have
breached their fiduciary duties in entering into the Merger Agreement and
related arrangements. The complaint seeks, among other things, a preliminary and
permanent injunction against the Merger and the related transactions, an order
to the directors and executive officers of Greater to carry-out their fiduciary
duties and unspecified damages and costs. Greater has indicated that it believes
that the allegations made in the Action are without merit and, on May 16, 1997,
the defendants filed a motion to dismiss the Action. The
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Association is a party to such action as the successor in interest to Greater as
a result of the Merger. The Association intends to aggressively defend its
interest with respect to such matter.
On July 18, 1997, a purported class action (the "Federal Action") was
commenced in the United States District Court for the Eastern District of New
York entitled Leonard Minzer et ano. v. Gerard C. Keegan, et al. (Index No. 97
Civ. 4077 (CPS)) against Greater, Greater's directors and certain of its
executive officers, the Company and the Association. The suit alleges, among
other things, that Greater, Greater's directors and certain of its executive
officers solicited proxies in violation of Section 14(a) of the Securities
Exchange Act of 1934 and Rule 14a-9, promulgated thereunder, by failing to
disclose certain allegedly material facts in the proxy statement, as amended,
that was circulated to Greater stockholders in connection with the Merger, and
that Greater's directors and certain of its executive officers have breached
their fiduciary duties by entering into the Merger Agreement and related
arrangements. The suit further alleges, without specification, that the Company
and the Association participated in the preparation, specification and
distribution of Greater's proxy materials and/or aided and abetted the alleged
breaches of fiduciary duty by Greater defendants. Plaintiffs sought, among other
things, a preliminary and permanent injunction against consummation of the
Merger and the related transactions, an order directing that the directors and
executive officers of Greater carry-out their fiduciary duties and unspecified
damages and costs. The Company and the Association were served with the
complaint in the Federal Action on July 30, 1997. On July 31, 1997, Plaintiffs
made an application to the Court for expedited discovery and to set a hearing on
their prospective application for a preliminary injunction. Shortly thereafter,
all defendants in the Action filed motions to dismiss the complaint in the
Federal Action.
At a hearing on August 11, 1997, the Court permitted certain limited,
particularized discovery to be had by Plaintiffs. On September 2, 1997,
Plaintiffs filed an amended complaint and an Application for a preliminary
injunction (the "Application").
An evidentiary hearing on Plaintiffs' Application was held on September
10, 1997. On September 22, 1997, the Court issued a written decision denying
Plaintiffs' Application in all respects.
The Company and the Association believe the allegations made in the
amended complaint in the Federal Action are without merit and intend to
aggressively defend their interests with respect to such matters.
During 1994, an action was commenced against the Association, AF Roosevelt
Avenue Corporation, a wholly owned subsidiary of the Association, 149 Roosevelt
Avenue Associates, a joint venture in which AF Roosevelt Avenue Corporation was
a joint venture partner, Henry Drewitz, then Chairman of the Board of the
Association, and George L. Engelke, Jr., Chairman, President and Chief Executive
Officer of the Association and a director and officer of AF Roosevelt Avenue
Corporation, among others. The litigation, which seeks damages in excess of
$20,000,000, arises from the development by 149 Roosevelt Avenue Associates of a
condominium project commencing in the mid 1980's. The development consists of
134 residential units, 25 medical facility units, and associated parking and
other facilities located in Flushing, New York. The litigation, commenced by the
Board of Managers of the condominium, alleges that there are various defects in
the condominium buildings with respect to the roof, certain masonry work and
structural components and seeks damages based upon breach of contract, fraud,
misrepresentation, breach of warranty, violations of Articles 23A and 36B of the
General Business Law of the State of New York, recklessness and negligence. The
above listed defendants have served their answers in the litigation, which is in
the preliminary stages of discovery. The Association has notified its liability
and director and officer liability insurance carriers of the action.
On September 19, 1997, the Queens Buildings Department ordered the partial
evacuation of the condominium. On October 2, 1997, the City of New York
commenced an action in New York State Supreme Court, Queens County against the
Vista Tower Condominium, the Condominium's Board of Managers, alleged members of
the Board of Managers individually and the Association. The action, which names
the Association only as an owner of individual units and holder of mortgages on
certain units within the condominium without naming other unit owners as
defendants, seeks injunctive relief to abate what are alleged to be public
nuisances and violations of the New York City Building Code. Prior to
commencement of the action, the Association had made a similar demand upon the
Board of Managers as the conditions complained of by the City of New York relate
to common areas of the building. The
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32
Association has answered such action denying the allegations of the complaint
and filed cross claims against the Board of Managers and its alleged members
individually for breach of their fiduciary duty to unit owners in failing to
respond to the New York City Building Department, indemnification and
contribution. As a result of its substantial financial interest in the building,
the Association has undertaken at its expense design work necessary to allow the
building to be reoccupied and has agreed to fund temporary repairs to the
building. The amount of such repairs are not material to the Association's
results of operation. In addition, in order to protect its financial interests
in the Condominium and without admitting liability, the Association has agreed
with the New York State Attorney General to pay the reasonable cost of permanent
structural and related repairs to the Condominium which are currently estimated
to be between $1.2 million and $1.7 million. The Association currently owns 11
units within the Condominium and has mortgages, prior to the application of loan
loss reserves, totaling $5.6 million on 83 units.
Management of the Association is continuing to work with the Attorney
General's office, the Queens Buildings Department and the Board of Managers in
an attempt to remedy the situation. In the event such a remedy is not found, the
Association intends to continue to defend the action vigorously.
No other material events occurred with respect to legal proceedings during
the quarter ended September 30, 1997, not previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 1, 1997, at a special meeting of the stockholders of the
Company, the stockholders approved the issuance by the Company of shares of its
common stock pursuant to the Agreement and Plan of Merger, as amended, by and
among the Company, the Association and Greater (the "Merger Agreement"). The
stockholders also approved, at that meeting, the amendment of the Company's
Certificate of Incorporation to change the par value of the Company's authorized
preferred stock from $0.01 to $1.00 per share. The matters received the
following votes:
1. The approval of the issuance of shares by the Company of shares of
its common stock pursuant to the Merger Agreement:
For: 17,199,220
Against: 175,782
Abstained: 54,692
Broker Non-Vote: 353,126
2. The approval of the amendment to the Company's Certificate of
Incorporation to change the par value of the Company's preferred
stock from $0.01 to $1.00 per share:
For: 17,506,933
Against: 167,631
Abstained: 108,256
Broker Non-Vote: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K have been filed with the
Securities and Exchange Commission since the beginning of the
quarter ended September 30, 1997:
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33
1) Form 8-K dated June 30, 1997 (filed July 1, 1997) which included the
First Amendment to the definitive agreement pursuant to which the
Company proposes to acquire the Greater New York Savings Bank; and
2) Form 8-K dated July 17, 1997 which included a copy of the Company's
press release announcing its earnings for the quarter ended June 30,
1997 and the declaration of a quarterly cash dividend payable on
September 2, 1997; and
3) Form 8-K dated July 24, 1997 which announced the commencement of a
purported class action in United States District Court of the
Eastern District of New York entitled Leonard Minzer and Harry
Schipper v. Gerard C. Keegan, et al (Index No. 97 Civ. 4077 (CPS))
against Astoria Financial Corporation, Astoria Federal Savings and
Loan Association and others; and
4) Form 8-K dated August 7, 1997 which announced the results of the
Company's Special Meeting of Stockholders held on August 1, 1997;
and
5) Form 8-K dated October 3, 1997, which announced the completion of
the acquisition of the Greater New York Savings Bank by Astoria
Financial Corporation following the close of business on September
30, 1997.
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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: November 12, 1997 By: /s/ Monte N. Redman
-------------------- -----------------------------------------
Monte N. Redman
Senior Vice President and Chief
Financial Officer
Dated: November 12, 1997 By:/s/ Frank E. Fusco
-------------------- -----------------------------------------
Frank E. Fusco
First Vice President, Chief Accounting
Officer and Controller
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35
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
34