<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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
(Address of principal executive offices) (Zip Code)
(516) 327-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, April 30, 1998
.01 Par Value 26,498,139
<PAGE> 2
PART 1 -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Item 1. Financial Statements.
<S> <C>
Consolidated Statements of Financial Condition at March 31, 1998 and 2
December 31, 1997.
Consolidated Statements of Income for the Three Months Ended 3
March 31, 1998 and March 31, 1997.
Consolidated Statement of Stockholders' Equity for the Three Months 4
Ended March 31, 1998.
Consolidated Statements of Cash Flows for the Three Months Ended 5
March 31, 1998 and March 31, 1997.
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds (Not Applicable)
Item 3. Defaults Upon Senior Securities (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)
Item 5. Other Information (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 29
(a) Exhibits
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
Signatures 30
</TABLE>
1
<PAGE> 3
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
Assets 1998 1997
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 24,535 $ 31,780
Federal funds sold and repurchase agreements 158,000 110,550
Mortgage-backed securities available-for-sale (at estimated fair value) 2,752,157 2,700,920
Other securities available-for-sale (at estimated fair value) 153,326 159,336
Mortgage-backed securities held-to-maturity (estimated fair value of
$1,367,914 and $1,369,738, respectively) 1,359,831 1,361,404
Other securities held-to-maturity (estimated fair value
of $1,231,315 and $1,255,097, respectively) 1,229,233 1,249,045
Federal Home Loan Bank of New York stock 60,050 60,050
Loans receivable:
Mortgage loans 4,592,674 4,291,720
Consumer and other loans 52,053 53,286
------------ ------------
4,644,727 4,345,006
Less allowance for loan losses 39,708 40,039
------------ ------------
Loans receivable, net 4,605,019 4,304,967
Real estate owned and investments in real estate, net 16,663 16,264
Accrued interest receivable 61,990 60,318
Premises and equipment, net 113,946 113,727
Goodwill 253,371 258,159
Other assets 107,488 101,873
------------ ------------
Total assets $ 10,895,609 $ 10,528,393
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings $ 1,709,700 $ 1,717,784
Money market 900,050 823,214
NOW 174,369 163,756
Certificates of deposit 3,421,524 3,516,164
------------ ------------
Total deposits 6,205,643 6,220,918
Reverse repurchase agreements 3,323,318 2,882,765
Federal Home Loan Bank of New York advances 320,086 390,016
Mortgage escrow funds 61,292 45,217
Accrued expenses and other liabilities 68,421 90,053
------------ ------------
Total liabilities 9,978,760 9,628,969
------------ ------------
Stockholders' Equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (325,000 shares authorized and -0- issued and outstanding) -- --
Series B (2,000,000 shares authorized, issued and outstanding) 2,000 2,000
Common stock, $.01 par value; (70,000,000 shares authorized; 26,451,252
issued; 26,366,224 and 26,197,768 outstanding, respectively) 265 265
Additional paid-in capital 504,133 497,284
Retained earnings - substantially restricted 431,844 430,549
Treasury stock (85,028 and 253,484 shares, at cost, respectively) (4,807) (13,867)
Accumulated other comprehensive income:
Net unrealized gains on securities, net of taxes 6,574 7,918
Unallocated common stock held by ESOP (20,679) (21,488)
Unearned common stock held by RRPs (2,481) (3,237)
------------ ------------
Total stockholders' equity 916,849 899,424
------------ ------------
Total liabilities and stockholders' equity $ 10,895,609 $ 10,528,393
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
Interest income:
<S> <C> <C>
Mortgage loans $ 84,792 $ 52,554
Consumer and other loans 1,228 1,446
Mortgage-backed securities 69,858 58,925
Other securities 27,558 15,280
Federal funds sold and repurchase agreements 1,494 868
----------- -----------
Total interest income 184,930 129,073
----------- -----------
Interest expense:
Deposits 63,995 47,559
Borrowed funds 51,075 32,058
----------- -----------
Total interest expense 115,070 79,617
----------- -----------
Net interest income 69,860 49,456
Provision for loan losses 300 500
----------- -----------
Net interest income after provision for loan losses 69,560 48,956
----------- -----------
Non-interest income:
Customer service and loan fees 3,777 2,615
Net gain on sales of securities and loans 2,103 378
Other 1,509 478
----------- -----------
Total non-interest income 7,389 3,471
----------- -----------
Non-interest expense:
General and administrative:
Compensation and benefits 17,909 13,164
Occupancy, equipment and systems 9,757 5,998
Federal deposit insurance premiums 776 810
Advertising 660 914
Other 4,267 2,873
----------- -----------
Total general and administrative 33,369 23,759
Real estate operations and provision for losses, net -- 176
Amortization of goodwill 4,788 2,110
----------- -----------
Total non-interest expense 38,157 26,045
----------- -----------
Income before income tax expense 38,792 26,382
Income tax expense 16,523 10,948
----------- -----------
Net income $ 22,269 $ 15,434
=========== ===========
Net income applicable to common shareholders - diluted $ 20,769 $ 15,434
=========== ===========
Basic earnings per common share (1) $ 0.84 $ 0.79
=========== ===========
Diluted earnings per common share (1) $ 0.80 $ 0.74
=========== ===========
Dividends per common share $ 0.20 $ 0.11
=========== ===========
Basic weighted average common shares (1) 24,636,539 19,417,530
Diluted weighted average common and common equivalent shares (1) 26,045,896 20,823,710
</TABLE>
(1) Prior year amounts have been restated as a result of the implementation
of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Preferred Common Paid-In Substantially
Total Stock Stock Capital Restricted
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 899,424 $2,000 $265 $ 497,284 $ 430,549
Net income 22,269 -- -- -- 22,269
Other comprehensive income, net of tax:
Net unrealized loss on securities, net
of reclassification adjustment (1,344) -- -- -- --
Common stock repurchased
(181,192 shares) (9,739) -- -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (6,606) -- -- (326) (6,280)
Exercise of stock options and
related tax benefit 7,468 -- -- 3,363 (14,694)
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit 5,377 -- -- 3,812 --
--------- ------ ---- --------- ---------
Balance at March 31, 1998 $ 916,849 $2,000 $265 $ 504,133 $ 431,844
========= ====== ==== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Unallocated Unearned
Other Common Common
Treasury Comprehensive Stock Held Stock Held
Stock Income by ESOP by RRPs
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $(13,867) $ 7,918 $(21,488) $(3,237)
Net income -- -- -- --
Other comprehensive income, net of tax:
Net unrealized loss on securities, net
of reclassification adjustment -- (1,344) -- --
Common stock repurchased
(181,192 shares) (9,739) -- -- --
Dividends on common and preferred stock
and amortization of purchase premium -- -- -- --
Exercise of stock options and
related tax benefit 18,799 -- -- --
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit -- -- 809 756
-------- ------- -------- -------
Balance at March 31, 1998 $ (4,807) $ 6,574 $(20,679) $(2,481)
======== ======= ======== =======
</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 THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,269 $ 15,434
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of net deferred loan origination fees,
discounts and premiums (7,673) (1,075)
Provision for loan and real estate losses 1,039 564
Depreciation and amortization 1,575 1,627
Net gain on sales of securities and loans (2,103) (378)
Amortization of goodwill 4,788 2,110
Allocated and earned shares from ESOP and RRPs 4,339 3,052
Increase in accrued interest receivable (1,672) (615)
Increase in mortgage escrow funds 16,075 10,329
(Increase)decrease in other assets (4,174) 1,696
(Decrease) increase in accrued expenses and other liabilities (17,231) 3,636
--------- ---------
Net cash provided by operating activities 17,232 36,380
--------- ---------
Cash flows from investing activities:
Loan originations (490,181) (182,423)
Loan purchases through third parties (54,226) (35,967)
Principal repayments on loans 227,437 86,551
Principal payments on mortgage-backed securities held-to-maturity 74,492 17,860
Principal payments on mortgage-backed securities available-for-sale 183,712 87,086
Purchases of mortgage-backed securities held-to-maturity (72,651) (19,988)
Purchases of mortgage-backed securities available-for-sale (237,256) (282,190)
Purchases of other securities held-to-maturity (213,456) (190,893)
Purchase of other securities available-for-sale (883) (294)
Proceeds from maturities of other securities held-to-maturity 242,230 70,213
Proceeds from maturities of other securities available-for-sale 299 45,001
Proceeds from sales of securities available-for-sale and loans 17,642 3,110
Proceeds from sales of real estate owned and investments
in real estate 4,325 2,725
Purchases of premises and equipment, net of proceeds from sale (1,794) (1,636)
--------- ---------
Net cash used in investing activities (320,310) (400,845)
--------- ---------
Cash flows from financing activities:
Net decrease in deposits (15,030) (18,988)
Net increase in reverse repurchase agreements 440,553 450,000
Net decrease in FHLB of New York advances (70,000) (21,000)
Costs to repurchase common stock (9,739) (16,184)
Cash dividends paid to stockholders (6,606) (2,276)
Cash received for options exercised, net of loss on issuance
of treasury stock 4,105 2,182
--------- ---------
Net cash provided by financing activities 343,283 393,734
--------- ---------
Net increase in cash and cash equivalents 40,205 29,269
Cash and cash equivalents at beginning of period 142,330 74,923
--------- ---------
Cash and cash equivalents at end of period $ 182,535 $ 104,192
========= =========
Supplemental disclosures:
Cash paid during the year:
Interest $ 111,678 $ 77,409
========= =========
Income taxes $ 18,396 $ 1,189
========= =========
Additions to real estate owned $ 5,678 $ 3,141
========= =========
</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 March 31, 1998 and December 31, 1997 and its results of
operations and cash flows for the three months ended March 31, 1998 and 1997
and stockholders' equity for the three months ended March 31, 1998. In
preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities of
the consolidated statements of financial condition as of March 31, 1998 and
December 31, 1997 and amounts of revenues and expenses of the results of
operations for the three month periods ended March 31, 1998 and 1997. The
results of operations for the three months ended March 31, 1998 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. Certain
reclassifications have been made to prior year amounts to conform to current
year presentation.
These consolidated financial statements should be read in conjunction
with the December 31, 1997 audited consolidated financial statements and
notes thereto of the Company.
2. EARNINGS PER SHARE ("EPS")
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
The Company has applied the provisions of SFAS No. 128 in its calculation of
EPS, and has restated all prior-period EPS data presented. SFAS No. 128
simplified the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, and replaced the presentation of primary EPS
and fully diluted EPS with the presentation of basic EPS and diluted EPS,
respectively. Upon adoption of SFAS No. 128, the change from primary EPS to
basic EPS and from fully diluted EPS to diluted EPS resulted in modest increases
in both EPS presentations.
Basic EPS is computed by dividing net income less preferred dividends
by the weighted-average common shares outstanding during the year. The
weighted-average common shares outstanding includes the average number of shares
of common stock outstanding adjusted for the weighted-average number of
unallocated shares held by the Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan (the "ESOP") and the Recognition and Retention
Plans ("RRPs").
Diluted EPS is computed by dividing net income less preferred
dividends by the weighted-average common shares and common equivalent shares
outstanding during the year. For the diluted EPS calculation, the
weighted-average common shares and common equivalent shares outstanding include
the average number of shares of common stock outstanding adjusted for the
weighted-average number of unallocated shares held by the ESOP and the RRPs and
the dilutive effect of unexercised stock options using the treasury stock
method. When applying the treasury stock method, the Company's average stock
price is utilized, and the Company adds to the proceeds, the tax benefit that
would have been credited to additional paid-in capital assuming exercise of
non-qualified stock options.
The following table is a reconciliation of basic and diluted EPS as
required under SFAS No. 128:
6
<PAGE> 8
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------------
1998 1997
------------------------------------------ --------------------------------------
(In Thousands, Average Per Share Average Per Share
Except Share Data) Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 22,269 $ 15,434
Less: preferred stock dividends 1,500 --
----------- ----------
Basic EPS:
Income available to common
stockholders 20,769 24,636,539 $0.84 15,434 19,417,530 $0.79
===== =====
Effect of dilutive unexercised
stock options 1,409,357(1) 1,406,180
----------- -----------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $ 20,769 26,045,896 $0.80 $ 15,434 20,823,710 $0.74
=========== =========== ===== =========== =========== =====
</TABLE>
(1) Options to purchase 4,000 shares of common stock at $56.63 per
share, 258,000 shares of common stock at $58.13 per share and
15,000 shares of common stock at $59.75 per share were
outstanding as of March 31, 1998 but were not included in the
computation of diluted EPS because the options' exercise
prices were greater than the average market prices of the
common shares.
3. CASH EQUIVALENTS
For the purpose of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold with original maturities of three
months or less.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 requires that all items that are
components of "comprehensive income" be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income is defined as "the change in equity [net assets] of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources." It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The Company has adopted the provisions of SFAS No. 130 during the first
quarter of 1998 and as such was required to (a) classify items of other
comprehensive income by their nature in a financial statement; (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section in the statement
of financial condition and (c) reclassify prior periods presented. As the
requirements of SFAS No. 130 are disclosure-related, its implementation had no
impact on the Company's financial condition or results of operations.
7
<PAGE> 9
Comprehensive income for the three months ended March 31, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $22,269 $15,434
Net unrealized losses on securities, net of
reclassification adjustment(a) (1,344) (9,627)
------- -------
Comprehensive income $20,925 $ 5,807
------- -------
(a) Disclosure of reclassification adjustment:
Net unrealized losses arising during period $ (175) $(9,406)
Less: reclassification adjustment for net gains
included in net income (1,169) (221)
------- -------
Net unrealized losses on securities $(1,344) $(9,627)
------- -------
</TABLE>
5. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires that enterprises report certain
financial and descriptive information about operating segments in complete sets
of financial statements of the Company and in condensed financial statements of
interim periods issued to stockholders. SFAS No. 131 also requires that
enterprises report certain information about their products and services,
geographic areas in which they operate, and their major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997 but does not
have to be applied to interim financial statements in the initial year of
application. As the requirements of SFAS No. 131 are disclosure-related, its
implementation will have no impact on the Company's financial condition or
results of operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No.132 revises employers'
disclosures about pension and other postretirement benefit plans, but does not
change the measurement or recognition of those plans. SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are not considered
useful. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997 and requires restatement of prior periods presented. As the requirements
of SFAS No. 132 are disclosure related, its implementation will have no impact
on the Company's financial condition or results of operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q may contain 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, but are not limited to general economic
conditions, changes in interest rates, deposit flows, loan demand, real estate
values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting each
Company's operations, pricing, products and services.
8
<PAGE> 10
GENERAL
The Company was incorporated on June 14, 1993, and is the holding company
for the Association. The Company is headquartered in Lake Success, New York and
its principal business currently consists of the operation of its wholly-owned
subsidiary, the Association. The Association's primary business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments and borrowed funds,
primarily in one-to-four family residential mortgage loans, mortgage-backed
securities and, to a lesser extent, commercial real estate loans, multi-family
mortgage loans and consumer loans. In addition, the Association invests in
securities issued by the U.S. Government and federal agencies and other
securities.
The Company's results of operations are dependent primarily on its net
interest income, which is the difference between the interest earned on its
assets, primarily its loan and securities portfolios, and its cost of funds,
which consists of the interest paid on its deposits and borrowings. The
Company's net income also is affected by its provision for loan losses as well
as non-interest income, general and administrative expense, other non-interest
expense, and income tax expense. General and administrative expense consists of
compensation and benefits, occupancy, equipment and systems expense, federal
deposit insurance premium, advertising and other operating expenses. Other
non-interest expense generally consists of real estate operations and provision
for real estate losses, net and amortization of goodwill. The earnings of the
Company are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates and U.S. Treasury
yield curves, government policies and actions of regulatory authorities.
MERGERS AND ACQUISITIONs
The Company continues to consider merger and acquisition activity part of
its long-term growth strategy. Following the close of business on September 30,
1997, the Company completed the acquisition of The Greater New York Savings Bank
("The Greater"), by merger of The Greater with and into the Association, in a
transaction ("The Greater Acquisition"), that was accounted for as a purchase.
The total consideration paid was $399.5 million, which included $38.2 million of
transaction costs. Goodwill generated in the transaction was $169.3 million,
which is being amortized on a straight line basis over 15 years.
On April 2, 1998, the Company entered into a definitive agreement and plan
of merger ("the Merger Agreement") pursuant to which Long Island Bancorp, Inc.
("LIB"), the holding company of The Long Island Savings Bank, FSB ("LISB"), will
merge with and into the Company. LISB will merge with and into the Association
pursuant to a related plan of bank merger. At March 31, 1998, LISB, a federally
chartered savings bank, had total assets of $6.30 billion. The Merger Agreement
is subject to approval of the shareholders of both the Company and LIB, approval
of the Office of Thrift Supervision ("OTS") and the satisfaction of certain
other conditions. Under the terms of the Merger Agreement, holders of LIB common
stock, par value $0.01 per share ("LIB Common Stock"), will receive 1.15 shares
of the Company's common stock ("Common Stock") for each share of LIB Common
Stock. The total transaction value is estimated to be $1.80 billion. The
transaction is expected to be accounted for as a pooling of interests, and is
expected to close at the end of the third quarter of 1998. See Item 6 -
Exhibits and Reports on Form 8-K.
INFORMATION SERVICES YEAR 2000 PROJECT
The Year 2000 Problem centers on the inability of some computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers may recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Company's direct control and with whom the Company electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) are likely to be affected. Furthermore, if computer systems
are not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many calculations which
rely on the date field information, such as interest, payment or due dates and
other operating functions, will generate results which could be significantly
misstated, and the Company could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
addition, under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in an adverse impact on
the Company's products, services and competitive condition.
9
<PAGE> 11
The Company is developing and implementing a Year 2000 Project Plan to
address the Year 2000 Problem and its effects on the Company. The Plan includes
five components which address issues involving awareness, assessment,
renovation, validation and implementation. As part of the Plan, the Company has
initiated formal communications with all of its significant suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Problem. The Company presently believes
that with modifications to existing software and conversions to new software,
the Year 2000 Problem will be mitigated without causing a material adverse
impact on the operations of the Company. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Problem
could have an adverse impact on the operations of the Company. At this time,
management does not believe that the impact and any resulting costs related to
the Company's Year 2000 Problem will be material.
Monitoring and managing the Year 2000 project will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Both direct and indirect costs of addressing the Year 2000 Problem will be
charged to earnings as incurred. Such costs have not been material to date. The
Company does not believe that such costs will have a material effect on results
of operations, although there can be no assurance that such costs would not
become material in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is cash provided by investing
activities and includes principal and interest payments on loans,
mortgage-backed securities and other securities. During the first quarter of
1998 and 1997, principal payments on loans and mortgage-backed securities and
proceeds from maturities of other securities totaled $728.2 million and $306.7
million, respectively. The increase in principal payments received is primarily
a result of significant acceleration of prepayments of mortgage loans and
mortgage-backed securities. The Company's other sources of funds are provided by
operating and financing activities. Net cash provided from operating activities
during the first quarter of 1998 and 1997 totaled $17.2 million and $36.4
million, respectively, of which $22.3 million and $15.4 million, respectively,
represented net income of the Company. Net cash provided by financing activities
during the first quarter of 1998 and 1997 totaled $343.3 million and $393.7
million, respectively, primarily due to net increases in borrowings during the
first quarter of 1998 and 1997 totaling $370.6 million and $429.0 million,
respectively. The Company's primary uses of funds in its investing activities
are for the purchase and origination of loans and the purchase of
mortgage-backed securities and other securities. During the first quarter of
1998 and 1997, the Company's purchases and originations of loans totaled $544.4
million and $218.4 million, respectively, and purchases of mortgage-backed
securities and other securities totaled $524.2 million and $493.4 million,
respectively.
Prior to December 31, 1997 the Association was 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 OTS. During the fourth quarter of 1997, the
OTS revised its liquidity requirements, which reduced the minimum required
liquidity from 5.0% to 4.0% and eliminated the 1.0% short-term liquidity
requirement. The Association's liquidity ratios were 4.15% and 4.73% at March
31, 1998 and December 31, 1997, respectively. The levels of the Association's
liquid assets are dependent on the Association's operating, investing and
financing activities during any given period. In the normal course of its
business, the Association routinely enters into various commitments, primarily
relating to the origination and purchase of loans, purchase of securities and
the leasing of certain office facilities. The Association anticipates that it
will have sufficient funds available to meet its current commitments in the
normal course of its business.
Stockholders' equity totaled $916.8 million at March 31, 1998, compared to
$899.4 million at December 31, 1997, reflecting the Company's earnings for the
first quarter of 1998, the amortization of the unallocated portion of shares
held by the ESOP and the unearned portion of shares held by the RRPs and related
tax benefit, the effect of the treasury stock purchases, the effect of exercises
of stock options and related tax benefit, dividends paid on common and preferred
stock and the change in the net unrealized gains on securities.
10
<PAGE> 12
Tangible stockholders' equity (stockholders' equity less goodwill) totaled
$663.5 million at March 31, 1998, compared to $641.3 million at December 31,
1997. This increase reflects the change in the Company's stockholders' equity
noted above, plus the reduction in the balance of goodwill. Tangible equity is a
critical measure of a company's ability to repurchase stock, pay dividends and
continue to grow. The Association is subject to various capital requirements
which affect its classification for safety and soundness purposes, as well as
for deposit insurance purposes. These requirements utilize tangible equity as a
base component, not equity as defined by generally accepted accounting
principles ("GAAP"). Although reported earnings and return on equity are
traditional measures of a company's performance, management believes that the
growth in tangible equity, or "cash earnings" is also a significant measure of a
company's performance. Cash earnings include reported earnings plus the non-cash
charges for goodwill amortization and amortization relating to certain employee
stock plans and related tax benefit. These items have either been previously
charged to equity, as in the case of ESOP and RRP charges, through contra-equity
accounts, or do not affect tangible equity, such as the market appreciation of
allocated ESOP shares, for which the operating charge is offset by a credit to
additional paid-in capital, and goodwill amortization for which the related
intangible asset has already been deducted in the calculation of tangible
equity. Management believes that cash earnings and cash returns on average
tangible equity reflect the Company's ability to generate tangible capital that
can be leveraged for future growth. See "Cash Earnings."
On November 27, 1996, the Board of Directors of the Company approved the
Company's fifth stock repurchase plan authorizing the purchase, at the
discretion of management, of up to 2,500,000 shares of outstanding Common Stock,
over a two year period. During the first quarter of 1998, the Company
repurchased 181,192 shares of Common Stock for an aggregate cost of $9.7
million, bringing the total number of Common Stock purchased under this plan to
1,638,189 shares, at an aggregate cost of $74.1 million. At March 31, 1998, the
Company's cumulative total of treasury shares (net of reissues for stock options
exercised) was 85,028 at an aggregate cost of $4.8 million. In connection with
the acquisition of LIB, the fifth stock repurchase plan has been terminated.
On March 2, 1998, the Company paid a quarterly cash dividend equal to $0.20
per share on shares of Common Stock outstanding as of the close of business on
February 13, 1998, aggregating $5.1 million. On April 15, 1998, the Company
declared a quarterly cash dividend of $0.20 per share payable on June 1, 1998 to
common stockholders of record as of the close of business on May 15, 1998. On
January 15, 1998 and April 14, 1998, the Company paid quarterly cash dividends
equal to $0.75 per share on shares of its 12% Noncumulative Perpetual Preferred
Stock, Series B, aggregating $1.5 million per quarter.
At the time of conversion from mutual to stock form of ownership, the
Association was required to establish a liquidation account equal to its
retained earnings as of June 30, 1993. As part of the acquisitions of Fidelity
New York, F.S.B. ("Fidelity") after the close of business on January 31, 1995
and The Greater after the close of business on September 30, 1997, the
Association established similar liquidation accounts equal to the remaining
liquidation account balances previously maintained by Fidelity and The Greater.
These liquidation accounts will be reduced to the extent that eligible account
holders reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Association, each eligible account holder will be entitled to
receive a distribution from the liquidation accounts. 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 stockholders'
equity to be reduced below the amount required for the liquidation accounts or
applicable regulatory capital requirements. As of March 31, 1998, the
Association's total capital exceeded the amount of the combined liquidation
accounts, and also exceeded all of its regulatory capital requirements with
tangible and core (leverage) ratios of 5.42% and a risk-based capital ratio of
14.90%. The respective minimum regulatory requirements were 1.50%, 3.00% and
8.00%.
INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, the Company's primary component of market risk
is interest rate volatility. The Company's net interest income, the primary
component of its net income, is subject to substantial risk due to changes in
interest rates or changes in market yield curves, particularly if there is a
substantial variation in the timing between the repricing of its assets and the
liabilities which fund them. The Company seeks to manage this risk by monitoring
and controlling the variation in repricing intervals between its assets and
liabilities. To a lesser extent, the Company also monitors its interest rate
sensitivity by analyzing the estimated changes in market value of its assets and
liabilities assuming various interest rate scenarios.
11
<PAGE> 13
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, either by
contractual terms or based upon certain assumptions made by management, within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets anticipated to mature or reprice
within a specific time period and the amount of interest-bearing liabilities
anticipated to mature or reprice within that same time period.
At March 31, 1998, the Company's interest-bearing liabilities maturing or
repricing within one year exceeded net interest-earning assets maturing or
repricing within the same time period by $150.2 million, representing a negative
cumulative one-year gap of 1.38% of total assets. This compares to
interest-bearing liabilities maturing or repricing within one year exceeding net
interest-earning assets maturing or repricing within the same time period by
$286.2 million, representing a negative cumulative one-year gap of 2.72% of
total assets at December 31, 1997. The Company's March 31, 1998 and December 31,
1997 cumulative one-year gap positions reflect the classification of
available-for-sale securities within repricing periods based on their
contractual maturities adjusted for estimated prepayments, if any. If those
securities at March 31, 1998 were classified within the one-year maturing or
repricing category, net interest-earning assets maturing or repricing within one
year would have exceeded interest-bearing liabilities maturing or repricing
within the same time period by $1.56 billion, representing a positive cumulative
one-year gap of 14.31% of total assets. Using this method at December 31, 1997,
net interest-earning assets maturing or repricing within one year would have
exceeded interest-bearing liabilities maturing or repricing within the same time
period by $1.21 billion, representing a positive cumulative one-year gap of
11.48% of total assets.
The following table (the "Gap Table") sets forth the amount of
interest-earning assets and interest-bearing liabilities outstanding at March
31, 1998, that 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. The Gap 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. Callable features of certain assets and liabilities, in
addition to the foregoing, may cause actual experience to vary from that
indicated. Included in the Gap Table are $1.14 billion of callable
mortgage-backed securities and other securities, classified according to their
maturity dates, which are primarily within the more than five years maturity
category. Of such securities, $287.4 million are callable within one year. Also
included in the Gap Table are $3.16 billion of callable borrowings, classified
according to their maturity dates, which are primarily within the more than one
year to three years category and the more than three years to five years
category for borrowings. Of such borrowings, $1.48 billion are callable within
one year.
12
<PAGE> 14
<TABLE>
<CAPTION>
At March 31, 1998
----------------------------------------------------------------------------------
More Than More Than
One Year Three Years
One Year to to More than
(Dollars in Thousands) or Less Three Years(1) Five Years(1) Five Years(1) Total
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Mortgage loans (2) $ 1,233,472 $ 1,184,983 $ 1,064,131 $ 1,046,710 $ 4,529,296
Consumer and other loans (2) 40,652 10,640 -- -- 51,292
Federal funds sold and
repurchase agreements 158,000 -- -- -- 158,000
Mortgage-backed and other securities
available-for-sale 1,195,603 387,790 258,119 1,063,971 2,905,483
Mortgage-backed and other securities
held-to-maturity 399,504 194,064 158,675 1,901,006 2,653,249
---------------------------------------------------------------------------------
Total interest-earning assets 3,027,231 1,777,477 1,480,925 4,011,687 10,297,320
Less:
Net unamortized purchase premiums
and deferred fees (3) 4,934 5,163 4,688 3,054 17,839
---------------------------------------------------------------------------------
Net interest-earning assets 3,032,165 1,782,640 1,485,613 4,014,741 10,315,159
---------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 205,164 393,231 341,940 769,365 1,709,700
NOW 17,629 17,629 17,629 35,259 88,146
Money manager 50,201 50,201 50,201 100,404 251,007
Money market 473,509 18,052 18,052 54,155 563,768
Certificates of deposit 2,047,540 983,705 390,279 -- 3,421,524
Borrowed funds 388,318 1,059,756 1,480,330 715,000 3,643,404
---------------------------------------------------------------------------------
Total interest-bearing liabilities $ 3,182,361 $ 2,522,574 $ 2,298,431 $ 1,674,183 $ 9,677,549
---------------------------------------------------------------------------------
Interest sensitivity gap $ (150,196) $ (739,934) $ (812,818) $ 2,340,558 $ 637,610
=================================================================================
Cumulative interest sensitivity gap $ (150,196) $ (890,130) $(1,702,948) $ 637,610
=================================================================================
Cumulative interest sensitivity gap
as a percentage of total assets (1.38)% (8.17)% (15.63)% 5.85%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 95.28% 84.40% 78.72% 106.59%
</TABLE>
(1) Includes $287.4 million of mortgage-backed and other securities and $1.48
billion of borrowings, which are callable within one year and at various
times thereafter, which are classified according to their contractual
maturity dates (primarily in the more than five years category for
mortgage-backed and other securities and the more than one year to three
years and the more than three years to five years categories for
borrowings).
(2) Mortgage, consumer and other loans exclude non-performing loans, but are not
reduced for the allowance for loan losses.
(3) Net unamortized purchase premiums and deferred fees are prorated.
13
<PAGE> 15
Certain shortcomings are inherent in the method of analysis presented in the
Gap 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 Gap 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, money market and money
manager accounts which, subject to certain regulatory exceptions not relevant
here, may be withdrawn at any time. The Company, based upon its historical
experience, assumes that while all customers in these account categories could
withdraw their funds on any given day, they will not do so, even if market
interest rates were to change. As a result, different assumptions may be used at
different points in time. The majority of the certificates of deposit projected
to mature within the next year have original terms of one and one-half to two
and one-half years. The Company has and currently offers competitive market
rates for products with these terms. Based upon historical experience, as well
as current and projected economic conditions, the Company believes it can
continue to offer competitive market rates and, therefore, while there is no
assurance of renewal, the Company believes a significant amount of the balance
will be renewed.
The Company's interest rate sensitivity is also monitored by management
through analysis of the change in the net portfolio value ("NPV"). NPV is
defined as the net present value of the expected future cash flows of an
entity's assets and liabilities and, therefore, hypothetically represents the
market value of an institution's net worth. Increases in the market value of
assets will increase the NPV whereas decreases in market value of assets will
decrease the NPV. Conversely, increases in the market value of liabilities will
decrease NPV whereas decreases in the market value of liabilities will increase
the NPV. The changes in market value of assets and liabilities due to changes in
interest rates reflect the interest sensitivity of those assets and liabilities
as their values are derived from the characteristics of the asset or liability
(i.e. fixed rate, adjustable rate, caps, floors) relative to the interest rate
environment. For example, in a rising interest rate environment the fair market
value of a fixed rate asset will decline, whereas the fair market value of an
adjustable rate asset, depending on its repricing characteristics, may not
decline. The NPV ratio under any interest rate scenario is defined as the NPV in
that scenario divided by the market value of assets in the same scenario. This
analysis, referred to in the following NPV table (the "NPV Table"), initially
measures percentage changes from the value of projected NPV in a given rate
scenario, and then measures interest rate sensitivity by the change in the NPV
ratio, over a range of interest rate change scenarios. The OTS also produces a
similar analysis using its own model based upon data submitted on the
Association's quarterly Thrift Financial Reports, the results of which may vary
from the Company's internal model primarily because of differences in
assumptions utilized between the Company's internal model and the OTS model,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. For purposes of the NPV Table, prepayment speeds and deposit decay rates
similar to those used in the Gap Table were used. In addition, the
available-for-sale securities were classified based on contractual maturities
and estimated prepayments.
The NPV Table is based on simulations which utilize institution specific
assumptions with regard to future cash flows, including customer options such as
loan prepayments, period and lifetime caps, puts and calls, and deposit
withdrawal estimates. The NPV Table uses discount rates derived from various
sources including, but not limited to, treasury yield curves, thrift retail
certificate of deposit curves, national and local secondary mortgage markets,
brokerage security pricing services and various alternative funding sources.
Specifically, for mortgage loans receivable, the discount rates used were based
on market rates for new loans of similar type and purpose, adjusted, when
necessary, for factors such as servicing cost, credit risk and term. The
discount rates used for certificates of deposit and borrowings were based on
rates which approximate the rates offered by the Company for deposits and
borrowings of similar remaining maturities. The NPV Table calculates the NPV at
a flat rate scenario by computing the present value of cash flows of interest
earning assets less the present value of interest bearing liabilities. Certain
assets, including fixed assets and real estate held for development, are assumed
to remain at book value (net of valuation allowance) regardless of interest rate
scenario. Other non-interest earning assets and non-interest bearing liabilities
such as deferred fees, unamortized premiums, goodwill and accrued expenses and
other liabilities are excluded from the NPV calculation.
14
<PAGE> 16
The following represents the Company's NPV table as of March 31, 1998.
<TABLE>
<CAPTION>
Changes in Net Portfolio Value ("NPV") Portfolio Value of Assets
Rates in -------------------------------------------- -------------------------
Basis Points Dollar Dollar Percentage NPV Percentage
(Rate Shock) Amount Change Change Ratio Change
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 $ 756,523 $ (276,320) (26.75)% 7.53% (21.73)%
+100 918,750 (114,093) (11.05) 8.84 (8.11)
-0- 1,032,843 -- -- 9.62 --
-100 1,171,688 138,845 13.44 10.61 10.29
-200 1,294,914 262,071 25.37 11.42 18.71
</TABLE>
As with the Gap Table, certain shortcomings are inherent in the methodology
used in the above interest rate risk measurements. Modeling of changes in NPV
requires the making of certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV Table assumes that the composition of the
Company's interest sensitive assets and liabilities existing at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in interest rates is immediate and is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. In addition, prepayment estimates and other
assumptions within the NPV Table are subjective in nature, involve uncertainties
and, therefore, cannot be determined with precision. Accordingly, although the
NPV measurements, in theory, may provide an indication of the Company's interest
rate risk exposure at a particular point in time, such measurements are not
intended to and do not provide for a precise forecast of the effect of changes
in market interest rates on the Company's net portfolio value and will differ
from actual results.
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
derivative agreements with third parties. The Company did not enter into any
such transactions during 1997 or the first quarter of 1998, except for interest
rate cap and floor agreements acquired from The Greater. Additionally, the
Company is not subject to foreign currency exchange or commodity price risk and
does not own any trading assets.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. The
following table sets forth certain information relating to the Company for the
quarters ended March 31, 1998 and 1997. Yields and costs are derived by dividing
income or expense by the average balance of related assets or liabilities,
respectively, for the periods shown, and annualized, except where noted
otherwise. This table should be analyzed in conjunction with management's
discussion of the comparison of operating results for the quarters ended March
31, 1998 and 1997.
15
<PAGE> 17
<TABLE>
<CAPTION>
Quarter Ended March 31,
--------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
(Annualized)
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans $4,416,110 $ 84,792 7.68% $2,650,825 $ 52,554 7.93%
Consumer and other loans 53,002 1,228 9.27 57,884 1,446 9.99
Mortgage-backed securities(1) 4,165,947 69,858 6.71 3,484,577 58,925 6.76
Other securities(1) 1,512,871 27,558 7.29 881,650 15,280 6.93
Federal funds sold and
repurchase agreements 108,244 1,494 5.52 66,054 868 5.26
---------- ---------- ---------- ----------
Total interest-earning assets 10,256,174 184,930 7.21 7,140,990 129,073 7.23
---------- ----------
Non-interest-earning assets 539,057 265,230
---------- ----------
Total assets $10,795,231 $7,406,220
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $1,703,668 10,861 2.55 $1,131,899 7,159 2.53
Certificates of deposit 3,440,417 45,745 5.32 2,732,022 36,591 5.36
NOW 81,835 256 1.25 70,873 221 1.25
Money manager 254,427 795 1.25 199,060 617 1.24
Money market 532,607 6,338 4.76 279,628 2,971 4.25
Borrowed funds 3,560,166 51,075 5.74 2,262,495 32,058 5.67
---------- ---------- ---------- ----------
Total interest-bearing liabilities 9,573,120 115,070 4.81 6,675,977 79,617 4.77
---------- ----------
Non-interest-bearing liabilities 313,597 143,168
---------- ----------
Total liabilities 9,886,717 6,819,145
Stockholders' equity 908,514 587,075
---------- ----------
Total liabilities and stockholders' equity $10,795,231 $7,406,220
========== ==========
Net interest income/net interest rate spread (2) $ 69,860 2.40% $ 49,456 2.46%
========== ========== ========== ===========
Net interest-earning assets/net interest margin (3) $ 683,054 2.72% $ 465,013 2.77%
========== ========== ========== ===========
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.
16
<PAGE> 18
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 March 31, 1998
Compared to
Quarter Ended March 31, 1997
------------------------------------
(In Thousands) Increase(Decrease)
------------------------------------
Volume Rate Net
-------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans ...................... $ 33,945 $ (1,707) $ 32,238
Consumer and other loans ............ (118) (100) (218)
Mortgage-backed securities .......... 11,374 (441) 10,933
Other securities .................... 11,448 830 12,278
Federal funds sold and repurchase
agreements ....................... 581 45 626
-------- -------- --------
Total ................................. 57,230 (1,373) 55,857
-------- -------- --------
Interest-bearing liabilities:
Savings ............................. 3,646 56 3,702
Certificates of deposit ............. 9,429 (275) 9,154
NOW ................................. 35 -- 35
Money manager ....................... 173 5 178
Money market ........................ 2,972 395 3,367
Borrowed funds ...................... 18,616 401 19,017
-------- -------- --------
Total ................................. 34,871 582 35,453
-------- -------- --------
Net change in net interest
income .............................. $ 22,359 $ (1,955) $ 20,404
======== ======== ========
</TABLE>
17
<PAGE> 19
ASSET QUALITY
One of the Company's key operating objectives has been and continues to
be to maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, the sale of problem assets or potential problem
assets, borrower workout arrangements and aggressive marketing of owned
properties, the Company has been proactive in addressing problem and
non-performing assets which, in turn, has helped to build the strength of the
Company's financial condition. Such strategies, as well as the Company's
concentration on one-to-four family mortgage lending and maintenance of sound
credit standards for new loan originations, have resulted in a reduction in
non-performing assets from December 31, 1992 through the third quarter of 1997.
Included in the balance of non-performing assets at December 31, 1997 are
mortgage loans, real estate owned and real estate investments totaling $11.8
million, acquired from The Greater which the Company intends to sell. During the
first quarter of 1998, $3.2 million of such properties were sold. The remaining
$8.6 million are expected to be sold by the end of 1998. Non-performing assets
decreased $257,000, from $59.1 million at December 31, 1997 to $58.8 million at
March 31, 1998. The following table shows a comparison of delinquent loans as of
March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
DELINQUENT LOANS
-----------------------------------------------------------------------------------------------
AT MARCH 31, 1998 AT DECEMBER 31, 1997
---------------------------------------------- -------------------------------------------
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
(Dollars in Thousands) LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family ........ 84 $ 3,770 365 $30,520 85 $ 3,741 365 $27,960
Multi-family .............. 3 518 20 3,329 2 480 20 7,089
Commercial real estate .... 2 918 12 7,555 -- -- 12 7,076
Consumer and other loans .. 30 139 38 761 30 299 35 696
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent loans .. 119 $ 5,345 435 $42,165 117 $ 4,520 432 $42,821
======= ======= ======= ======= ======= ======= ======= =======
Delinquent loans to total
loans ................... 0.12% 0.91% 0.10% 0.99%
</TABLE>
18
<PAGE> 20
The following table sets forth information regarding non-performing
assets at March 31, 1998 and December 31, 1997. In addition to the
non-performing loans, the Company has approximately $5.3 million and $4.5
million of potential problem loans at March 31, 1998 and December 31, 1997,
respectively. Such loans are 60-89 days delinquent as shown on page 18.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1998 (1) 1997 (1)
------- -------
<S> <C> <C>
Non-accrual delinquent mortgage loans (2) ............ $35,385 $37,397
Non-accrual delinquent consumer
and other loans .................................... 761 696
Mortgage loans delinquent 90 days or more (3) ........ 6,019 4,728
------- -------
Total non-performing loans ......................... 42,165 42,821
------- -------
Real estate owned, net (4) ........................... 7,854 6,091
Investments in real estate, net (5) .................. 8,809 10,173
------- -------
Total real estate owned and investments
in real estate, net .............................. 16,663 16,264
------- -------
Total non-performing assets (6) .................... $58,828 $59,085
======= =======
Allowance for loan losses to non-performing loans .... 94.17% 93.50%
Allowance for loan losses to total loans ............. 0.86% 0.93%
</TABLE>
- ----------
(1) If all non-accrual loans had been performing in accordance
with their original terms, the Company would have recorded
interest income of $802,000 for the quarter ended March 31,
1998 and $2.9 million for the year ended December 31, 1997.
Actual payments recorded to interest income totaled $185,000
for the quarter ended March 31, 1998 and $1.2 million for the
year ended December 31, 1997.
(2) 17.8% and 27.6% are secured by other than one-to-four family
properties at March 31, 1998 and December 31, 1997,
respectively.
(3) Loans delinquent 90 days or more and still accruing interest
consist solely of loans delinquent 90 days or more as to their
maturity date but not their interest payments, and are
primarily secured by multi-family and commercial properties.
(4) 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.
(5) Investments in real estate is recorded at the lower of cost or
fair value.
(6) Balance includes $8.6 million and $11.8 million at March 31,
1998 and December 31, 1997, respectively, of non-performing
assets acquired from The Greater, which the Company intends to
sell.
19
<PAGE> 21
The following table sets forth the Company's change in allowance for loan,
investments in real estate and REO losses.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Allowance for Loan Losses:
Balance at December 31, 1997 ............................ $ 40,039
Provision charged to operations ....................... 300
Charge-offs:
One-to-four family .................................. (364)
Multi-family ........................................ (483)
Consumer and other .................................. (66)
--------
Total charge-offs ................................. (913)
--------
Recoveries:
One-to-four family .................................. 165
Multi-family ........................................ 71
Consumer and other .................................. 46
--------
Total recoveries .................................. 282
--------
Total net charge-offs ................................. (631)
--------
Balance at March 31, 1998 ............................... $ 39,708
========
</TABLE>
Ratio of net charge-offs during the period to average loans outstanding
during the period 0.01%
Ratio of allowance for loan losses to total loans at end of the period 0.86%
Ratio of allowance for loan losses to non-performing loans at end of the
period 94.17%
<TABLE>
<S> <C>
Allowance for Investments in Real Estate and REO Losses:
Balance at December 31, 1997 .................................. $ 1,493
Provision charged to operations ............................. 739
Charge-offs ................................................. (52)
Recoveries .................................................. 41
-------
Balance at March 31, 1998 ..................................... $ 2,221
=======
</TABLE>
The following table sets forth the Company's allocation of the allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable. The portion of the allowance for loan losses allocated to each
loan category does not represent the total available for future losses which may
occur within the loan category since the total loan loss reserve is a valuation
reserve applied to the entire loan portfolio.
<TABLE>
<CAPTION>
At March 31, 1998
-----------------
% of Loans
In Category to
Amount Total Loans
------- -------
<S> <C> <C>
One-to-four family $26,811 83.29%
Multi-family 3,455 7.50
Commercial 8,636 8.08
Consumer and other loans 806 1.13
------- -------
Total allowances $39,708 100.00%
======= =======
</TABLE>
20
<PAGE> 22
The following table sets forth the composition of the Company's loan portfolio
at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
At March 31, 1998 At December 31, 1997
----------------- --------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to-four family ............. $ 3,850,240 83.29% $ 3,561,673 82.34%
Multi-family ................... 346,984 7.50 331,968 7.68
Commercial real estate ......... 373,476 8.08 378,558 8.75
------------- ------------- ------------- -------------
Total mortgage loans ............. 4,570,700 98.87 4,272,199 98.77
------------- ------------- ------------- -------------
CONSUMER AND OTHER LOANS:
Home equity .................... 31,688 0.69 32,652 0.76
Passbook ....................... 5,278 0.11 4,956 0.11
Other .......................... 15,087 0.33 15,678 0.36
------------- ------------- ------------- -------------
Total consumer and other loans ... 52,053 1.13 53,286 1.23
------------- ------------- ------------- -------------
Total loans ...................... 4,622,753 100.00% 4,325,485 100.00%
------------- ============= ------------- =============
LESS:
Unearned discounts, premiums and
deferred loan fees, net ...... 21,974 19,521
Allowance for loan losses ...... (39,708) (40,039)
------------- -------------
Total loans, net .............. $ 4,605,019 $ 4,304,967
============= =============
</TABLE>
21
<PAGE> 23
SECURITIES PORTFOLIO
The following tables set forth the amortized cost and estimated fair values of
mortgage-backed securities and other securities available-for-sale and
held-to-maturity at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
At March 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
GNMA pass-through certificates $ 291,559 $ 2,593 $ (375) $ 293,777
FHLMC pass-through certificates 337,507 3,450 (897) 340,060
FNMA pass-through certificates 112,900 286 (473) 112,713
Other pass-through certificates 446,791 7,277 (3,011) 451,057
REMICs and CMOs:
Agency issuance 1,338,654 4,475 (6,823) 1,336,306
Non agency issuance 200,403 1,191 (631) 200,963
Other 17,269 85 (73) 17,281
---------- ---------- ---------- ----------
Total mortgage-backed securities 2,745,083 19,357 (12,283) 2,752,157
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 83,340 78 (155) 83,263
FNMA and FHLMC preferred stock 53,415 3,192 -- 56,607
Equity and other securities 12,056 1,504 (104) 13,456
---------- ---------- ---------- ----------
Total other securities 148,811 4,774 (259) 153,326
---------- ---------- ---------- ----------
Total Available-for-Sale $2,893,894 $ 24,131 $ (12,542) $2,905,483
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed securities:
GNMA pass-through certificates $ 67,133 $ 3,860 $ -- $ 70,993
FHLMC pass-through certificates 19,865 959 (4) 20,820
FNMA pass-through certificates 18,720 63 (128) 18,655
REMICs and CMOs:
Agency issuance 900,490 7,166 (2,404) 905,252
Non agency issuance 353,623 689 (2,118) 352,194
---------- ---------- ---------- ----------
Total mortgage-backed securities 1,359,831 12,737 (4,654) 1,367,914
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 1,169,702 5,253 (3,176) 1,171,779
Obligations of states and
political subdivisions 49,507 -- (28) 49,479
Corporate debt securities 10,024 34 (1) 10,057
---------- ---------- ---------- ----------
Total other securities 1,229,233 5,287 (3,205) 1,231,315
---------- ---------- ---------- ----------
Total Held-to-Maturity $2,589,064 $ 18,024 $ (7,859) $2,599,229
========== ========== ========== ==========
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
GNMA pass-through certificates $ 316,726 $ 2,716 $ (440) $ 319,002
FHLMC pass-through certificates 362,570 3,852 (768) 365,654
FNMA pass-through certificates 122,864 361 (715) 122,510
Other pass-through certificates 497,976 8,365 (2,970) 503,371
REMICs and CMOs:
Agency issuance 1,164,895 2,845 (5,924) 1,161,816
Non agency issuance 209,082 1,346 (69) 210,359
Other 18,208 14 (14) 18,208
---------- ------- -------- ----------
Total mortgage-backed securities 2,692,321 19,499 (10,900) 2,700,920
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 83,023 32 (298) 82,757
FNMA and FHLMC preferred stock 56,915 3,086 -- 60,001
Equity and other securities 14,063 2,538 (23) 16,578
---------- ------- -------- ----------
Total other securities 154,001 5,656 (321) 159,336
---------- ------- -------- ----------
Total Available-for-Sale $2,846,322 $25,155 $(11,221) $2,860,256
========== ======= ======== ==========
HELD-TO-MATURITY:
Mortgage-backed securities:
GNMA pass-through certificates $ 71,321 $ 4,171 $ -- $ 75,492
FHLMC pass-through certificates 21,308 969 (4) 22,273
FNMA pass-through certificates 19,425 104 (130) 19,399
REMICs and CMOs:
Agency issuance 926,779 6,597 (2,404) 930,972
Non agency issuance 322,571 594 (1,563) 321,602
---------- ------- -------- ----------
Total mortgage-backed securities 1,361,404 12,435 (4,101) 1,369,738
---------- ------- -------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 1,189,300 7,282 (1,223) 1,195,359
Obligations of states and
political subdivisions 49,725 -- (34) 49,691
Corporate debt securities 10,020 28 (1) 10,047
---------- ------- -------- ----------
Total other securities 1,249,045 7,310 (1,258) 1,255,097
---------- ------- -------- ----------
Total Held-to-Maturity $2,610,449 $19,745 $ (5,359) $2,624,835
========== ======= ======== ==========
</TABLE>
23
<PAGE> 25
COMPARISON OF FINANCIAL CONDITION AS OF
MARCH 31, 1998 AND DECEMBER 31, 1997
AND OPERATING RESULTS FOR THE QUARTERS ENDED
MARCH 31, 1998 AND 1997
FINANCIAL CONDITION
Total assets increased $367.2 million, to $10.90 billion at March 31,1998,
from $10.53 billion at December 31, 1997. This increase was primarily due to an
increase in the mortgage loan portfolio. Gross mortgage loans originated and
purchased during the first quarter of 1998 totaled $533.2 million, of which
$479.3 million were originations and $53.9 million were purchases. This compares
to $174.3 million of originations and $35.8 million of purchases for a total of
$210.1 million during the first quarter of 1997. The growth in the loan
portfolio was funded primarily through additional medium- and long-term reverse
repurchase agreements, which increased $440.6 million, to $3.32 billion at March
31, 1998, from $2.88 billion at December 31, 1997. In addition to the increase
in the mortgage loan portfolio, federal funds sold and repurchase agreements
increased $47.4 million to $158.0 million at March 31, 1998, from $110.6 million
at December 31, 1997. Deposits remained relatively stable at $6.21 billion, at
March 31, 1998, reflecting a decrease in certificates of deposit from $3.52
billion at December 31, 1997 to $3.42 billion at March 31, 1998, offset by an
increase in money market accounts from $823.2 million at December 31, 1997 to
$900.1 million at March 31, 1998.
Stockholders' equity increased to $916.8 million at March 31, 1998 from
$899.4 million at December 31, 1997, which reflects net income of $22.3 million,
the amortization relating to the allocation of ESOP stock and earned portion of
RRP stock and related tax benefit of $5.4 million and the effect of stock
options exercised and related tax benefit of $7.5 million, offset by repurchases
of common stock of $9.7 million, the change in unrealized gains on securities,
net of taxes, of $1.3 million and dividends paid of $6.6 million.
RESULTS OF OPERATIONS
GENERAL
Net income increased 44.3%, to $22.3 million, or $0.80 per common share,
for the first three months of 1998, from $15.4 million, or $0.74 per common
share, for the comparable period in 1997. The return on average assets was
unchanged at 0.83% for the three months ended March 31, 1998 and 1997. The
return on average equity for the three months ended March 31, 1998 and 1997 was
9.81% and 10.52%, respectively. The return on average common equity decreased
to 9.68% for the first quarter of 1998, from 10.52% for the first quarter of
1997. The return on average tangible equity increased to 13.66% for the first
quarter of 1998, from 12.65% for the first quarter of 1997. The decreases in
both the return on average equity and the return on average common equity were
primarily the result of an increase in stockholders' equity of $332.4 million,
or 56.9%, from $584.4 million at March 31, 1997 to $916.8 million at March 31,
1998, as a result of The Greater Acquisition.
NET INTEREST INCOME
Net interest income increased $20.4 million, or 41.3%, from $49.5 million in
the first quarter of 1997 to $69.9 million in the first quarter of 1998. The
increase is due to the growth in total average interest-earning assets of $3.12
billion, primarily as a result of The Greater Acquisition, which, after the
close of business on September 30, 1997, provided $689.8 million of loans held
for investment and $1.29 billion of mortgage-backed securities and other
securities available-for-sale. During the first quarter of 1998, the Company has
continued to emphasize the origination of mortgage loans. Despite the continuous
flattening of the U.S. Treasury yield curve, the Company has achieved
24
<PAGE> 26
minimal reductions in its net interest spread and margin. The Company's net
interest spread decreased from 2.46% in 1997 to 2.40% in 1998, which was the
result of the decrease in the average yield on total average interest-earning
assets, from 7.23% in 1997 to 7.21% in 1998 and an increase in the average cost
of total average interest-bearing liabilities, from 4.77% in 1997 to 4.81% in
1998. The net interest margin decreased from 2.77% for the first quarter of 1997
to 2.72% for the first quarter of 1998 which was the result of the decrease in
the net interest rate spread. The average yield on mortgage loans decreased 25
basis points from 7.93% for the first quarter of 1997 to 7.68% for the first
quarter of 1998. Additionally, the average yield on consumer and other loans
decreased 72 basis points, from 9.99% for the first quarter of 1997 to 9.27% for
the first quarter of 1998, partially as a result of the sale of the Company's
$8.1 million credit card portfolio in the third quarter of 1997, which had an
average yield of 12.65% for the first quarter of 1997. As a result of the
Federal Reserve increasing rates offered on overnight federal funds by 25 basis
points in March 1997, the average yield of federal funds sold and repurchase
agreements increased from 5.26% for the first quarter of 1997 to 5.52% for the
first quarter of 1998. The average yield on other securities increased 36 basis
points from 6.93% for the first quarter of 1997 to 7.29% for the first quarter
of 1998 as a result of the Company purchasing higher-yielding long-term U.S.
Government and agency securities with non-callable features between one to three
years. The increase in total average interest-earning assets was offset by an
increase in total average interest-bearing liabilities of $2.90 billion, also as
a result of The Greater Acquisition, which after the close of business on
September 30, 1997 provided an additional $493.5 million and $1.60 billion of
borrowings and deposits, respectively. The Company also increased borrowings
with higher interest rates which were primarily utilized to fund the asset
growth discussed above. Additionally, the average cost of money market accounts
increased from 4.25% for the first quarter of 1997 to 4.76% for the first
quarter of 1998, which was the result of the Company increasing the rates
offered on high balance money market accounts at the end of the first quarter
of 1997. The higher rates offered, contributed to an increase in the average
balance of money markets by $253.0 million to $532.6 million for the first
quarter of 1998 from $279.6 million for the first quarter of 1997.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased from $500,000 for the first quarter of
1997 to $300,000 for the comparable 1998 period. The allowance for loan losses
decreased slightly from $40.0 million at December 31, 1997 to $39.7 million at
March 31, 1998 reflecting, in part, net charge-offs of $631,000 during the three
months ended March 31, 1998. For the three months ended March 31, 1997, net
charge-offs totaled $565,000. Despite continued increases in the mortgage loan
portfolio, non-performing loans decreased slightly from $42.8 million at
December 31, 1997 to $42.2 million at March 31, 1998. The reduction in
non-performing loans continued to improve the Company's percentage of allowance
for loan losses to non-performing loans from 93.50% at December 31, 1997 to
94.17% at March 31, 1998.
NON-INTEREST INCOME
Non-interest income for the quarter ended March 31, 1998, exclusive of net
gain on sales of securities and loans of $2.1 million, increased $2.2 million to
$5.3 million compared to $3.1 million, exclusive of net gain on sales of
securities and loans of $378,000, for the quarter ended March 31, 1997. The
increase resulted from additional customer service and loan fees of $1.2 million
from $2.6 million for the first quarter of 1997 to $3.8 million for the first
quarter of 1998 primarily attributable to The Greater Acquisition.
NON-INTEREST EXPENSE
Non-interest expense increased $12.2 million, from $26.0 million for the
first quarter of 1997, to $38.2 million for the first quarter of 1998, primarily
as a result of the addition of The Greater's operations in the 1997 fourth
quarter. General and administrative expense increased $9.6 million, from $23.8
million in 1997 to $33.4 million in 1998, primarily from the combined effect of
an increase in compensation and benefits of $4.7 million, which includes an
increase in amortization expense relating to employee stock plans of $1.3
million, and an increase in occupancy, equipment and systems expense of $3.8
million. The change in amortization expense relating to employee stock option
25
<PAGE> 27
plans includes an increase relating to the allocation of ESOP stock due to a
higher average market value of the Common Stock from $39.43 per share for the
first quarter of 1997 to $55.36 per share for the first quarter of 1998. In
addition, goodwill amortization increased $2.7 million as a result of The
Greater Acquisition, to $4.8 million for the quarter ended March 31, 1998 from
$2.1 million for the comparable 1997 period. The Company's percentage of
general and administrative expense to average assets improved to 1.24% for the
first quarter of 1998, from 1.28% for the first quarter of 1997. The Company's
efficiency ratio also improved to 44.43% for the first quarter of 1998 from
45.21% for the first quarter of 1997.
INCOME TAX EXPENSE
Income tax expense increased $5.6 million from $10.9 million for the first
quarter of 1997 to $16.5 million for the comparable quarter in 1998, primarily
due to the increase in income before taxes of $12.4 million.
CASH EARNINGS
Management believes that cash earnings and cash returns on average tangible
equity reflect the Company's ability to generate tangible capital that can be
leveraged for future growth. Cash earnings for the first quarter of 1998 totaled
$32.4 million, an increase of $11.0 million over $21.4 million cash earnings for
the first quarter of 1997. Cash returns on average tangible equity and average
assets for the first quarter of 1998 were 19.90% and 1.20%, respectively,
compared to 17.55% and 1.16%, respectively, for the comparable 1997 period.
Presented below are the Company's Condensed Consolidated Schedules of Cash
Earnings for the three months ended March 31, 1998 and 1997.
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED SCHEDULES OF CASH EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Net Income $22,269 $15,434
Add back:
Employee stock plans amortization expense 4,339 3,052
Amortization of goodwill 4,788 2,110
Income tax benefit on amortization expense of
earned portion of RRP stock 1,038 807
------- -------
Cash Earnings 32,434 21,403
------- -------
Preferred dividends declared 1,500 --
------- -------
Cash earnings available to common shareholders $30,934 $21,403
======= =======
Basic earnings per common share (1) $ 1.26 $ 1.10
======= =======
Diluted earnings per common share (1) $ 1.19 $ 1.03
======= =======
</TABLE>
(1) Based on the weighted average shares used to calculate earnings per
share on the Consolidated Statements of Operations. Prior year amounts
have been restated as a result of the implementation of SFAS No. 128.
26
<PAGE> 28
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of the Company's quantitative and qualitative disclosures
about market risk, see the information set forth under the caption "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Interest Rate Sensitivity Analysis."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 21, 1995, the Association commenced an action, Astoria Federal
Savings and Loan Association v. United States, No. 95-468C, in the United States
Court of Federal Claims against the United States seeking in excess of $250
million in damages arising from the government's breach of an assistance
agreement entered into by the Association's predecessor in interest, Fidelity
New York, FSB, in connection with its acquisition in October 1984 of Suburbia
Federal Savings and Loan Association, and the government's subsequent enactment
and implementation of the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") in 1989. The case was stayed throughout most of 1996
awaiting the decision of the United States Supreme Court in United States v.
Winstar Corp., 116 S.Ct. 2432 (1996), which held the government liable for
breach of contract to the Plaintiffs in three similar cases and remanded such
cases to the Court of Federal Claims to ascertain damage. In November 1996, the
Association moved for partial summary judgment against the government on the
issues of whether Fidelity had a contract with the government and whether the
enactment of FIRREA was contrary to the terms of such contract. The government
contested such motion and cross-moved for summary judgment seeking to dismiss
the Association's contract claims. (The Association's complaint also asserts
claims based on promissory estoppel, failure of consideration and frustration of
purpose, and a taking of the Association's property without just compensation in
violation of the Fifth Amendment to the United States Constitution.)
On August 7 and 8, 1997, the United States Court of Federal Claims heard
oral arguments on 11 common issues raised by the government in the various
partial summary judgment motions filed by the Plaintiffs in the goodwill cases.
The Court heard argument on these common issues in the context of 4 specific
summary judgment motions, not including the Association's. In an opinion filed
December 22, 1997, all such common issues were found in favor of the Plaintiffs
and the government was ordered to show cause within 60 days why partial summary
judgment should not be entered in all cases which have partial summary judgment
motions pending, including the Association's. The government has responded in
the Association's case that if the Court will not consider case specific facts,
then it has no defense to the Association's motion. The government further
indicated that if the Court will consider case specific facts, then it asserts
that the relevant portion of the Assistance Agreement with Fidelity did not
authorize the use of its capital credit as a permanent addition to regulatory
capital. In this response, the government did not raise any issues related to
the supervisory goodwill portion of the Association's motion. The Association
has responded to the government's response indicating in substance that the
issue raised by the government was specifically addressed and decided by the
United States Supreme Court in the Winstar cases cited above, that the
contractual language in the Association's Assistance Agreement and other
operative documents is factually indistinguishable from that ruled upon in the
Winstar cases, and thus, that the Association's motion for partial summary
judgment should be granted. The Association's response further requests
reimbursement of the Association's attorneys' fees from the government for
seeking to relitigate the capital credit issue. The motion remains pending
before the Court.
While management is confident that it will be successful in the pursuit of
its motion and intends to aggressively pursue its claim against the government,
no assurance can be given as to the result of such claim or the timing of the
recovery, if any, with respect thereto. The costs incurred with respect to this
litigation to date have not been material to the Association's results of
operations. Based upon the current scheduling by the Court, the Association does
not expect to commence significant discovery in its case until 1999.
27
<PAGE> 29
On July 18, 1997, a purported class action (the "Federal Action") was
commenced in the United States District Court for the Eastern District of New
York entitled Leonard Minzer, et ano. v. Gerard C. Keegan, et al. (Index No. 97
Civ. 4077 (CPS)) against The Greater, The Greater's directors and certain of its
executive officers, the Company and the Association. The suit alleges, among
other things, that The Greater, The Greater's directors and certain of its
executive officers solicited proxies in violation of Section 14(a) of the
Securities Exchange Act of 1934 and Rule 14a-9, promulgated thereunder, by
failing to disclose certain allegedly material facts in the proxy statement, as
amended, that was circulated to The Greater stockholders in connection with The
Greater Acquisition, and that The Greater's directors and certain of its
executive officers have breached their fiduciary duties by entering into The
Greater Acquisition and related arrangements. The suit further alleges, without
specification, that the Company and the Association participated in the
preparation and distribution of The Greater's proxy materials and/or aided and
abetted the alleged breaches of fiduciary duty by The Greater defendants.
Plaintiffs sought, among other things, a preliminary and permanent injunction
against consummation of The Greater Acquisition and the related transactions, an
order directing that the directors and executive officers of The Greater
carry-out their fiduciary duties, and unspecified damages and costs.
On September 2, 1997, plaintiffs filed an amended complaint and an
Application for a preliminary injunction (the "Application"). An evidentiary
hearing on plaintiffs' Application was held on September 10, 1997. On September
22, 1997, the Court issued a written decision denying plaintiffs' Application in
all respects. Upon stipulation of the parties, all claims against the
non-director, executive officers of The Greater, except one, have been
dismissed. The remaining defendants have moved to dismiss the amended complaint.
On April 6, 1998, the Court heard a brief oral argument on defendant's motions
to dismiss and reserved decision on the motions. The motions are still pending.
The Company and the Association believe the allegations made in the amended
complaint in the Federal Action are without merit and intend to aggressively
defend their interests with respect to such matters.
During 1994, an action was commenced against the Association, AF Roosevelt
Avenue Corporation, a wholly owned subsidiary of the Association, 149 Roosevelt
Avenue Associates, a joint venture in which AF Roosevelt Avenue Corporation was
a joint venture partner, Henry Drewitz, then Chairman of the Board of the
Association, and George L. Engelke, Jr., Chairman, President and Chief Executive
Officer of Astoria Federal and a director and officer of AF Roosevelt Avenue
Corporation, among others. The litigation arises from the development by 149
Roosevelt Avenue Associates of a condominium project ("Vista Tower") commencing
in the mid 1980's. The development consists of 134 residential units, 25 medical
facility units, and associated parking and other facilities located in Flushing,
New York. The litigation, commenced by the Board of Managers of the condominium,
alleges that there are various defects in the condominium buildings with respect
to the roof, certain masonry work and structural components and seeks damages
based upon breach of contract, fraud, misrepresentation, breach of warranty,
violations of Articles 23A and 36B of the General Business Law of the State of
New York, recklessness and negligence. The above listed defendants have served
their answers in the litigation. The Association has notified its liability and
director and officer liability insurance carriers of the action. Although
extremely limited discovery was taken in the matter, the plaintiff, in January
1998 filed a note of issue alleging damages of at least $340 million with
respect to this matter. Several defendants, including the Association, AF
Roosevelt Avenue Corporation and Messrs. Engelke and Drewitz, have moved to
strike the note of issue. Messrs. Drewitz and Engelke have moved for summary
judgment to dismiss all claims against them.
On September 19, 1997, the Queens Buildings Department ordered the partial
evacuation of the condominium. The Association, in meetings with the Buildings
Department and the New York State Attorney General's office, has agreed to pay
the cost of design work and repairs necessary to render the building both
temporarily and permanently safe and habitable. The Board of Managers has
recently begun the temporary repair work.
On October 2, 1997, the City of New York commenced an action and sought
injunctive relief by order to show cause against Vista Tower, The Board of
Managers of the condominium, the individual members of the Board of Managers and
the Association. The Association is named in such action solely as an owner of
units and holder of mortgages in the condominium. The action sets forth two
causes of action pursuant to the New York City Administrative Code and seeks
injunctive relief directing the defendants to take all steps necessary to make
the premises safe, certain civil penalties for violations of the building code,
a declaration that the premises constitute a public
28
<PAGE> 30
nuisance and directing the abatement of such nuisance, certain damages, costs
and attorneys fees. The Association answered such action, denying the
allegations of the complaint and has asserted cross claims against the Board of
Managers and its members for waste, breach of fiduciary duty, indemnification
and contribution. The Board of Managers and its members similarly cross claimed
against the Association. Through a series of stipulations and interim orders,
the parties agreed to a plan of remediation and interim repair to the premises
to allow the building to be re-inhabited. In the interim, both the City of New
York and the Association have moved for appointment of a receiver to take
control of the management and repair of the property. The Board of Managers has
opposed such motions which are pending.
On November 18, 1997, The Board of Managers of Vista Tower commenced an
action against the Association in Supreme Court, Queens County. The complaint
set forth causes of action based upon alleged discrimination against the
purchasers of the units in Vista Tower under the New York State Executive Law
purportedly due to the national origin of a number of such unit owners, unjust
enrichment for receiving mortgage loan payments with respect to the mortgage
loans held by the Association and seeks injunctive relief to prevent the
Association from foreclosing on the mortgage loans it holds in such building.
The plaintiffs have granted the Association an open ended extension of the
Association's time to answer such complaint. In addition, on or about December
4, 1997, The Board of Managers commenced suit in the United States District
Court for the Southern District of New York against New York State, the New York
State Attorney General, the City of New York, the New York City Building
Department, the New York City Department of Housing Preservation and
Development, the Association, Henry Drewitz, George L. Engelke, Jr., AF
Roosevelt and 149 Roosevelt Avenue Associates and others. As to the Association
related defendants, the complaint alleged discrimination claims based upon the
national origin of the unit owners at Vista Tower under both New York State and
federal law. The summons and complaint in this action, while filed with the
Court, has not been served on any Association related defendant and, therefore,
under Federal law is deemed dismissed.
The Association has commenced settlement discussions with the Board of
Managers and unit owners at Vista Tower which are continuing. Based upon current
available information, management does not believe that a resolution based upon
these discussions would have a material adverse impact on the results of
operations or the financial condition of the Company. Management of the
Association is continuing to work with the Attorney General's office, the Queens
Buildings Department and the Board of Managers in an attempt to remedy the
situation. In the event such a remedy is not found, the Association intends to
continue to defend the actions vigorously.
No other material events occurred with respect to legal proceedings during
the quarter ended March 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Regarding Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed with the Securities
and Exchange Commission since the beginning of the quarter ended March
31, 1998:
1) Form 8-K, dated April 2, 1998 (filed April 3, 1998), which includes
the description of the definitive agreement and plan of merger
pursuant to which the Company proposes to acquire Long Island
Bancorp, Inc.
2) Form 8-K/A, dated April 2, 1998 (filed April 10, 1998), which
includes the definitive agreement and plan of merger and related
documents pursuant to which the Company proposes to acquire Long
Island Bancorp, Inc.
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: May 13, 1998 By: /s/ Monte N. Redman
------------------- --------------------------
Monte N. Redman
Executive Vice President and Chief
Financial Officer
30
<PAGE> 32
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11. Statement Regarding Computation of Per Share Earnings
27. Financial Data Schedule
31
<PAGE> 1
EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1998
--------------
(In Thousands,
Except Per Share Data)
<S> <C> <C>
1. Net Income $22,269
Less: Preferred stock dividends declared 1,500
-------
Net income available to common shareholders $20,769
=======
2. Weighted average common shares outstanding 26,328
3. ESOP shares not committed to be released (1,680)
4. RRP shares purchased but unallocated (11)
-------
6. Total weighted average common shares outstanding 24,637
=======
7. Basic earnings per common share $ 0.84
=======
8. Total weighted average common shares outstanding 24,637
9. Dilutive effect of stock options using the treasury
stock method 1,409
-------
10. Total average common and common equivalent
shares 26,046
=======
11. Diluted earnings per common share $ 0.80
=======
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF MARCH 31, 1998 AND
THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,535
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 158,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,905,483
<INVESTMENTS-CARRYING> 2,589,064
<INVESTMENTS-MARKET> 2,599,229
<LOANS> 4,644,727
<ALLOWANCE> 39,708
<TOTAL-ASSETS> 10,895,609
<DEPOSITS> 6,205,643
<SHORT-TERM> 368,318
<LIABILITIES-OTHER> 129,713
<LONG-TERM> 3,275,086
0
2,000
<COMMON> 265
<OTHER-SE> 914,584
<TOTAL-LIABILITIES-AND-EQUITY> 10,895,609
<INTEREST-LOAN> 86,020
<INTEREST-INVEST> 98,910
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 184,930
<INTEREST-DEPOSIT> 63,995
<INTEREST-EXPENSE> 51,075
<INTEREST-INCOME-NET> 69,860
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 2,037
<EXPENSE-OTHER> 4,267
<INCOME-PRETAX> 38,792
<INCOME-PRE-EXTRAORDINARY> 22,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,269
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 2.72
<LOANS-NON> 36,146
<LOANS-PAST> 6,019
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,345
<ALLOWANCE-OPEN> 40,039
<CHARGE-OFFS> 913
<RECOVERIES> 282
<ALLOWANCE-CLOSE> 39,708
<ALLOWANCE-DOMESTIC> 39,708
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
