<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3170868
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
ONE ASTORIA FEDERAL PLAZA, LAKE SUCCESS, NEW YORK 11042-1085
(Address of principal executive offices) (Zip Code)
(516) 327-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASSES OF COMMON STOCK NUMBER OF SHARES OUTSTANDING, NOVEMBER 12, 1996
----------------------- -----------------------------------------------
.01 PAR VALUE 21,547,886
------------- ----------
<PAGE> 2
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements.
Consolidated Statements of Financial Condition at September
30, 1996 and December 31, 1995. 2
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1996 and September 30, 1995. 3
Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 30, 1996. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and September 30, 1995. 5
Notes to Unaudited Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities (Not Applicable)
Item 3. Defaults Upon Senior Securities (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
Signatures 31
</TABLE>
1
<PAGE> 3
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
Assets 1996 1995
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 15,780 $ 33,869
Federal funds sold and repurchase agreements 44,000 100,000
Mortgage-backed and mortgage-related securities
available-for-sale (at estimated fair value) 2,167,895 2,332,822
Other securities available-for-sale (at estimated fair value) 195,392 183,146
Mortgage-backed and mortgage-related securities
held-to-maturity (estimated fair value of $1,313,937
and $1,340,588, respectively) 1,338,803 1,333,644
Other securities held-to-maturity (estimated fair value
of $632,869 and $280,192, respectively) 639,572 281,898
Federal Home Loan Bank of New York stock 32,354 24,975
Loans receivable:
Mortgage loans 2,505,219 1,995,475
Consumer and other loans 57,418 61,663
------------ ------------
2,562,637 2,057,138
Less allowance for loan losses 14,024 13,495
------------ ------------
Loans receivable, net 2,548,613 2,043,643
Real estate owned, net 11,254 17,677
Investments in real estate, net 4,698 5,654
Accrued interest receivable 42,509 35,931
Premises and equipment, net 82,644 80,083
Excess of cost over fair value of net assets acquired
and other intangibles 102,509 109,022
Other assets 40,162 37,738
------------ ------------
Total assets $ 7,266,185 $ 6,620,102
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Savings $ 1,145,531 $ 1,154,777
Money market 446,219 218,653
NOW 125,016 314,288
Certificates 2,804,382 2,575,703
------------ ------------
Total deposits 4,521,148 4,263,421
Reverse repurchase agreements 1,836,847 1,483,329
Federal Home Loan Bank of New York advances 266,550 221,362
Mortgage escrow funds 29,300 22,585
Accrued expenses and other liabilities 46,096 38,720
------------ ------------
Total liabilities 6,669,941 6,029,417
------------ ------------
Stockholders' Equity:
Preferred stock, $.01 par value; (5,000,000 shares
authorized; none issued) -- --
Common stock, $.01 par value; (70,000,000 shares authorized: 26,361,704
issued; 21,511,444 and 22,609,940 shares outstanding, respectively) 264 264
Additional paid-in capital 328,936 325,992
Retained earnings - substantially restricted 368,005 351,923
Treasury stock (4,850,260 and 3,751,764 shares, at cost, respectively) (89,221) (60,693)
Net unrealized (losses) gains on securities, net of taxes (9,340) 11,126
Unallocated common stock held by ESOP (25,199) (27,355)
Unearned common stock held by RRPs (7,201) (10,572)
------------ ------------
Total stockholders' equity 566,244 590,685
------------ ------------
Total liabilities and stockholders' equity $ 7,266,185 $ 6,620,102
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1996 1995(1) 1996 1995(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 49,031 $ 39,689 $ 136,517 $ 112,287
Consumer and other loans 1,519 1,641 4,560 4,923
Mortgage-backed and mortgage-related securities 61,543 63,173 187,119 174,103
Federal funds sold and repurchase agreements 470 1,067 2,418 7,991
Other securities 14,153 7,799 33,178 19,831
------------ ------------ ------------ ------------
Total interest income 126,716 113,369 363,792 319,135
------------ ------------ ------------ ------------
Interest expense:
Deposits 49,330 48,005 142,459 136,205
Borrowed funds 29,782 23,396 82,171 56,244
------------ ------------ ------------ ------------
Total interest expense 79,112 71,401 224,630 192,449
------------ ------------ ------------ ------------
Net interest income 47,604 41,968 139,162 126,686
Provision for loan losses 958 349 3,522 2,177
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 46,646 41,619 135,640 124,509
------------ ------------ ------------ ------------
Non-interest income:
Customer service fees 1,912 1,319 5,345 3,725
Loan fees 466 450 1,360 1,248
Net gain (loss) on sales of securities and loans 52 (1) 1,321 6
Other 944 564 2,345 1,964
------------ ------------ ------------ ------------
Total non-interest income 3,374 2,332 10,371 6,943
------------ ------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 12,366 11,502 37,273 34,094
Occupancy, equipment and systems 5,815 5,387 17,512 15,375
Federal deposit insurance premiums 2,517 2,498 7,436 7,250
Advertising 693 590 2,786 3,212
Other 2,481 2,865 7,466 7,550
------------ ------------ ------------ ------------
Total general and administrative 23,872 22,842 72,473 67,481
Real estate operations, net 176 (2,251) (2,740) (2,765)
(Recovery of) provision for real estate losses (202) 704 (1,534) (33)
Amortization of excess of cost over fair value
of net assets acquired 2,171 2,232 6,513 6,075
SAIF recapitalization assessment 28,545 -- 28,545 --
------------ ------------ ------------ ------------
Total non-interest expense 54,562 23,527 103,257 70,758
------------ ------------ ------------ ------------
(Loss) Income before income tax (benefit) expense (4,542) 20,424 42,754 60,694
Income tax (benefit) expense (1,320) 9,035 19,548 26,622
------------ ------------ ------------ ------------
Net (loss) income $ (3,222) $ 11,389 $ 23,206 $ 34,072
============ ============ ============ ============
Primary (loss) earnings per share $ (0.17) $ 0.52 $ 1.12 $ 1.54
============ ============ ============ ============
Fully diluted (loss) earnings per share $ (0.17) $ 0.52 $ 1.12 $ 1.51
============ ============ ============ ============
Dividends per common share $ .11 $ .10 $ .32 $ .10
============ ============ ============ ============
Primary average common shares and equivalents 19,446,410 21,842,792 20,713,185 22,137,438
Fully diluted average common shares and equivalents 19,446,410 21,976,608 20,746,062 22,511,870
</TABLE>
See accompanying notes to consolidated financial statements.
(1) As adjusted for two-for-one stock split on June 3, 1996.
3
<PAGE> 5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED
RETAINED GAINS (LOSSES)
ADDITIONAL EARNINGS ON
COMMON PAID-IN SUBSTANTIALLY TREASURY SECURITIES,
STOCK CAPITAL RESTRICTED STOCK NET OF TAXES
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 264 $325,992 $ 351,923 $ (60,693) $ 11,126
Net Income -- -- 23,206 -- --
Change in unrealized gains (losses)
on securities available-for-sale -- -- -- -- (20,466)
Common stock repurchased
(1,130,496 shares) -- -- -- (29,055) --
Cash dividends declared
on common stock -- -- (6,841) -- --
Treasury stock issued for options
exercised (32,000 shares) -- -- -- 527 --
Loss on issuance of treasury stock
(32,000 shares) -- -- (283) -- --
Tax benefit attributable to vested
RRP shares -- 638 -- -- --
Sale of unallocated RRP stock
(10,176 shares) -- -- -- -- --
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock -- 2,306 -- -- --
----- -------- --------- --------- ---------
Balance at September 30, 1996 $ 264 $328,936 $ 368,005 $ (89,221) $ (9,340)
===== ======== ========= ========= =========
<CAPTION>
UNALLOCATED UNEARNED
COMMON COMMON
STOCK HELD STOCK HELD
BY ESOP BY RRP'S TOTAL
-------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (27,355) $ (10,572) $ 590,685
Net income -- -- 23,206
Change in unrealized gains (losses)
on securities available-for-sale -- -- (20,466)
Common stock repurchased
(1,130,496 shares) -- -- (29,055)
Cash dividends declared
on common stock -- -- (6,841)
Treasury stock issued for options
exercised (32,000 shares) -- -- 527
Loss on issuance of treasury stock
(32,000 shares) -- -- (283)
Tax benefit attributable to vested
RRP shares -- -- 638
Sale of unallocated RRP stock
(10,176 shares) -- 147 147
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock 2,156 3,224 7,686
--------- --------- ---------
Balance at September 30, 1996 $ (25,199) $ (7,201) $ 566,244
========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,206 $ 34,072
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net deferred loan origination
fees, discounts and premiums (4,921) (5,866)
Provision for loan and real estate losses 1,988 2,144
Depreciation and amortization 4,194 3,744
Net gain on sales of securities and loans (1,321) (6)
Amortization of excess of cost over fair value
of net assets acquired 6,513 6,075
Amortization of allocated and earned shares from ESOP and RRPs 7,686 6,026
Decrease in accrued interest receivable (6,242) (2,658)
Increase in mortgage escrow funds 6,715 6,594
Net changes in other assets, accrued expenses
and other liabilities 21,089 (1,872)
--------- ---------
Net cash provided by operating activities 58,907 48,253
--------- ---------
Cash flows from investing activities:
Loan originations (500,530) (128,355)
Loan purchases through third parties (225,364) (94,283)
Bulk loan purchases (60,410) (98,904)
Principal repayments on loans 266,281 173,864
Principal payments on mortgage-backed and mortgage-
related securities 386,968 254,872
Purchases of mortgage-backed and mortgage-related securities (336,711) (517,462)
Purchases of other securities (451,649) (207,825)
Proceeds from maturities of other securities
and redemption of FHLB-NY stock 70,655 44,341
Proceeds from sale of securities and loans 90,552 524,214
Proceeds from sale of real estate owned 12,390 15,831
Proceeds from sales net of costs and advances
related to investments in real estate 1,212 628
Purchases of premises and equipment (6,755) (4,661)
Cash paid for Fidelity net of cash and cash equivalents acquired -- (158,491)
--------- ---------
Net cash used in investing activities (753,361) (196,231)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 257,352 (59,677)
Net increase in reverse repurchase agreements 353,518 469,217
Proceeds from FHLB-NY advances 135,000 50,000
Payments of FHLB of New York advances (90,000) (433,049)
Costs to repurchase common stock (29,055) (26,592)
Cash dividends paid to stockholders (6,841) (2,295)
Cash received for options exercised 244 52
Cash received from sale of unallocated RRP stock 147 --
--------- ---------
Net cash provided by (used in) financing activities 620,365 (2,344)
--------- ---------
Net decrease in cash and cash equivalents (74,089) (150,322)
Cash and cash equivalents at beginning of period 133,869 209,203
--------- ---------
Cash and cash equivalents at end of period $ 59,780 $ 58,881
========= =========
Supplemental disclosures:
Cash paid during the year:
Interest $ 224,068 $ 191,590
========= =========
Income taxes $ 26,065 $ 24,150
========= =========
Additions to real estate owned $ 7,730 $ 3,466
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
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, 1996 and December 31, 1995 and the statements
of operations for the three and nine months ended September 30, 1996 and
1995, cash flows for the nine months ended September 30, 1996 and 1995 and
stockholders' equity for the nine months ended September 30, 1996. 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,
1996 and December 31, 1995 and amounts of revenues and expenses of the
results of operations for the three and nine month periods ended September
30, 1996 and 1995. The results of operations for the three and nine months
ended September 30, 1996 are not necessarily indicative of the results of
operations to be expected for the remainder of the year. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
These consolidated financial statements should be read in conjunction with
the December 31, 1995 audited consolidated financial statements, interim
financial statements and notes thereto of the Company.
2. IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based
on the entity's common stock price, except for employee stock ownership
plans. SFAS No. 123 established a fair value based method of accounting for
stock-based compensation arrangements with employees, rather than the
intrinsic value based method that is contained in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"). SFAS No. 123 does not require an entity to adopt the new fair value
based method for purposes of preparing its basic financial statements. While
the SFAS No. 123 fair value based method is considered by the FASB to be
preferable to the APB No. 25 method, entities are allowed to continue to use
the APB No. 25 method for preparing its basic financial statements. Entities
not adopting the fair value based method under SFAS No. 123 are required to
present pro forma net income and earnings per share information, in the
notes to the financial statements, as if the fair value based method had
been adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, but may
also be adopted upon the issuance of SFAS No. 123. The disclosure
requirements are effective for financial statements for fiscal years
beginning after December 15, 1995, or for an earlier fiscal year for which
SFAS No. 123 is initially adopted for recognizing compensation cost. Pro
forma disclosures required for entities that elect to continue to measure
compensation cost using the APB No. 25 method must include the effects of
all awards granted in fiscal years that begin after December 15, 1994. Pro
forma disclosures for awards granted in the first fiscal year beginning
after December 15, 1994 need not be included in financial statements for
that fiscal year but should be presented subsequently whenever financial
statements for that fiscal year are presented for comparative purposes with
financial statements for a later fiscal year. The Company intends to
continue to use the APB No. 25 method for preparing its financial statements
and as such, the implementation of SFAS No. 123 will have no impact on the
Company's financial condition or results of operations.
6
<PAGE> 8
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 establishes
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. Under this approach, an
entity, subsequent to a transfer of financial assets, must recognize the
financial and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. Standards for distinguishing transfers of
financial assets that are sales from those that are secured borrowings are
provided in SFAS No. 125. A transfer not meeting the criteria for a sale must be
accounted for as a secured borrowing with pledge of collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It additionally requires that servicing assets and
other retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by amortization
in proportion to and over the period of estimated net servicing income or loss
and assessed for asset impairment, or increased obligation, based on their fair
value.
This Statement supersedes the FASB's Statement of Financial Accounting Standards
No. 76, "Extinguishment of Debt", and Statement of Financial Accounting
Standards No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse." SFAS No. 125 amends Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," ("SFAS
No. 115") to prohibit the classification of a debt security as held to maturity
if it can be prepaid or otherwise settled in such a way that the holder of the
security would not recover substantially all of its recorded investment. It
further requires that loans and other assets that can be prepaid or otherwise
settled in such a way that the holder would not recover substantially all of its
recording investment shall be subsequently measured like debt securities
classified as available-for-sale or trading under SFAS No. 115, as amended by
SFAS No. 125. SFAS No. 125 also amends and extends to all servicing assets and
liabilities the accounting standards for mortgage servicing rights now in
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities," and supersedes Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights."
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. The
Company is currently reviewing the impact of the implementation of SFAS No. 125
on its consolidated financial statements.
3. (LOSS) EARNINGS PER SHARE
Primary and fully diluted earnings per common share are computed by dividing net
income by the weighted-average number of common stock and common stock
equivalents outstanding during this year.
For the primary earnings per share calculation, the weighted-average number of
common stock and common stock equivalents outstanding includes the average
number of shares of common stock outstanding, the dilutive effect of unexercised
stock options, adjusted for the weighted average number of unallocated shares
held by the Employee Stock Ownership Plan ("ESOP") and the Recognition and
Retention Plans ("RRPs").
For the fully diluted earnings per share calculation, the weighted average
number 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.
7
<PAGE> 9
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 $59,780,000 and $34,000,000
at September 30, 1996 and 1995, respectively.
5. STOCK SPLIT
On April 17, 1996, the Company's Board of Directors approved a two-for-one stock
split, in the form of a 100% stock dividend, which was paid on June 3, 1996.
Accordingly, all capital accounts, share and per share data have been restated
for all reported periods to reflect the stock split.
8
<PAGE> 10
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 adverse
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") was incorporated on June 14,
1993, and is the holding company of Astoria Federal Savings and Loan Association
(the "Association"). On November 18, 1993, the Association completed its
conversion from a mutual savings and loan association to the stock form of
ownership at which time the Company issued 13,180,852 shares of common stock and
utilized a portion of the proceeds to acquire all of the issued shares of the
Association.
The Company is headquartered in Lake Success, New York and its principal
business currently consists of the operation of its wholly-owned subsidiary, the
Association. The Association's primary business is attracting retail deposits
from the general public and investing those deposits, together with funds
generated from operations, principal repayments and borrowings, primarily in
one-to-four family residential mortgage loans and mortgage-backed and
mortgage-related securities and, to a lesser extent, commercial real estate
loans, multi-family mortgage loans and consumer loans. In addition, the
Association invests in securities issued by the U.S. Government and agencies
thereof and other investments permitted by federal laws and regulations.
The Company's results of operations are primarily dependent 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
expenses, and income tax expense. General and administrative expense consists
primarily of compensation and benefits, occupancy, equipment and systems
expense, federal deposit insurance premium, advertising and other operating
expenses. Other non-interest expense consists of real estate operations, net,
provision for real estate losses and amortization of excess of cost over fair
value of net assets acquired. The earnings of the Company may also significantly
be affected by general economic and competitive conditions, particularly changes
in market interest rates and yield curves, government policies and actions of
regulatory authorities.
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. 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 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. As a result of this
legislation, the Company expects to add $4.3 million, after tax, to earnings for
1997. See "Impact of New Legislation."
FIDELITY ACQUISITION
After the close of business on January 31, 1995, the Company successfully
completed the acquisition of Fidelity New York F.S.B. ("Fidelity") in a
transaction which was accounted for as a purchase. The cost of the acquisition
was
9
<PAGE> 11
$157.8 million, and, in addition, the Company incurred approximately $21.3
million of acquisition-related costs, of which $3.3 million was for the buyout
of leased data processing equipment. As a result of the acquisition, after the
close of business on January 31, 1995, the Company had approximately $6.4
billion in assets and $4.3 billion in deposits. Subsequent to the acquisition,
the Company restructured the resulting investment portfolio by selling $521.1
million of securities acquired in the acquisition and utilizing the proceeds
from the sale to repay $417.0 million of borrowings. The excess of cost over the
fair value of net assets acquired generated in the transaction was $112.1
million, which is being amortized on a straight line basis over 15 years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings and
principal and interest payments on loans, mortgage-backed and mortgage-related
securities, and other securities. During the first nine months of 1995, the
Company's total principal payments on loans, mortgage-backed and
mortgage-related and other securities were $428.7 million. The Company also
received $521.1 million of proceeds from the sale of securities acquired from
Fidelity during this same nine month period. During the first nine months of
1996, the Company's total principal payments on loans, mortgage-backed and
mortgage-related and other securities totaled $653.2 million, and net increases
in borrowings totaled $398.5 million. The Company's primary uses of funds are
purchases and originations of mortgage loans, and the purchases of
mortgage-backed, mortgage-related and other securities. During the first nine
months of 1995, the Company's primary uses of funds were for the purchases of
mortgage-backed, mortgage-related and other securities, loan originations and
purchases and the acquisition of Fidelity. During the first nine months of 1996,
the Company's purchases and originations of mortgage loans totaled $763.3
million, of which $284.4 million and $478.9 million were purchases and
originations, respectively. Of the $284.4 million of loans purchased, $59.8
million were bulk loan purchases and $224.6 million were purchased through third
party mortgage bankers. This compares to $299.6 million of purchases and
originations during the first nine months of 1995, of which $191.2 million and
$108.4 million were purchases and originations, respectively. Of the $191.2
million of loans purchased, $97.5 million were bulk loan purchases and $93.7
million were purchased through third party mortgage bankers. The Company's
purchases of mortgage-backed, mortgage-related and other securities during the
first nine months of 1996 totaled $788.4 million of which $285.8 million are
classified as available-for-sale as of September 30, 1996. Mortgage-backed,
mortgage-related and other securities purchased during the first nine months of
1995 totaled $725.3 million.
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 7.84% and 7.09% at September 30, 1996 and December 31,
1995, respectively, while its short-term liquidity ratios were 2.81% and 2.50%
at September 30, 1996 and December 31, 1995, respectively. In the normal course
of its business, the Association routinely enters into various commitments,
primarily relating to leasing certain of its office facilities and lending
commitments. The Association anticipates that it will have sufficient funds
available to meet its current commitments in the normal course of its business.
Stockholders' equity totaled $566.2 million at September 30, 1996 compared
to $590.7 million at December 31, 1995, reflecting the Company's earnings for
the nine months, the effect of the treasury stock purchases, dividends paid on
common stock, the change in the net unrealized (losses) gains on securities, net
of taxes, and 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.
During the year ended December 31, 1995, the Company repurchased 1,471,752
of its common shares for an aggregate cost of $26.6 million, bringing the
cumulative total of common shares repurchased, through December 31, 1995, to
3,759,836 for an aggregate cost of $60.8 million. An additional 5% stock
repurchase plan was approved by the Board of Directors on December 21, 1995.
During the first nine months of 1996, the Company completed this fourth 5% stock
repurchase program, repurchasing during this program a total of 1,130,496 of its
outstanding common shares at an aggregate cost of $29.1 million, bringing the
cumulative total of common shares repurchased through September 30, 1996 to
4,890,332 for an aggregate cost of $89.9 million. The Company may consider
10
<PAGE> 12
future repurchase plans as approved by its Board of Directors.
On September 3, 1996, the Company paid a quarterly cash dividend of $0.11
per share on shares of common stock outstanding as of the close of business on
August 15, 1996, aggregating $2.3 million.
At its Board of Directors meeting held on October 16, 1996, the Company
declared a cash dividend of $0.11 per common share payable on December 2, 1996
to shareholders of record as of the close of business on November 15, 1996.
While the payment of the Company's cash dividend is not subject to the
Association's payment of a dividend to the Company, the ability of the Company
to continue to fund the payment of future cash dividends is dependent, to a
degree, upon the Association continuing to declare and pay cash dividends to the
Company.
At the time of the Association's conversion to stock form, the Association
was required to establish a liquidation account equal to its capital as of June
30, 1993. The liquidation account will be reduced to the extent that eligible
account holders reduce their qualifying deposits. In the unlikely event of a
complete liquidation of the Association, each eligible account holder will be
entitled to receive a distribution from the liquidation account. As a result of
the Fidelity acquisition, the Association assumed the obligation of Fidelity's
liquidation account initially created in connection with Fidelity's conversion
to stock form. 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, 1996, the Association's total capital exceeded
the amount of the combined liquidation accounts, and exceeded all of its
regulatory capital requirements with tangible and core capital ratios of 5.76%
and a risk-based capital ratio of 17.09%. 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.
Management has established a policy to monitor interest rate sensitivity so that
adjustments to the asset and liability mix, when deemed appropriate, can be made
on a timely basis.
The matching of the repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that same time period.
At September 30, 1996, the Company's net interest-earning assets maturing or
repricing within one year exceeded interest-bearing liabilities maturing or
repricing within the same time period by $1.3 billion, representing a positive
cumulative one-year gap of 17.5% of total assets. This compares to net
interest-earning assets maturing or repricing within one year exceeding
interest-bearing liabilities maturing or repricing within the same time period
by $1.4 billion, representing a positive cumulative one-year gap of 21.7% of
total assets at December 31, 1995. 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 the Company categorized its
available-for-sale portfolio according to repricing periods based on their
estimated prepayments and maturities, interest-bearing liabilities maturing or
repricing within one year, at September 30, 1996, would have exceeded net
interest-earning assets maturing or repricing within the same time period by
$71.0 million, representing a negative cumulative one-year gap of 1.0% of total
assets. If the Company categorized its available-for-sale portfolio according to
repricing periods based on their estimated prepayments and maturities, net
interest-earning assets maturing or repricing within one year, at December 31,
1995, would have been
11
<PAGE> 13
approximately equal to interest-bearing liabilities maturing or repricing within
the same time period. Additionally, the Company purchased various callable debt
securities and has entered into callable reverse repurchase agreements. At
September 30, 1996, $258.0 million of debt securities and $545.0 million of
borrowings, set forth in the following table at their maturity dates, were
callable within one year.
The Company, from time to time, in an attempt to further reduce volatility
in its earnings caused by changes in interest rates will enter into financial
agreements with third parties to hedge its position. During 1994, the Company,
as part of its overall interest rate risk management strategy, purchased an
interest rate cap with a notional amount of $105.0 million on which the Company
received a payment, based on the notional amount, equal to the three month LIBOR
in excess of 5% on any reset date for the reset period, and simultaneously sold
an interest rate cap on the same amount pursuant to which the Company made a
payment, based on the notional amount, equal to the three month LIBOR in excess
of 7% on any reset date for the reset period. These transactions, referred to,
in the aggregate, as a corridor, were structured to reset quarterly on the same
dates and mature on the same date as a $105.0 million reverse repurchase
agreement bearing interest at the three month LIBOR, which matured on March 15,
1996. During the second quarter of 1995, the Company entered into an interest
rate swap with a notional amount of $50.0 million, the effect of which was to
convert a medium term $50.0 million borrowing, with a variable rate equal to the
three month LIBOR, to a fixed rate borrowing equal to 6.632%, by agreeing,
within the interest rate swap agreement, to pay a fixed rate of interest equal
to 6.632% and receive the three month LIBOR. The agreement matures on April 21,
1997, the same date as the borrowing.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Company, using certain assumptions based on its historical
experience and other data available to management, to reprice or mature in each
of the future time periods shown.
This table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the actual repricing
dates of various assets and liabilities are subject to customer discretion and
competitive and other pressures. The duration of mortgage-backed and
mortgage-related securities can be significantly impacted by changes in mortgage
prepayment rates. Prepayment rates will vary due to a number of factors,
including the regional economy in the area where the underlying mortgages were
originated, seasonal factors, demographic variables, and the assumability of the
underlying mortgages. However, the largest determinant of prepayment rates are
prevailing interest rates and related mortgage refinancing opportunities.
Therefore, actual experience may vary from that indicated. In addition, the
available-for-sale securities may or may not be sold, or effectively repriced,
since that activity is subject to management's discretion.
12
<PAGE> 14
<TABLE>
<CAPTION>
At September 30, 1996
----------------------------------------------------------------------
More Than More Than
One Year Three Years
One Year to to More than
or Less Three Years Five Years Five Years Total
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) $ 858,791 $ 476,092 $ 338,801 $ 801,802 $2,475,486
Consumer and other loans (1) 37,503 8,549 10,389 -- 56,441
Federal funds sold and
repurchase agreements 44,000 -- -- -- 44,000
Mortgage-backed, mortgage-related
and other securities available-for-sale 2,363,287 -- -- -- 2,363,287
Mortgage-backed and mortgage-
related securities held-to-maturity (2) 349,983 196,884 159,700 637,737 1,344,304
Other securities held-to-maturity (2) 55,200 12,340 50,800 554,007 672,347
----------------------------------------------------------------------
Total interest-earning assets 3,708,764 693,865 559,690 1,993,546 6,955,865
Less:
Unearned discount, premium
and deferred fees (3) 2,544 1,410 1,004 2,376 7,334
----------------------------------------------------------------------
Net interest-earning assets 3,706,220 692,455 558,686 1,991,170 6,948,531
----------------------------------------------------------------------
Interest-bearing liabilities:
Savings 168,000 288,000 240,000 449,531 1,145,531
NOW 17,640 14,112 12,696 17,698 62,146
Money market 129,260 134,820 89,928 92,211 446,219
Certificates of deposit 1,500,206 1,083,436 220,474 266 2,804,382
Borrowed funds (2) 622,847 1,465,000 5,550 10,000 2,103,397
----------------------------------------------------------------------
Total interest-bearing liabilities 2,437,953 2,985,368 568,648 569,706 6,561,675
----------------------------------------------------------------------
Interest sensitivity gap $1,268,267 $(2,292,913) $ (9,962) $1,421,464 $ 386,856
======================================================================
Cumulative interest sensitivity gap $1,268,267 $(1,024,646) $(1,034,608) $ 386,856
======================================================================
Cumulative interest sensitivity gap
as a percentage of total assets 17.45% (14.10)% (14.24)% 5.32%
Cumulative net interest-earning assets
as a percentage of interest-bearing liabilities 152.02% 81.11% 82.73% 105.90%
</TABLE>
(1) For purposes of this analysis, mortgage, consumer and other
loans exclude non-performing loans, but are not reduced for the
allowance for loan losses.
(2) For purposes of this analysis, $258.0 million of debt
securities and $545.0 million 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).
(3) For purposes of this analysis, unearned discount, premium and
deferred fees are prorated.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Additionally, certain
assets, such as ARM loans, have contractual features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of borrowers to service their ARM loans or other loan
obligations may decrease in the event of an interest rate increase. The table
reflects the estimates of management as to periods to repricing at a particular
point in time. Among the factors considered, are current trends and historical
repricing experience with respect to similar products. For example, the Company
has a number of deposit accounts, including savings, NOW and money market
accounts which, subject to certain regulatory exceptions not relevant here, may
be withdrawn at any time. The Company, based upon its historical experience,
assumes that while all customers in these account categories could withdraw
their funds on any given day, they will not do so, even if market interest rates
were to change. As a result, different assumptions may be used at different
points in time.
13
<PAGE> 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, 1996 and 1995. Yields and costs are derived by
dividing income or expense by the average balance of related assets or
liabilities, respectively, for the periods shown, and annualized, except where
noted otherwise. This table should be analyzed in conjunction with management's
discussion of the comparison of operating results for the quarters ended
September 30, 1996 and 1995.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $2,434,385 $ 49,031 8.01% $1,874,450 $ 39,689 8.47%
Consumer and other loans 57,530 1,519 10.50% 61,421 1,641 10.69%
Mortgage-backed and mortgage-
related securities (1) 3,576,226 61,543 6.85% 3,632,352 63,173 6.96%
Federal funds sold and
repurchase agreements 35,025 470 5.34% 71,966 1,067 5.93%
Other securities (1) 820,576 14,153 6.86% 474,124 7,799 6.58%
---------- ---------- ---------- ----------
Total interest-earning assets 6,923,742 126,716 7.28% 6,114,313 113,369 7.42%
---------- ----------
Non-interest-earning assets 269,072 342,530
---------- ----------
Total assets $7,192,814 $6,456,843
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,139,701 7,248 2.53% $1,172,747 7,418 2.53%
Certificates of deposit 2,794,543 38,416 5.47% 2,596,018 37,273 5.74%
NOW 72,475 368 2.02% 250,281 1,264 2.02%
Money manager 187,884 954 2.02% -- -- --
Money market 241,581 2,344 3.86% 208,931 2,050 3.92%
Borrowed funds 2,061,569 29,782 5.75% 1,547,825 23,396 6.05%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 6,497,753 79,112 4.84% 5,775,802 71,401 4.94%
---------- ----------
Non-interest-bearing liabilities 129,767 111,975
---------- ----------
Total liabilities 6,627,520 5,887,777
Stockholders' equity 565,294 569,066
---------- ----------
Total liabilities and stockholders' equity $7,192,814 $6,456,843
========== ==========
Net interest income/net interest rate spread (2) $ 47,604 2.44% $ 41,968 2.48%
========== ==== ========== ====
Net interest-earning assets/net interest margin (3) $ 425,989 2.74% $ 338,511 2.75%
========== ==== ========== ====
Ratio of interest-earning assets to interest-
bearing liabilities 1.07x 1.06x
==== ====
</TABLE>
(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
<PAGE> 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, 1996 and 1995. Yields and costs are derived by
dividing income or expense by the average balance of related assets or
liabilities, respectively, for the periods shown, and annualized, except where
noted otherwise. This table should be analyzed in conjunction with management's
discussion of the comparison of operating results for the nine months ended
September 30, 1996 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $2,243,190 $ 136,517 8.13% $1,768,469 $ 112,287 8.47%
Consumer and other loans 59,031 4,560 10.32% 60,864 4,923 10.78%
Mortgage-backed and mortgage-
related securities (1) 3,633,587 187,119 6.88% 3,307,912 174,103 7.02%
Federal funds sold and
repurchase agreements 59,918 2,418 5.39% 176,544 7,991 6.04%
Other securities (1) 661,830 33,178 6.70% 412,157 19,831 6.42%
---------- ---------- ---------- ----------
Total interest-earning assets 6,657,556 363,792 7.30% 5,725,946 319,135 7.43%
---------- ----------
Non-interest-earning assets 270,833 298,607
---------- ----------
Total assets $6,928,389 $6,024,553
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,150,543 21,832 2.53% $1,186,298 22,510 2.53%
Certificates of deposit 2,677,189 110,015 5.49% 2,473,451 105,052 5.66%
NOW 127,603 1,933 2.02% 237,888 3,604 2.02%
Money manager 133,631 2,025 2.02% -- -- --
Money market 232,865 6,654 3.82% 188,261 5,039 3.57%
Borrowed funds 1,904,540 82,171 5.76% 1,271,628 56,244 5.90%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 6,226,371 224,630 4.82% 5,357,526 192,449 4.79%
---------- ----------
Non-interest-bearing liabilities 127,341 103,410
---------- ----------
Total liabilities 6,353,712 5,460,936
Stockholders' equity 574,677 563,617
---------- ----------
Total liabilities and stockholders' equity $6,928,389 $6,024,553
========== ==========
Net interest income/net interest rate spread (2) $ 139,162 2.48% $ 126,686 2.64%
========== ==== ========== ====
Net interest-earning assets/net interest margin (3) $ 431,185 2.79% $ 368,420 2.95%
========== ==== ========== ====
Ratio of interest-earning assets to interest-
bearing liabilities 1.07x 1.07x
==== ====
</TABLE>
(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
<PAGE> 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.
<TABLE>
<CAPTION>
Quarter Ended September 30, 1996 Nine Months Ended September 30, 1996
Compared to Compared to
Quarter Ended September 30, 1995 Nine Months Ended September 30, 1995
-------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
-------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- ------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .................. $ 22,496 $(13,154) $ 9,342 $ 31,539 $ (7,309) $ 24,230
Consumer and other loans ........ (95) (27) (122) (150) (213) (363)
Mortgage-backed and mortgage-
related securities .......... (806) (824) (1,630) 18,525 (5,509) 13,016
Federal funds sold and repurchase
agreements .................. (500) (97) (597) (4,792) (781) (5,573)
Other securities ................ 6,004 350 6,354 12,451 896 13,347
-------- -------- -------- -------- -------- --------
Total ..................... 27,099 (13,752) 13,347 57,573 (12,916) 44,657
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings ......................... (170) -- (170) (678) -- (678)
Certificates of deposit ......... 9,387 (8,244) 1,143 9,800 (4,837) 4,963
NOW ............................. (896) -- (896) (1,671) -- (1,671)
Money manager ................... 954 -- 954 2,025 -- 2,025
Money market .................... 496 (202) 294 1,246 369 1,615
Borrowed funds .................. 13,637 (7,251) 6,386 28,145 (2,218) 25,927
-------- -------- -------- -------- -------- --------
Total ...................... 23,408 (15,697) 7,711 38,867 (6,686) 32,181
-------- -------- -------- -------- -------- --------
Net change in net interest
income .......................... $ 3,691 $ 1,945 $ 5,636 $ 18,706 $ (6,230) $ 12,476
======== ======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 18
ASSET QUALITY
One of the Company's key operating objectives has been and continues to be
improving asset quality. Through a variety of strategies, including, but not
limited to, borrower workout arrangements and aggressive marketing of owned
properties, the Company has taken an active role in addressing problem and
non-performing assets which, in turn, has helped to build the strength of the
Company's financial condition. Such strategies have resulted in a reduction of
non-performing assets of $19.7 million, or 29.1%, from $67.8 million at December
31, 1995 to $48.1 million at September 30, 1996. During this nine month period,
net loan charge-offs totaled $3.0 million, which consisted primarily of large
commercial properties. The reduction in non-performing assets was primarily due
to decreases in non-accrual mortgage loans and real estate owned, net of $12.1
million, or 32.4%, and $6.4 million, or 36.3%, respectively. The decrease in
real estate owned during the nine month period ended September 30, 1996 was
primarily a result of sales. The following tables show a comparison of
delinquent loans and non-performing assets as of September 30, 1996 and December
31, 1995.
<TABLE>
<CAPTION>
DELINQUENT LOANS
-----------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1995
-------------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- ------------------- -------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- -------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family ........ 54 $ 3,022 264 $25,409 118 $ 8,173 366 $33,384
Multi-family .............. 4 430 14 3,272 3 336 17 2,851
Commercial real estate .... -- -- 11 2,220 3 384 21 4,698
Construction and land ..... -- -- 3 244 -- -- 10 2,271
Consumer and other loans .. 51 402 95 977 47 622 65 1,276
------- ------- ------- ------- ------- ------- ------- -------
Total Delinquent Loans 109 $ 3,854 387 $32,122 171 $ 9,515 479 $44,480
======= ======= ======= ======= ======= ======= ======= =======
Delinquent Loans to Total
Loans ............... 0.15% 1.25% 0.46% 2.16%
</TABLE>
17
<PAGE> 19
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Non-accrual delinquent mortgage loans ........... $25,271 $37,394
Non-accrual delinquent consumer
and other loans ............................ 977 1,276
Mortgage loans delinquent 90 days or more (1) ... 5,874 5,810
------- -------
Total non-performing loans ................. 32,122 44,480
------- -------
Real estate owned, net (2) ...................... 11,254 17,677
Investment in real estate, net (3) .............. 4,698 5,654
------- -------
Total real estate owned and investment
in real estate, net ...................... 15,952 23,331
------- -------
Total non-performing assets .......... $48,074 $67,811
======= =======
Allowance for loan losses to non-performing loans 43.66% 30.34%
Allowance for loan losses to total loans ........ 0.55% 0.65%
</TABLE>
(1) Loans delinquent 90 days or more and still accruing interest consist
solely of loans delinquent 90 days or more as to their maturity date but
not their interest payments.
(2) Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is recorded at the lower of cost or fair
value less estimated costs to sell.
(3) Investment in real estate is recorded at the lower of cost or fair value.
18
<PAGE> 20
The following table sets forth the composition of the Company's loan portfolio
at September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
At September 30, At December 31,
1996 1995
----------------------- -------------------------
Percent Percent
of of
Amount Total Amount Total
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to-four family .............. $ 2,196,954 85.69% $ 1,748,284 84.82%
Multi-family .................... 145,686 5.68 109,944 5.34
Commercial real estate .......... 153,890 6.00 128,668 6.24
Construction .................... 10,101 0.39 12,598 0.61
----------- ------- ----------- -------
Total mortgage loans ......... 2,506,631 97.76 1,999,494 97.01
----------- ------- ----------- -------
CONSUMER AND OTHER LOANS:
Home equity ..................... 34,605 1.35 38,761 1.88
Credit card ..................... 8,230 0.32 8,578 0.42
Passbook ........................ 3,582 0.14 2,915 0.14
Agency for International
Development .................. 1,067 0.04 1,193 0.06
Education ....................... 2,651 0.11 2,415 0.11
Personal ........................ 4,127 0.16 3,708 0.18
Other ........................... 3,156 0.12 4,104 0.20
----------- ------- ----------- -------
Total consumer and other loans 57,418 2.24 61,674 2.99
----------- ------- ----------- -------
Total loans ............... 2,564,049 100.00% 2,061,168 100.00%
----------- ======= ----------- =======
LESS:
Unearned discount, premium and
deferred loan fees, net ...... (1,412) (4,030)
Allowance for loan losses ....... (14,024) (13,495)
----------- -----------
Total loans, net ............. $ 2,548,613 $ 2,043,643
=========== ===========
</TABLE>
19
<PAGE> 21
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, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
At September 30, 1996
---------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Mortgage-backed and mortgage-related securities:
GNMA certificates ......................... $ 241,196 $ 1,685 $ (2,518) $ 240,363
FHLMC certificates ........................ 281,343 1,058 (3,882) 278,519
FNMA certificates ......................... 48,770 51 (439) 48,382
REMICs:
Agency issuance ....................... 1,168,844 3,521 (20,955) 1,151,410
Private issuance ...................... 14,841 -- (334) 14,507
Other mortgage-related .................... 428,244 7,076 (606) 434,714
--------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities ....... 2,183,238 13,391 $ (28,734) $2,167,895
--------- ---------- ---------- ----------
Other securities:
Obligations of the U.S. ...................
government and agencies ................. 129,228 186 (2,226) 127,188
Equity and other securities ............... 67,120 1,119 (35) 68,204
--------- ---------- ---------- ----------
Total other securities .............. 196,348 1,305 (2,261) 195,392
--------- ---------- ---------- ----------
Total Available-for-Sale ......................... $2,379,586 $ 14,696 $ (30,995) $2,363,287
========== ========== =========== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates ......................... $ 91,189 $ 3,354 $ (20) $ 94,523
FHLMC certificates ........................ 30,110 1,026 (89) 31,047
FNMA certificates ......................... 22,553 60 (845) 21,768
CMOs ...................................... 7,085 67 (80) 7,072
REMICs:
Agency issuance ....................... 942,766 1,496 (20,132) 924,130
Private issuance ...................... 244,749 -- (9,703) 235,046
Other mortgage-related .................... 351 -- -- 351
--------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities ....... 1,338,803 6,003 (30,869) 1,313,937
--------- ---------- ---------- ----------
Other securities:
Obligations of the U.S. ...................
government and agencies ............... 578,289 508 (7,139) 571,658
Obligations of states and
political subdivisions ................ 51,242 -- (141) 51,101
Corporate debt securities ................. 10,041 71 (2) 10,110
--------- ---------- ---------- ----------
Total other securities .............. 639,572 579 $ (7,282) 632,869
--------- ---------- ---------- ----------
Total Held-to-Maturity ........................... $1,978,375 $ 6,582 $ (38,151) $1,946,806
========== ========== =========== ==========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
At December 31, 1995
---------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Mortgage-backed and mortgage-related securities:
GNMA certificates ......................... $ 156,330 $ 3,082 $ -- $ 159,412
FHLMC certificates ........................ 332,109 4,363 (635) 335,837
FNMA certificates ......................... 147,016 1,425 (17) 148,424
REMICs:
Agency issuance ....................... 1,116,842 9,418 (5,584) 1,120,676
Private issuance ...................... 22,433 41 (73) 22,401
Other mortgage-related .................... 540,565 5,900 (393) 546,072
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities ....... 2,315,295 24,229 (6,702) 2,332,822
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S. ...................
government and agencies ................. 149,990 1,023 (446) 150,567
Equity and other securities ............... 30,961 1,719 (101) 32,579
---------- ---------- ---------- ----------
Total other securities .............. 180,951 2,742 (547) 183,146
---------- ---------- ---------- ----------
Total Available-for-Sale ......................... $2,496,246 $ 26,971 $ (7,249) $2,515,968
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed and mortgage-related securities:
GNMA certificates ......................... $ 105,589 $ 4,566 $ (22) $ 110,133
FHLMC certificates ........................ 36,503 1,406 (16) 37,893
FNMA certificates ......................... 24,613 150 (476) 24,287
CMOs ...................................... 10,638 119 (46) 10,711
REMICs:
Agency issuance ....................... 961,536 9,169 (4,396) 966,309
Private issuance ...................... 194,411 412 (3,922) 190,901
Other mortgage-related .................... 354 -- -- 354
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities ....... 1,333,644 15,822 (8,878) 1,340,588
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S. ...................
government and agencies ............... 220,181 1,022 (2,460) 218,743
Obligations of states and
political subdivisions ................ 51,753 2 (96) 51,659
Corporate debt securities ................. 9,964 -- (174) 9,790
---------- ---------- ---------- ----------
Total other securities .............. 281,898 1,024 (2,730) 280,192
---------- ---------- ---------- ----------
Total Held-to-Maturity ........................... $1,615,542 $ 16,846 $ (11,608) $1,620,780
========== ========== ========== ==========
</TABLE>
21
<PAGE> 23
COMPARISON OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
AND OPERATING RESULTS FOR THE QUARTERS ENDED
AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
FINANCIAL CONDITION
At September 30, 1996, the Company's total assets were $7.3 billion compared
to $6.6 billion at December 31, 1995. The increase was primarily due to growth
in the one-to-four family mortgage loan portfolio and the other securities
portfolios (in the form of obligations of the U.S. Government and agencies)
funded through growth in deposits and additional borrowings. Mortgage loans
originated and purchased during the nine months ended September 30, 1996 totaled
$763.3 million, compared to $299.6 million for the nine months ended September
30, 1995. Purchases of other securities held-to-maturity and available-for-sale
during the first nine months of 1996 totaled $451.6 million, compared to $207.8
million in the comparable 1995 period. Deposits increased $257.7 million during
the nine month period ended September 30, 1996, including a $228.7 million
increase in certificates of deposit, and borrowed funds increased $398.7
million, primarily in the form of additional reverse repurchase agreements for
the same period. During the first quarter of 1996, the Company implemented a
program which converted its NOW accounts to a master account consisting of a NOW
sub-account and a money market sub-account (money manager account). The result
of this change was a substantial shift of deposits from NOW accounts to money
markets. While this program has no effect on the Company's depositors, it has
provided additional investable funds to the Company by substantially reducing
the reserve balances required to be maintained at the Federal Reserve Bank of
New York. Stockholders' equity decreased $24.4 million to $566.2 million from
$590.6 million at December 31, 1995, which reflects the repurchase of 1,130,496
shares of common stock, the net change in the market valuation, net of taxes, of
securities available-for-sale, and dividends declared, partially offset by net
income and the amortization relating to ESOP and RRP stock and related tax
benefit.
RESULTS OF OPERATIONS
GENERAL
The Company experienced a net loss of $3.2 million, or $0.17 per share and
net income of $23.2 million, or $1.12 per share, for the three months and the
nine months ended September 30, 1996, respectively.
During the 1996 third quarter, the Company recorded a $28.5 million ($16.9
million, net of taxes), one-time special deposit insurance assessment in
connection with the recapitalization of the SAIF, as a result of final
legislative action taken by Congress and the President on September 30, 1996
(see "SAIF Special Assessment" and "Impact of New Legislation" for further
discussion). Although this non-recurring assessment produced a net loss for the
third quarter of 1996, the Company expects to recognize long-term benefits of
significantly reduced deposit insurance premiums, beginning in 1997.
Net income, excluding the one-time $16.9 million, net of taxes, special
assessment for the recapitalization of the SAIF, for the three months ended
September 30, 1996 increased $2.3 million, or 19.9%, to $13.7 million compared
to $11.4 million for the same period in 1995 and earnings per share increased
25% to $0.65 from $0.52, respectively. Net income, excluding the SAIF
recapitalization assessment, for the nine months ended September 30, 1996
increased $6.0 million, or 17.6%, to $40.1 million compared to $34.1 million for
the same period in 1995 and earnings per share increased 22.7% to $1.89 from
$1.54, respectively. Return on average equity, excluding the SAIF
recapitalization assessment, increased to 9.59% for the 1996 third quarter from
8.01% for the 1995 third quarter and increased to 9.27% for the nine months
ended September 30, 1996 from 8.06% for the same period in 1995. Return on
average tangible equity, excluding the SAIF recapitalization assessment,
increased to 11.72% for the 1996 third quarter from 9.98% for the 1995 third
quarter and increased to 11.36% for the nine months ended September 30, 1996
from 9.72% for the same period in 1995. Return on average assets, excluding the
SAIF recapitalization assessment, increased from 0.71% to 0.76% for the 1995 and
1996 third quarters, respectively and from 0.75% to 0.77% for the nine months
ended September 30, 1995 and 1996, respectively.
22
<PAGE> 24
Net income, including the SAIF recapitalization assessment, decreased $14.6
million, from $11.4 million for the 1995 third quarter to a net loss of $3.2
million for the 1996 third quarter and earnings and loss per share for the 1995
and 1996 third quarters of $0.52 and $0.17, respectively decreased $0.69, or
132.7%. Net income for the nine months ended September 30, 1996 decreased $10.9
million or 31.9%, to $23.2 million compared to $34.1 million for the same period
in 1995 and earnings per share decreased 27.3% to $1.12 from $1.54,
respectively. Return on average equity decreased to a negative 2.28% for the
1996 third quarter from 8.01% for the 1995 third quarter and decreased to 5.38%
for the nine months ended September 30, 1996 from 8.06% for the same period in
1995. Return on average tangible equity, decreased to a negative 2.79% for the
1996 third quarter from 9.98% for the 1995 third quarter and decreased to 6.60%
for the nine months ended September 30, 1996 from 9.72% for the same period in
1995. Return on average assets decreased to a negative 0.18% for the 1996 third
quarter from 0.71% for the 1995 third quarter and decreased to 0.45% for the
nine months ended September 30, 1996 from 0.75% for the same period in 1995.
NET INTEREST INCOME
For the 1996 third quarter, net interest income increased $5.6 million, or
13.4% to $47.6 million, from $42.0 million for the 1995 third quarter. For the
nine months ended September 30, 1996, net interest income increased $12.5
million, or 9.9% to $139.2 million, from $126.7 million for the nine month
period ended September 30, 1995. These increases are due to the increases in
average interest-earning assets for the three and nine month periods, over the
comparable 1995 periods, of 13.2% and 16.3%, respectively. The increases in
interest-earning assets is due primarily to the significant growth in the
mortgage loan portfolio which resulted from record loan originations for the
periods, as well as loan purchases. In addition, the Company purchased higher-
yielding, agency-issued other securities during the nine months ended September
30, 1996. The impact of the increases in interest-earning assets was slightly
offset by the decrease in the Company's net interest margin from 2.74% for the
quarter ended September 30, 1996 compared to 2.75% for the prior year's quarter.
The Company's interest rate spread decreased from 2.48% for the quarter ended
September 30, 1996, to 2.44% in the comparable three month period and from 2.64%
to 2.48% for the nine month periods.
PROVISION FOR LOAN LOSSES
For the third quarter of 1996, provision for loan losses increased to
$958,000 compared to $349,000 for the third quarter of 1995. For the nine month
period ending September 30, 1996, the provision increased to $3.5 million from
$2.2 million in 1995. The increase for both periods was primarily attributable
to the increase in the loan portfolio as a result of record loan originations
and purchases. Total net loan charge-offs for the nine months ended September
30, 1996 were $3.0 million, which partially consisted of certain large
commercial properties. The net effect of the provision for loan losses with
these charge-offs during the nine months ended September 30, 1996, resulted in
an increase in the allowance for loan losses of only $529,000 from $13.5 million
at December 31, 1995 to $14.0 million at September 30, 1996. This slight
increase, coupled with the significant increase in the loan portfolio, resulted
in a reduction of the Company's percentage of allowance for loan losses to total
loans from 0.65% at December 31, 1995 to 0.55% at September 30, 1996. The
reduction in non-performing loans, coupled with an increase in the allowance for
loan losses improved the Company's percentage of allowance for loan losses to
non-performing loans from 30.34% at December 31, 1995 to 43.66% at September 30,
1996. See "Asset Quality."
NON-INTEREST INCOME
Non-interest income for the third quarter of 1996 increased $1.1 million, or
44.7%, to $3.4 million from $2.3 million for the comparable period in 1995. For
the nine months ended September 30, 1996, non-interest income increased $3.5
million, or 49.4%, to $10.4 million from $6.9 million in 1995. The increase in
both periods resulted from increases in customer service and loan fees as a
result of additional and increased fees on deposit products and increased loan
volumes, in addition to gains recognized on sales of securities.
NON-INTEREST EXPENSE
Non-interest expense for the third quarter of 1996, excluding the one-time
SAIF recapitalization assessment of
23
<PAGE> 25
$28.5 million, (see "Impact of New Legislation"), increased $2.6 million, to
$26.1 million, from $23.5 million for the third quarter of 1995. Non-interest
expense for the third quarter of 1996, including the SAIF recapitalization
assessment, increased $31.1 million to $54.6 million, from $23.5 million for the
third quarter of 1995. General and administrative expenses increased from $22.8
million in 1995 to $23.9 million in 1996 primarily due to an increase in
compensation and benefits, including a $500,000 increase in the amortization
relating to the allocation of ESOP stock due to a higher average fair market
value of the Company's stock. Real estate operations, net and provision for real
estate losses decreased from a net recovery of $1.5 million in 1995 to a net
recovery of $26,000 in 1996. The net recovery in 1995 includes the recognition
of $2.2 million of profit from the sale of a single REO property.
Non-interest expense for the nine month period ended September 30, 1996,
excluding the one-time SAIF recapitalization assessment, increased $4.0 million
to $74.7 million from $70.7 million for the same period in 1995. Non-interest
expense for the nine month period ended September 30, 1996, including the SAIF
recapitalization assessment, increased $32.5 million to $103.3 million, from
$70.8 million for the same period in 1995. General and administrative expenses
increased from $67.5 million in 1995 to $72.5 million in 1996. The increase is
due to the full nine month impact of the Fidelity acquisition on general and
administrative expense, and additional compensation and benefits, including an
increase of $1.7 million in the amortization relating to the allocation of ESOP
stock due to a higher average fair market value of the Company's stock. Real
estate operations, net and recoveries for real estate losses increased from a
net recovery of $2.8 million in 1995 to a net recovery of $4.3 million in 1996.
This increase resulted from gains on dispositions of both real estate owned and
investment in real estate.
INCOME TAX EXPENSE
Income tax expense, excluding the tax benefit of $11.6 from the SAIF
recapitalization assessment, increased $1.4 million for the third quarter of
1996, to $10.4 million, from $9.0 million in 1995. For the nine month period
ended September 30, 1996, income tax expense increased $4.6 million, to $31.2
million, from $26.6 million in 1995. The change for both periods is due to an
increase in income, excluding the SAIF recapitalization assessment of $28.5
million, before taxes of $24.0 million and $71.3 million, respectively.
IMPACT OF NEW LEGISLATION
Deposit Insurance - SAIF Recapitalization. For the first three quarters of
1996, SAIF-insured institutions paid deposit insurance assessment rates of $0.23
to $0.31 per $100 of deposits. In contrast, institutions insured by the Federal
Deposit Insurance Corporation's ("FDIC") Bank Insurance Fund (the "BIF") that
were well capitalized and without any significant supervisory concerns paid the
minimum annual assessment of $2,000, and all other BIF-insured institutions paid
deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits.
In response to the SAIF/BIF assessment disparity, the Deposit Funds
Insurance Act of 1996 (the "Funds Act") was enacted into law on September 30,
1996. The Funds Act amended the Federal Deposit Insurance Act (the "FDIA") in
several ways to recapitalize the SAIF and reduce the disparity in the assessment
rates for the BIF and the SAIF. The Funds Act authorized the FDIC to impose a
special assessment on all institutions with SAIF-assessable deposits in the
amount necessary to recapitalize the SAIF. As implemented by the FDIC,
institutions with SAIF-assessable deposits will pay a special assessment,
subject to adjustment, of 65.7 basis points per $100 of the institution's
SAIF-assessable deposits, and the special assessment will be paid on November
27, 1996. The special assessment is based on the amount of SAIF-assessable
deposits held on March 31, 1995. The Funds Act provides that the amount of the
special assessment will be deductible for federal income tax purposes for the
taxable year in which the special assessment is paid. Based on the foregoing,
the special assessment for the Association is $28.5 million (before taxes) and
has been charged against income for the quarter ended September 30, 1996.
In view of the recapitalization of the SAIF, the FDIC proposed on October 8,
1996, to reduce the assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. As would be effective for the SAIF-assessable
deposits of SAIF-insured savings associations, such as the Company, the proposed
assessment rates would range from 18 to 27 basis points for the last quarter of
1996 and would range from 0 to 27 basis points for subsequent assessment
periods. However, the Funds Act also provides that the FDIC cannot assess
regular insurance assessments for an insurance fund unless required to maintain
or to achieve the designated reserve ratio of 1.25%, except on those
24
<PAGE> 26
of its member institutions that are not classified as "well capitalized" or that
have been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Association has not been so classified
by the FDIC or the OTS. Accordingly, assuming that the designated reserve ratio
is maintained by the SAIF after the collection of the special SAIF assessment,
the Association, as long as it maintains its regulatory status, will have to pay
substantially lower regular SAIF assessments compared to those paid by the
Association in recent years. As a result of the lower SAIF assessment, the
Company expects to add $4.3 million, after tax, to earnings for 1997.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds (the "FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation to include the deposits of both BIF- and SAIF-insured institutions
beginning January 1, 1997. Until December 31, 1999, or such earlier date on
which the last savings association ceases to exist, the rate of assessment for
BIF-assessable deposits will be one-fifth of the rate imposed on SAIF-assessable
deposits. It has been estimated that the rates of assessment for the payment of
interest on the FICO bonds will be approximately 1.3 basis points for
BIF-assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January 1,
1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Secretary of the Treasury is required to conduct a study of
relevant factors with respect to the development of a common charter for all
insured depository institutions and abolition of separate charters for banks and
thrifts and to report the Secretary's conclusions and findings to the Congress
on or before March 31, 1997.
Recapture of Bad Debt Reserves. Prior to the enactment, on August 20, 1996,
of the Small Business Job Protection Act of 1996 (the "1996 Act"), for federal
income tax purposes, thrift institutions such as the Association, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Association's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interest in real property, could be computed using an amount based on
a six-year moving average of the Association's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Association's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. Similar deductions for additions to the
Association's bad debt reserve were permitted under the New York State Bank
Franchise Tax and the New York City Banking Corporation Tax; however, for
purposes of these taxes, the effective allowable percentage under the PTI method
was 32% rather than 8%.
Under the 1996 Act, the PTI Method was repealed and the Association, as a
"large bank" (one with assets having an adjusted basis of more than $500
million), will be unable to make additions to its tax bad debt reserve, will be
permitted to deduct bad debts only as they occur and will be required to
recapture (that is, take into taxable income) over a six-year period, beginning
with the Association's taxable year beginning January 1, 1996, the excess of the
balance of its bad debt reserves (other than the supplemental reserve) as of
December 31, 1995 over the greater of the balance of such reserves as of
December 31, 1987 (or over a lesser amount if the Association's loan portfolio
decreased since December 31, 1987). However, under the 1996 Act, such recapture
requirements will be suspended for each of the two successive taxable years
beginning January 1, 1996 in which the Association originates a minimum amount
of certain residential loans during such years that is not less than the average
of the principal amounts of such loans made by the Association during its six
taxable years preceding January 1, 1996. Since the Association has already
provided a deferred income tax liability for financial reporting purposes, there
will be no adverse impact to the Association's financial condition or results of
operations from the enactment of this legislation.
The New York State tax law has been amended to prevent a similar recapture
of the Association's bad debt reserve, and to permit continued future use of the
bad debt reserve method for purposes of determining the Association's New York
State tax liability. The Company's officers and industry leaders continue to
seek such amendments to the New York City tax law; however, the Company cannot
predict whether such changes to New York City law will be adopted and, if so, in
what form.
25
<PAGE> 27
CASH EARNINGS
Cash earnings is the amount by which tangible equity changes each period
due to operating results. It represents reported earnings adjusted for non-cash
charges for amortization relating to the allocation of ESOP stock, the earned
portion of RRP stock and related tax benefit and amortization of excess of cost
over fair value of net assets acquired.
Management believes that cash earnings, as well as cash returns on average
assets and cash returns on average tangible equity are more relevant measures
of financial performance since they define a company's ability to repurchase
stock, pay dividends and support growth, either internally or through
acquisitions. Further, regulatory capital adequacy measures are based on
tangible capital; accordingly, tangible capital is the basis for the
Association's growth potential.
Cash earnings, excluding the SAIF recapitalization assessment, for the
quarter ended September 30, 1996 totaled $18.7 million, or $0.89 per share,
compared to $15.8 million, or $0.72 per share for the 1995 third quarter. For
the nine months ended September 30, 1996, cash earnings, excluding the SAIF
recapitalization assessment, totaled $54.9 million, or $2.59 per share, compared
to $46.2 million, or $2.09 per share for the comparable 1995 period.
The related cash returns on average tangible equity, excluding the SAIF
recapitalization assessment, for the 1996 third quarter and the nine months
ended September 30, 1996 were 16.1% and 15.6% versus 13.8% and 13.2% for the
comparable 1995 periods. Cash returns on average assets, excluding the SAIF
recapitalization assessment, for the third quarter and the nine month period
ended September 30, 1996, were 1.04% and 1.06% versus 0.98% and 1.02% for the
comparable 1995 periods.
Presented below are the Company's Consolidated Statements of Cash Earnings
for the three and nine month periods ended September 30, 1996 and 1995.
26
<PAGE> 28
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH EARNINGS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 (1)
--------------------------------------- --------------------------------------
REPORTED CASH REPORT CASH
EARNINGS ADJUSTMENTS EARNINGS EARNINGS ADJUSTMENTS EARNINGS
--------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $ 126,716 -- $ 126,716 $ 113,369 -- $ 113,369
Total interest expense 79,112 -- 79,112 71,401 -- 71,401
--------- --------- -------- ---------
Net interest income 47,604 -- 47,604 41,968 -- 41,968
Provision for loan losses 958 -- 958 349 -- 349
--------- --------- -------- ---------
Net interest income after
provision for loan losses 46,646 -- 46,646 41,619 -- 41,619
--------- --------- -------- ---------
Total non-interest income 3,374 -- 3,374 2,332 -- 2,332
--------- --------- -------- ---------
Non-interest expense:
General and administrative:
Compensation and benefits 12,366 (2,918)(2) 9,448 11,502 (2.147)(2) 9,355
Other general and administrative 11,506 -- 11,506 11,340 -- 11,340
--------- -------- -------- -------- -------- ---------
Total general and administrative 23,872 (2,918) 20,954 22,842 (2,147) 20,695
Real estate operations, net 176 -- 176 (2,251) -- (2,251)
(Recovery of) provision for real
estate losses (202) -- (202) 704 -- 704
Amortization of excess of cost
over fair value of net assets
acquired 2,171 (2,171)(3) -- 2,232 (2,232)(3) --
SAIF recapitalization assessment 28,545 -- 28,545 -- -- --
--------- -------- -------- -------- -------- ---------
Total non-interest expense 54,562 (5,089) 49,473 23,527 (4,379) 19,148
--------- -------- -------- -------- -------- ---------
Income (loss) before income tax expense (4,542) 5,089 547 20,424 4,379 24,803
Income tax (benefit) expense (1,320) -- (1,320) 9,035 -- 9,035
--------- -------- -------- -------- -------- ---------
NET (LOSS) INCOME $ (3,222) $ 5,089 $ 1,867 $ 11,389 $ 4,379 $ 15,768
========= ======== ========= ========= ======== =========
Primary (loss) earnings per share $ (0.17) $ 0.27 $ 0.10 $ 0.52 $ 0.20 $ 0.72
========= ======== ========= ========= ======== =========
Fully diluted (loss) earnings
per share $ (0.17) $ 0.27 $ 0.10 $ 0.52 $ 0.20 $ 0.72
========= ======== ========= ========= ======== =========
Primary average common
stock and common
stock equivalents 19,446,410(4) 21,842,792
Fully diluted average common
stock and common
stock equivalents 19,446,410(4) 21,976,608
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (5) $ 13,652 $ 5,089 $ 18,741
======= ======== =========
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes (6) $ 0.65 $ 0.24 $ 0.89
======== ======== =========
</TABLE>
(1) As adjusted for two-for-one stock split on June 3, 1996.
(2) Non-cash amortization expense relating to allocation of ESOP stock and
earned portion of RRP stock, and related tax benefit.
(3) Non-cash amortization expense of excess of cost over fair value of net
assets acquired (goodwill).
(4) Common stock equivalents are excluded for loss periods as they are
antidilutive.
(5) Excluding SAIF recapitalization assessment of $16,874,000, net of taxes.
(6) Based on common stock and common stock equivalents of 20,985,571, which
includes dilutive effect of equivalents.
27
<PAGE> 29
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 (1)
------------------------------------- ---------------------------------------
REPORTED CASH REPORT CASH
EARNINGS ADJUSTMENTS EARNINGS EARNINGS ADJUSTMENTS EARNINGS
--------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $ 363,792 -- $ 363,792 $ 319,135 -- $ 319,135
Total interest expense 224,630 -- 224,630 192,449 -- 192,449
--------- --------- --------- ---------
Net interest income 139,162 -- 139,162 126,686 -- 126,686
Provision for loan losses 3,522 -- 3,522 2,177 -- 2,177
--------- --------- --------- ---------
Net interest income after
provision for loan losses 135,640 -- 135,640 124,509 -- 124,509
--------- --------- --------- ---------
Total non-interest income 10,371 -- 10,371 6,943 -- 6,943
--------- --------- --------- ---------
Non-interest expense:
General and administrative:
Compensation and benefits 37,273 (8,324)(2) 28,949 34,094 (6,026)(2) 28,068
Other general and administrative 35,200 -- 35,200 33,387 -- 33,387
--------- -------- --------- -------- -------- ---------
Total general and administrative 72,473 (8,324) 64,149 67,481 (6,026) 61,455
Real estate operations, net (2,740) -- (2,740) (2,765) -- (2,765)
(Recovery of) provision for real
estate losses (1,534) -- (1,534) (33) -- (33)
Amortization of excess of cost
over fair value of net assets
acquired 6,513 (6,513)(3) -- 6,075 (6,075)(3) --
SAIF recapitalization assessment 28,545 -- 28,545 -- -- --
--------- -------- --------- -------- -------- ---------
Total non-interest expense 103,257 (14,837) 88,420 70,758 (12,101) 58,657
Income before income tax expense 42,754 14,837 57,591 60,694 12,101 72,795
Income tax expense 19,548 -- 19,548 26,622 -- 26,622
--------- -------- --------- -------- -------- ---------
NET INCOME $ 23,206 $ 14,837 $ 38,043 $ 34,072 $ 12,101 $ 46,173
========= ======== ========= ========= ======== =========
Primary earnings per share $ 1.12 $ 0.72 $ 1.84 $ 1.54 $ 0.55 $ 2.09
========= ======== ========= ========= ======== =========
Fully diluted earnings
per share $ 1.12 $ 0.71 $ 1.83 $ 1.51 $ 0.54 $ 2.05
========= ======== ========= ========= ======== =========
Primary average common
stock and common
stock equivalents 20,713,185(4) 22,137,438
Fully diluted average common
stock and common
stock equivalents 20,746,062(4) 22,511,870
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME, excluding SAIF
recapitalization assessment (5) $ 40,080 $ 14,837 $ 54,917
========= ======== =========
Earnings per share excluding SAIF
recapitalization assessment,
net of taxes (6) $ 1.89 $ 0.70 $ 2.59
========= ======== =========
</TABLE>
(1) As adjusted for two-for-one stock split on June 3, 1996.
(2) Non-cash amortization expense relating to allocation of ESOP stock and
earned portion of RRP stock, and related tax benefit.
(3) Non-cash amortization expense of excess of cost over fair value of net
assets acquired (goodwill).
(4) Common stock equivalents are excluded for loss periods as they are
antidilutive.
(5) Excluding SAIF recapitalization assessment of $16,874,000, net of taxes.
(6) Based on common stock and common stock equivalents of 21,226,238, which
includes dilutive effect of equivalents.
28
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Association has brought an action against the United States in the
United States Court of Federal Claims arising out of the acquisition of Suburbia
Federal Savings and Loan Association by the Association's
predecessor-in-interest, Fidelity New York F.S.B. Astoria Federal Savings and
Loan Association v. United States, No. 95-468C. Fidelity and the government (the
Federal Home Loan Bank Board and the Federal Savings and Loan Insurance
Corporation ("FSLIC")) agreed, in 1984, that supervisory goodwill created by the
acquisition and cash contributed by the FSLIC as part of the acquisition would
be treated as regulatory capital for all regulatory purposes. The government
breached that agreement following passage of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989. The action is one of many "goodwill" or
"Winstar" cases now pending in the United States Court of Federal Claims.
The Association's lawsuit has been reassigned, as have all other
"goodwill" cases, to Chief Judge Smith. On September 18, 1996, Chief Judge Smith
entered an Omnibus Case Management Order which applies to all but two of the
"Winstar" cases, including the Association's. The order provides, among other
things, for the establishment of a Plaintiffs' Coordinating Committee and a
Defendant's Coordinating Committee. The Committees have the authority to bind
all plaintiffs and the defendant, respectively, with respect to procedural
matters concerning pleadings, motions, discovery, trials and related scheduling.
The Committees were also charged with the responsibility to develop a Master
Litigation Plan which is to include a comprehensive discovery plan and will
address issues such as the resolution of common issues, dispositive motions, and
trials. The order also provided for the exchange of "core documents" and
document indexes by the parties. The order provides that following the exchange
of "core documents," any plaintiff may file a motion for partial summary
judgment related to two liability related issues: (1) whether a contract existed
in each case, and (2) whether the government acted inconsistently with such
contract.
In the Association's case, the parties have exchanged "core documents"
and "document indexes." In addition, on November 6, 1996, the Association filed
a motion for partial summary judgment with the Court. The government, pursuant
to the Omnibus Case Management Order, has 60 days from filing to respond to this
motion. The government will also have 120 days from filing to set forth any
defenses of any kind, counterclaims, setoffs, pleas in fraud, or similar
defenses of which it knows or has reason to know that relate to the two issues
asserted in the Association's partial summary judgment motion. In the Omnibus
Case Management Order, the Court also established a group of thirteen "priority"
cases, of which the Association's is not included, which could commence trials
four months following completion of trials in the cases of Glendale Federal
Bank, FSB v. United States, No. 90-772C and Statesman Holding Corp., et al. v.
United States, No. 90-773C.
Management intends to pursue its action against the United States
vigorously.
No other material events occurred with respect to legal proceedings
during the quarter ended September 30, 1996, not previously reported.
ITEM 5. OTHER INFORMATION
Effective July 17, 1996, the Board of Directors of the Company
appointed Ralph F. Palleschi to serve as a director of both the Company and the
Association. Mr. Palleschi's term as a director of the Company will expire at
the annual meeting of shareholders to be held following the close of the
Company's 1998 fiscal year. Effective September 18, 1996, Harold B. Vicory
retired from the Board of Directors of both the Company and the Association. On
October 16, 1996, the Company reduced the size of its Board of Directors to
nine.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11. Statement Re: Computation of Per Share Earnings
29
<PAGE> 31
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 17, 1996, the Company filed with the Securities and
Exchange Commission a current report on Form 8-K, which describes the
Company's adoption of a Shareholder Rights Plan and the Company's
declaration of a dividend of one preferred share purchase right
("Right") for each outstanding share of common stock.
30
<PAGE> 32
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, 1996 By: /s/ Monte N. Redman
---------------------- --------------------------------------
Monte N. Redman
Senior Vice President and Chief
Financial Officer
Dated: November 12, 1996
----------------------
By: /s/ Frank E. Fusco
--------------------------------------
Frank E. Fusco
First Vice President, Chief Accounting
Officer and Controller
31
<PAGE> 33
Exhibit Index
Exhibit No. Identification of Exhibit
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
32
<PAGE> 1
(a) EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
-------------------
(In Thousands
Except Per Share Data)
<S> <C>
1. Net Income $ 23,206
========
2. Weighted average common
shares outstanding 21,864
3. ESOP shares not committed to be released (2,093)
4. RRP shares purchased but unallocated (33)
5. Common stock equivalents due to dilutive
effect of stock options 975
--------
6. Total weighted average common shares
and equivalents outstanding 20,713
========
7. Primary earnings per share: $ 1.12
========
8. Total weighted average common shares and
equivalents outstanding 20,713
9. Additional dilutive common stock equivalents due to
effect of stock options 33
--------
10. Total outstanding shares for fully diluted earnings
per share computation 20,746
========
11. Fully diluted earnings per share: $ 1.12
========
</TABLE>
33
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1996
(UNAUDITED) AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,780
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 44,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,363,287
<INVESTMENTS-CARRYING> 1,978,375
<INVESTMENTS-MARKET> 1,946,806
<LOANS> 2,562,637
<ALLOWANCE> 14,024
<TOTAL-ASSETS> 7,266,185
<DEPOSITS> 4,521,148
<SHORT-TERM> 622,847
<LIABILITIES-OTHER> 75,396
<LONG-TERM> 1,480,550
0
0
<COMMON> 264
<OTHER-SE> 565,980
<TOTAL-LIABILITIES-AND-EQUITY> 7,266,185
<INTEREST-LOAN> 141,077
<INTEREST-INVEST> 222,715
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 363,792
<INTEREST-DEPOSIT> 142,459
<INTEREST-EXPENSE> 224,630
<INTEREST-INCOME-NET> 139,162
<LOAN-LOSSES> 3,522
<SECURITIES-GAINS> 1,331
<EXPENSE-OTHER> 107,531
<INCOME-PRETAX> 42,754
<INCOME-PRE-EXTRAORDINARY> 23,206
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,206
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 2.79
<LOANS-NON> 26,248
<LOANS-PAST> 5,874
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,854
<ALLOWANCE-OPEN> 13,495
<CHARGE-OFFS> 3,383
<RECOVERIES> 390
<ALLOWANCE-CLOSE> 14,024
<ALLOWANCE-DOMESTIC> 14,024
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
