<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, October 30, 1998
- ----------------------- ----------------------------------------------
.01 Par Value 54,670,807
<PAGE> 2
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements.
Consolidated Statements of Financial Condition at September 30, 1998 2
and December 31, 1997.
Consolidated Statements of Income for the 3
Three and Nine Months Ended September 30,
1998 and September 30, 1997.
Consolidated Statement of Stockholders' Equity for the Nine Months 4
Ended September 30, 1998.
Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 1998
and September 30, 1997.
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 32
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 35
Item 5. Other Information (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 36
(a) Exhibits
(4) Bylaws of Astoria Federal Savings and Loan Association, as amended
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
Signatures 37
</TABLE>
1
<PAGE> 3
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,244 $ 31,780
Federal funds sold and repurchase agreements 283,016 110,550
Mortgage-backed securities available-for-sale (at estimated fair value) 4,059,405 2,700,920
Other securities available-for-sale (at estimated fair value) 428,848 159,336
Mortgage-backed securities held-to-maturity (estimated fair value of
$1,238,744 and $1,369,738, respectively) 1,227,238 1,361,404
Other securities held-to-maturity (estimated fair value
of $1,043,352 and $1,255,097, respectively) 1,032,644 1,249,045
Federal Home Loan Bank of New York stock 98,750 60,050
Loans receivable:
Mortgage loans, net 4,999,719 4,291,720
Consumer and other loans 47,176 53,286
------------ ------------
5,046,895 4,345,006
Less allowance for loan losses 38,483 40,039
------------ ------------
Loans receivable, net 5,008,412 4,304,967
Real estate owned and investments in real estate, net 11,542 16,264
Accrued interest receivable 67,946 60,318
Premises and equipment, net 122,860 113,727
Goodwill 248,177 258,159
Other assets 101,974 101,873
------------ ------------
Total assets $ 12,713,056 $ 10,528,393
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings $ 1,669,719 $ 1,717,784
Money market 1,038,062 823,214
NOW 163,483 163,756
Certificates of deposit 3,222,176 3,516,164
------------ ------------
Total deposits 6,093,440 6,220,918
Reverse repurchase agreements 5,220,000 2,882,765
Federal Home Loan Bank of New York advances 270,142 390,016
Mortgage escrow funds 59,489 45,217
Accrued expenses and other liabilities 109,062 90,053
------------ ------------
Total liabilities 11,752,133 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; (200,000,000 and 70,000,000 shares
authorized, respectively; 26,593,634 and 26,451,252 issued, respectively;
and 26,593,495 and 26,197,768 outstanding, respectively) 266 265
Additional paid-in capital 513,150 497,284
Retained earnings - substantially restricted 464,270 430,549
Treasury stock (139 and 253,484 shares, at cost, respectively) (8) (13,867)
Accumulated other comprehensive income:
Net unrealized gains on securities, net of taxes 1,511 7,918
Unallocated common stock held by ESOP (19,297) (21,488)
Unearned common stock held by RRPs (969) (3,237)
------------ ------------
Total stockholders' equity 960,923 899,424
------------ ------------
Total liabilities and stockholders' equity $ 12,713,056 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 92,543 $ 62,376 $ 267,150 $ 171,761
Consumer and other loans 1,146 1,297 3,561 4,147
Mortgage-backed securities 81,325 52,238 222,524 167,699
Other securities 26,948 19,713 80,911 51,655
Federal funds sold and repurchase agreements 3,117 1,351 7,671 6,198
----------- ----------- ----------- -----------
Total interest income 205,079 136,975 581,817 401,460
----------- ----------- ----------- -----------
Interest expense:
Deposits 62,848 49,783 190,125 146,277
Borrowed funds 69,893 37,100 178,686 106,190
----------- ----------- ----------- -----------
Total interest expense 132,741 86,883 368,811 252,467
----------- ----------- ----------- -----------
Net interest income 72,338 50,092 213,006 148,993
Provision for loan losses 266 895 880 2,809
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 72,072 49,197 212,126 146,184
----------- ----------- ----------- -----------
Non-interest income:
Customer service and loan fees 4,853 2,815 12,946 8,050
Net gain on sales of securities and loans 3,283 3,179 8,710 4,695
Other 1,264 735 4,117 2,116
----------- ----------- ----------- -----------
Total non-interest income 9,400 6,729 25,773 14,861
----------- ----------- ----------- -----------
Non-interest expense:
General and administrative:
Compensation and benefits 17,106 13,622 52,682 39,907
Occupancy, equipment and systems 9,202 5,990 27,582 17,907
Federal deposit insurance premiums 959 716 2,711 2,288
Advertising 762 604 2,154 2,664
Other 4,204 3,159 12,904 9,210
----------- ----------- ----------- -----------
Total general and administrative 32,233 24,091 98,033 71,976
Real estate operations and provision for losses, net 5 181 223 663
Amortization of goodwill 4,866 2,110 14,519 6,330
----------- ----------- ----------- -----------
Total non-interest expense 37,104 26,382 112,775 78,969
----------- ----------- ----------- -----------
Income before income tax expense 44,368 29,544 125,124 82,076
Income tax expense 18,965 12,652 53,789 34,543
----------- ----------- ----------- -----------
Net income $ 25,403 $ 16,892 $ 71,335 $ 47,533
=========== =========== =========== ===========
Net income available to common shareholders - diluted $ 23,903 $ 16,892 $ 66,835 $ 47,533
=========== =========== =========== ===========
Basic earnings per common share (1) $ 0.96 $ 0.89 $ 2.69 $ 2.48
=========== =========== =========== ===========
Diluted earnings per common share (1) $ 0.92 $ 0.83 $ 2.56 $ 2.31
=========== =========== =========== ===========
Dividends per common share $ 0.20 $ 0.15 $ 0.60 $ 0.41
=========== =========== =========== ===========
Basic weighted average common shares (1) 25,002,441 18,944,620 24,833,081 19,187,602
Diluted weighted average common and common equivalent shares (1) 26,103,517 20,383,257 26,088,284 20,582,388
</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 Nine Months Ended September 30, 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 71,335 -- -- -- 71,335
Other comprehensive income, net of tax:
Net unrealized loss on securities, net
of reclassification adjustment (6,407) -- -- -- --
Common stock repurchased
(181,192 shares) (9,739) -- -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (20,234) -- -- (978) (19,256)
Exercise of stock options and
related tax benefit 11,944 -- 1 6,703 (18,358)
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit 14,600 -- -- 10,141 --
--------- --------- --------- --------- ---------
Balance at September 30, 1998 $ 960,923 $ 2,000 $ 266 $ 513,150 $ 464,270
========= ========= ========= ========= =========
</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 -- (6,407) -- --
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 23,598 -- -- --
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit -- -- 2,191 2,268
--------- --------- --------- ---------
Balance at September 30, 1998 $ (8) $ 1,511 $ (19,297) $ (969)
========= ========= ========= =========
</TABLE>
See accompany notes to consolidated financial statements.
4
<PAGE> 6
ASTORIA FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 71,335 $ 47,533
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of net deferred loan origination fees,
discounts and premiums (27,948) (5,395)
Provision for loan and real estate losses 1,728 3,196
Depreciation and amortization 5,999 4,664
Net gain on sales of securities and loans (8,710) (4,695)
Amortization of goodwill 14,519 6,330
Allocated and earned shares from ESOP and RRPs 11,486 9,834
Increase in accrued interest receivable (7,628) (372)
Increase in mortgage escrow funds 14,272 11,334
Decrease (increase) in other assets 4,897 (14,347)
Increase in accrued expenses and other liabilities 27,321 33,049
----------- -----------
Net cash provided by operating activities $ 107,271 91,131
----------- -----------
Cash flows from investing activities:
Loan originations (1,432,861) (908,933)
Loan purchases through third parties (135,724) (145,399)
Principal repayments on loans 776,045 314,944
Principal payments on mortgage-backed securities held-to-maturity 207,535 57,842
Principal payments on mortgage-backed securities available-for-sale 769,823 280,537
Purchases of mortgage-backed securities held-to-maturity (72,651) (19,988)
Purchases of mortgage-backed securities available-for-sale (2,467,141) (282,190)
Purchases of other securities held-to-maturity and FHLB stock (252,156) (411,917)
Purchases of other securities available-for-sale (331,748) (23,694)
Proceeds from maturities of other securities held-to-maturity 457,613 113,748
Proceeds from maturities of other securities available-for-sale 30,297 45,001
Proceeds from sales of securities available-for-sale and loans 443,149 454,839
Proceeds from sales of real estate owned and investments
in real estate 11,338 6,884
Purchases of premises and equipment, net of proceeds from sale (15,124) (5,675)
----------- -----------
Net cash used in investing activities (2,011,605) (524,001)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits (126,744) 46,224
Net increase in reverse repurchase agreements 2,337,235 556,106
Net decrease in FHLB of New York advances (120,000) (31,000)
Costs to repurchase common stock (9,739) (44,278)
Cash dividends paid to stockholders (20,234) (8,343)
Cash received for options exercised, net of loss on issuance
of treasury stock 6,746 2,775
----------- -----------
Net cash provided by financing activities 2,067,264 521,484
----------- -----------
Net increase in cash and cash equivalents 162,930 88,614
Cash and cash equivalents at beginning of period 142,330 74,923
----------- -----------
Cash and cash equivalents at end of period $ 305,260 $ 163,537
=========== ===========
Supplemental disclosures:
Cash paid during the year:
Interest $ 355,962 $ 249,243
=========== ===========
Income taxes $ 20,784 $ 1,189
=========== ===========
Additions to real estate owned $ 8,239 $ 5,999
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Astoria Financial Corporation (the "Company") and its
wholly-owned subsidiary, Astoria Federal Savings and Loan Association
(the "Association") and the Association's wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated
in consolidation.
In the opinion of management, the accompanying consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the
Company's financial condition as of September 30, 1998 and December 31,
1997 and its results of operations for the three and nine months ended
September 30, 1998 and 1997, cash flows for the nine months ended
September 30, 1998 and 1997 and stockholders' equity for the nine
months ended September 30, 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 September 30, 1998 and December
31, 1997 and amounts of revenues and expenses for the three and nine
month periods ended September 30, 1998 and 1997. The results of
operations for the three and nine months ended September 30, 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 the current year presentation.
These consolidated financial statements should be read in
conjunction with the December 31, 1997 audited consolidated financial
statements, interim 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.
6
<PAGE> 8
The following table is a reconciliation of basic and diluted EPS as
required under SFAS No. 128:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------------------------------------------
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 $25,403 $16,892
Less: preferred stock dividends 1,500 --
------- -------
Basic EPS:
Income available to common
stockholders 23,903 25,002,441 $0.96 16,892 18,944,620 $0.89
===== =====
Effect of dilutive unexercised
stock options 1,101,076(1) 1,438,637
---------- ----------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $23,903 26,103,517 $0.92 $16,892 20,383,257 $0.83
======= ========== ===== ======= ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
-----------------------------------------------------------------------------------------
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 $71,335 $47,533
Less: preferred stock dividends 4,500 --
------- -------
Basic EPS:
Income available to common
stockholders 66,835 24,833,081 $2.69 47,533 19,187,602 $2.48
===== =====
Effect of dilutive unexercised
stock options 1,255,203(1) 1,394,786
---------- ----------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $66,835 26,088,284 $2.56 $47,533 20,582,388 $2.31
======= ========== ===== ======= ========== =====
</TABLE>
(1) Options to purchase 325,000 shares of common stock at prices between
$50.31 per share and $59.75 per share were outstanding as of September
30, 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, federal funds sold and
repurchase agreements 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
7
<PAGE> 9
distributions to owners. The Company 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.
Comprehensive income for the three and nine months ended
September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 25,403 $ 16,892 $ 71,335 $ 47,533
Net unrealized (losses) gains on securities,
net of reclassification adjustment (a) (5,588) 6,431 (6,407) 8,102
-------- -------- -------- --------
Comprehensive income $ 19,815 $ 23,323 $ 64,928 $ 55,635
======== -------- ======== ========
(a) Disclosure of reclassification adjustment:
Net unrealized (losses) gains arising during period $ (3,863) $ 6,431 $ (1,976) $ 8,973
Less: reclassification adjustment for net gains
included in net income (1,725) -- (4,431) (871)
-------- -------- -------- --------
Net unrealized (losses) gains on securities $ (5,588) $ 6,431 $ (6,407) $ 8,102
======== ======== ======== ========
</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.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is,
unrealized gains and losses) depends on the intended use of the
8
<PAGE> 10
derivative and the resulting designation. SFAS No. 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 1999 and does
not require restatement of prior periods. Management of the Company
believes the implementation of SFAS No. 133 will not have a material
impact on the Company's financial condition or results of operations.
In October 1998, the FASB issued Statement of Financial
Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"). SFAS No. 134
conforms the accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with
the accounting for securities retained after the securitization of
other types of assets by a nonmortgage banking enterprise. SFAS No. 134
is effective for the first fiscal quarter beginning after December 15,
1998. Management of the Company believes the implementation of SFAS No.
134 will not have a material 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" within the meaning of the Private Securities Litigation Reform Act
of 1995, and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." Examples of
forward looking statements include, but are not limited to, 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 the Company's operations, pricing, products and services.
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 is also affected by its provision for loan losses as well
as non-interest income, general and administrative expense, other non-interest
expense, and income tax expense. General and administrative expense consists of
compensation and benefits, occupancy, equipment and systems expense, federal
deposit insurance premiums, advertising and other operating expenses. Other
non-interest expense generally consists of real estate operations 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 as
part of its long-term growth strategy. Following
9
<PAGE> 11
the close of business on September 30, 1998, the Company completed the
acquisition of Long Island Bancorp, Inc. ("LIB"), the holding company of The
Long Island Savings Bank, FSB ("LISB"), a federally chartered savings bank, with
LIB merging with and into the Company and LISB merging with and into the
Association (the "LIB Merger"). The transaction was accounted for as a pooling
of interests. Since the transaction was not consummated until following the
close of business on September 30, 1998, the financial information set forth in
this report, unless otherwise specifically noted, does not reflect such
consummation. Under the terms of the merger agreement, holders of LIB common
stock, par value $.01 per share ("LIB Common Stock"), received 1.15 shares of
the Company's common stock ("Common Stock") for each share of LIB Common Stock.
As a result of the consummation of the LIB Merger, after the close of business
on September 30, 1998, the Company had total assets of $19.26 billion, total
deposits of $9.68 billion, total borrowings, net of $7.75 billion and total
loans, net of $8.71 billion. After the completion of the LIB Merger, the
Association continued to exceed each of its capital requirements.
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 is being amortized on a
straight line basis over 15 years.
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 and adversely 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 which the Company electronically
or operationally interfaces (e.g. including, but not limited to, 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, may generate
results which could be significantly misstated, and the Company could experience
an inability of temporary, but unknown duration, 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 a material adverse impact on the Company's
products, services and competitive condition and therefore, its results of
operations and could be deemed to imperil the safety and soundness of the
Association. There has been limited litigation filed against corporations
regarding the Year 2000 Problem and their compliance efforts. To date, no such
litigation has resulted in a decision imposing liability on the corporate
entity. Nonetheless, the law in this area will likely continue to develop well
into the new millennium. Should the Company experience a Year 2000 failure,
exposure of the Company could be significant and material, unless there is
legislative action to limit such liability. Legislation has been introduced in
several jurisdictions regarding the Year 2000 Problem. However, no assurance can
be given that legislation will be enacted in jurisdictions where the Company
does business that will have the effect of limiting any potential liability.
The Office of Thrift Supervision ("OTS"), the Company's primary federal
bank regulatory agency, along with the other federal bank regulatory agencies
has published substantive guidance on the Year 2000 Problem and has included
Year 2000 compliance as a substantive area of examination for both regularly
scheduled and special bank examinations. These publications, in addition to
providing guidance as to examination criteria, have outlined requirements for
creation and implementation of a compliance plan and target dates for testing
and implementation of corrective action, as discussed below. As a result of the
oversight by and authority vested in the federal bank regulatory agencies, a
financial institution that does not become Year 2000 compliant could become
subject to administrative remedies similar to those imposed on financial
institutions otherwise found not to be operating in a safe and sound manner,
including remedies available under prompt corrective action regulations.
The Company has developed and is implementing a Year 2000 Project Plan
(the "Plan") to address the Year 2000
10
<PAGE> 12
Problem and its effects on the Company. The Plan includes five components which
address issues involving awareness, assessment, renovation, validation and
implementation. The Company has completed the awareness and assessment phases
of the Plan. During the awareness and assessment phases of the Plan, the
Company inventoried all material information systems and reviewed them for Year
2000 compliance. Among the systems reviewed were computer hardware and systems
software, applications software and communications hardware and software as
well as embedded or automated devices. As noted below, this review included
both internal systems and those of third party vendors which provide systems
such as retail deposit processing, loan origination processing, loan servicing
and general ledger and accounting systems and software. The Company is now
actively involved in the renovation, validation and implementation phases with
the renovation phase approximately 55% complete, the validation phase
approximately 45% complete and the implementation phase approximately 40%
complete. Under regulatory guidelines issued by the federal banking regulators,
the Association and the Company must substantially complete testing of core
mission critical internal systems by December 31, 1998 with testing of both
internally and externally supplied systems complete and all renovation
substantially complete, by June 30, 1999. In accordance with those guidelines,
the Company completed testing of its mission critical systems prior to
September 1, 1998 and its customer systems prior to September 30, 1998. The
Company has agreed to use its facilities as a test site for its major retail
deposit processor allowing the Company additional opportunity to test and
stress such system.
As part of the Plan, the Company has had 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 and has been following the progress of those vendors with their Year
2000 compliance status. The Company presently believes that with modifications
to existing software and conversions to new software and hardware where
necessary, the Year 2000 Problem will be mitigated without causing a material
adverse impact on the operations of the Company. At this time, the Company
anticipates most of its hardware and software systems to become Year 2000
compliant, tested and operational within the OTS's suggested time frame.
However, if such modifications and conversions are not successfully made or are
not completed on a timely basis, the Year 2000 Problem could have an adverse
impact on the operations of the Company.
Despite its best efforts to ensure Year 2000 compliance, it is possible
that one or more of the Company's internal or external systems may fail to
operate. At this time, while the Company expects to become Year 2000 compliant,
the probability of such likelihood cannot be determined. As a result, the
Company expects to formulate contingency plans for its mission critical systems
where possible. These systems include retail deposit processing, check clearing
and wire transfer capabilities, loan origination processing, loan servicing,
investment monitoring and accounting, general ledger and accounting systems and
payroll processing. The Company does maintain a disaster recovery program
designed to deal with similar failures on an ongoing basis. All business units
have been directed to update and review their existing recovery plans in
addition to developing contingency plans prior to March 31, 1999, to address the
possible failure of one or more mission critical systems.
The Company has reviewed its customer base to determine whether they
pose significant Year 2000 risks. The Company's customer base consists primarily
of individuals who utilize the Company's services for personal, household or
consumer uses. Individually such customers are not likely to pose significant
year 2000 risks directly. It is not possible at this time to gauge the indirect
risks which could be faced if the employers of such customers encounter
unresolved Year 2000 issues.
Monitoring and managing the Year 2000 Project Plan 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 for Year 2000 compliance, and costs for developing and
implementing contingency plans for critical systems which fail. Indirect costs
will principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing and developing 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. It is currently
estimated that total Year 2000 compliance efforts will cost, excluding
reallocation of internal resources, approximately $1,500,000 which includes
$750,000 expensed by LISB prior to the Merger.
11
<PAGE> 13
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 nine months ended
September 30, 1998 and 1997, principal payments on loans and mortgage-backed
securities and proceeds from maturities of other securities totaled $2.24
billion and $812.1 million, respectively. The increase in principal payments
received is primarily a result of the decrease in long term interest rates which
has caused significant acceleration of prepayments of mortgage loans and
mortgage-backed securities. Additionally, during the nine months ended September
30, 1998 and 1997, the Company received $443.1 million and $454.8 million,
respectively, of funds from the sale of securities available-for-sale and loans.
The Company's other sources of funds are provided by operating and financing
activities. Net cash provided from operating activities during the nine months
ended September 30, 1998 and 1997 totaled $107.3 million and $91.1 million,
respectively, of which $71.3 million and $47.5 million, respectively,
represented net income of the Company. Net cash provided by financing activities
during the nine months ended September 30, 1998 and 1997 totaled $2.07 billion
and $521.5 million, respectively, primarily due to net increases in borrowings
totaling $2.22 billion and $525.1 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 nine months ended September 30, 1998, the Company's purchases and
originations of loans totaled $1.57 billion and purchases of mortgage-backed
securities and other securities totaled $3.12 billion. For the same period in
1997, the Company's purchases and originations of loans totaled $1.05 billion
and purchases of mortgage-backed securities and other securities totaled $737.8
million.
The Association is required by the OTS to maintain a minimum liquidity
ratio of 4.00%. The Association's liquidity ratios were 4.95% and 4.73% at
September 30, 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 $960.9 million at September 30, 1998,
compared to $899.4 million at December 31, 1997, reflecting the Company's
earnings for the nine months ended September 30, 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 in the first quarter of 1998, 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.
Tangible stockholders' equity (stockholders' equity less goodwill)
totaled $712.7 million at September 30, 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 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."
12
<PAGE> 14
During the first quarter of 1998, as part of the Company's fifth stock
repurchase plan, the Company repurchased 181,192 shares of Common Stock for an
aggregate cost of $9.7 million. In connection with the acquisition of LIB, the
fifth stock repurchase plan was terminated. The Company has since reissued the
majority of its repurchased treasury shares for option exercises.
On September 1, 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 August 14, 1998, aggregating $5.3 million. On October 21, 1998, the
Company declared a quarterly cash dividend of $0.20 per share payable on
December 1, 1998 to common stockholders of record as of the close of business on
November 16, 1998. In addition, the Company paid four quarterly cash dividends
during 1998 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.
Additionally, as part of the LIB Merger, the Association, following the close of
business on September 30, 1998, established a liquidation account equal to the
remaining liquidation account balance previously maintained by LISB. These
liquidation accounts are 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 September 30, 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 5.08% and a risk-based capital ratio of
14.41%. 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 (which is the sensitivity of income to
variations in interest rates). The Company's market rate sensitive instruments
primarily include interest-earning assets and interest-bearing liabilities.
Accordingly, 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 interest rate 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. Movements in equity prices
may have an indirect, but limited, effect on certain of the Company's business
activities and/or the value of credit sensitive loans and on its own operating
expenses in the case of its Common Stock.
13
<PAGE> 15
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 September 30, 1998, the Company's net interest-earning assets
maturing or repricing within one year exceeded interest-bearing liabilities
maturing or repricing within the same time period by $24.3 million, representing
a positive cumulative one-year gap of 0.19% 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 September 30, 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 September 30, 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 $2.91 billion, representing a positive cumulative
one-year gap of 22.92% 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
September 30, 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 $1.20 billion of callable
other securities, classified according to their maturity dates, which are
primarily within the more than five years maturity category. Of such securities,
$670.5 million are callable within one year and at various times thereafter.
Also included in the Gap Table are $5.36 billion of callable borrowings,
classified according to their maturity dates, which are primarily within the
more than three years to five years category and the more than five years
category. Of such borrowings, $2.03 billion are callable within one year and at
various times thereafter.
14
<PAGE> 16
<TABLE>
<CAPTION>
At September 30, 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
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (2) $ 1,255,735 $ 1,337,042 $ 1,112,771 $ 1,231,602 $ 4,937,150
Consumer and other loans (2) 37,045 9,535 -- -- 46,580
Federal funds sold and
repurchase agreements 283,016 -- -- -- 283,016
Mortgage-backed and other securities
available-for-sale 1,696,917 971,388 295,300 1,623,398 4,587,003
Mortgage-backed and other securities
held-to-maturity 473,775 302,845 173,788 1,313,075 2,263,483
----------- ----------- ----------- ----------- -----------
Total interest-earning assets 3,746,488 2,620,810 1,581,859 4,168,075 12,117,232
Add:
Net unamortized purchase premiums
and deferred fees (3) 5,625 6,548 5,682 5,987 23,842
----------- ----------- ----------- ----------- -----------
Net interest-earning assets 3,752,113 2,627,358 1,587,541 4,174,062 12,141,074
----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Savings 200,366 384,035 333,944 751,374 1,669,719
NOW 16,589 16,589 16,589 33,178 82,945
Money manager 51,108 51,108 51,108 102,214 255,538
Money market 609,422 16,669 16,669 50,004 692,764
Certificates of deposit 2,085,312 890,689 246,036 139 3,222,176
Borrowed funds 765,000 630,142 1,580,000 2,515,000 5,490,142
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 3,727,797 $ 1,989,232 $ 2,244,346 $ 3,451,909 $11,413,284
----------- ----------- ----------- ----------- -----------
Interest sensitivity gap $ 24,316 $ 638,126 $ (656,805) $ 722,153 $ 727,790
=========== =========== =========== =========== ===========
Cumulative interest sensitivity gap $ 24,316 $ 662,442 $ 5,637 $ 727,790
Cumulative interest sensitivity gap
as a percentage of total assets 0.19% 5.21% 0.04% 5.72%
Cumulative net interest-earning assets
as a percentage of interest-bearing liabilities 100.65% 111.59% 100.07% 106.38%
</TABLE>
(1) Includes $670.5 million of other securities and $2.03 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
other securities and the more than three years to five years and
the more than 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.
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
15
<PAGE> 17
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.
16
<PAGE> 18
The following represents the Company's NPV table as of September 30, 1998.
<TABLE>
<CAPTION>
Changes in
Rates in Net Portfolio Value ("NPV") Portfolio Value of Assets
Basis Points Dollar Dollar Percentage NPV Percentage
(Rate Shock) Amount Change Change Ratio Change
- ------------ -------- --------- ---------- -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 $581,582 $(313,517) (35.03)% 4.91% (30.85)%
+100 826,340 (68,759) (7.68) 6.74 (5.07)
-0- 895,099 -- -- 7.10 --
-100 800,477 (94,622) (10.57) 6.24 (12.11)
-200 706,880 (188,219) (21.03) 5.41 (23.80)
</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 for the nine months ended September 30, 1998,
except for outstanding interest rate cap and floor agreements acquired in The
Greater Acquisition in 1997. 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 and nine months ended September 30, 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
and nine months ended September 30, 1998 and 1997.
17
<PAGE> 19
<TABLE>
<CAPTION>
Quarter Ended September 30,
----------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS: (Annualized) (Annualized)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 4,930,564 $ 92,543 7.51% $ 3,156,929 $ 62,376 7.90%
Consumer and other loans 48,595 1,146 9.43 50,946 1,297 10.18
Mortgage-backed securities (1) 4,894,262 81,325 6.65 3,051,817 52,238 6.85
Other securities (1) 1,509,024 26,948 7.14 1,092,467 19,713 7.22
Federal funds sold and
repurchase agreements 222,397 3,117 5.61 96,673 1,351 5.59
----------- ----------- ----------- -----------
Total interest-earning assets 11,604,842 205,079 7.07 7,448,832 136,975 7.36
----------- -----------
Non-interest-earning assets 547,216 293,919
----------- -----------
Total assets $12,152,058 $ 7,742,751
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 1,683,571 10,731 2.55% $ 1,109,565 7,018 2.53%
Certificates of deposit 3,199,008 43,126 5.39 2,698,008 37,457 5.55
NOW 85,693 268 1.25 69,440 217 1.25
Money manager 262,908 821 1.25 195,840 612 1.25
Money market 661,182 7,902 4.78 381,191 4,479 4.70
Borrowed funds 4,944,472 69,893 5.65 2,480,516 37,100 5.98
----------- ----------- ----------- -----------
Total interest-bearing liabilities 10,836,834 132,741 4.90 6,934,560 86,883 5.01
----------- -----------
Non-interest-bearing liabilities 365,476 204,063
----------- -----------
Total liabilities 11,202,310 7,138,623
Stockholders' equity 949,748 604,128
----------- -----------
Total liabilities and stockholders'
equity $12,152,058 $ 7,742,751
=========== ===========
Net interest income/net interest
rate spread (2) $ 72,338 2.17% $ 50,092 2.35%
=========== ==== =========== =====
Net interest-earning assets/net
interest margin (3) $ 768,008 2.49% $ 514,272 2.69%
=========== ==== =========== =====
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.
18
<PAGE> 20
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS: (Annualized) (Annualized)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 4,693,752 $ 267,150 7.59% $ 2,894,462 $ 171,761 7.91%
Consumer and other loans 50,797 3,561 9.35 55,010 4,147 10.05
Mortgage-backed securities (1) 4,444,261 222,524 6.68 3,287,240 167,699 6.80
Other securities (1) 1,500,066 80,911 7.19 981,062 51,655 7.02
Federal funds sold and
repurchase agreements 182,696 7,671 5.60 149,439 6,198 5.53
----------- ----------- ----------- -----------
Total interest-earning assets 10,871,572 581,817 7.14 7,367,213 401,460 7.27
----------- -----------
Non-interest-earning assets 556,421 245,165
----------- -----------
Total assets $11,427,993 $ 7,612,378
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 1,698,111 $ 32,476 2.55% $ 1,122,411 21,298 2.53%
Certificates of deposit 3,312,058 132,964 5.35 2,715,815 111,245 5.46
NOW 86,131 808 1.25 71,063 666 1.25
Money manager 258,177 2,420 1.25 196,083 1,838 1.25
Money market 597,265 21,457 4.79 330,524 11,230 4.53
Borrowed funds 4,193,293 178,686 5.68 2,415,988 106,190 5.86
----------- ----------- ----------- -----------
Total interest-bearing liabilities 10,145,035 368,811 4.85 6,851,884 252,467 4.91
----------- -----------
Non-interest-bearing liabilities 353,814 166,316
----------- -----------
Total liabilities 10,498,849 7,018,200
Stockholders' equity 929,144 594,178
----------- -----------
Total liabilities and stockholders'
equity $11,427,993 $ 7,612,378
=========== ===========
Net interest income/net interest
rate spread (2) $ 213,006 2.29% $ 148,993 2.36%
=========== ==== =========== =====
Net interest-earning assets/net
interest margin (3) $ 726,537 2.61% $ 515,329 2.70%
=========== ==== =========== =====
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.08x
=========== ===========
</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.
19
<PAGE> 21
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Quarter Ended September 30, 1998 Nine Months Ended September 30, 1998
Compared to Compared to
Quarter Ended September 30, 1997 Nine Months Ended September 30, 1997
---------------------------------------- ----------------------------------------
(In Thousands) Increase (Decrease) Increase (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans ...................... $ 33,389 $ (3,222) $ 30,167 $ 102,605 $ (7,216) $ 95,389
Consumer and other loans ............ (58) (93) (151) (307) (279) (586)
Mortgage-backed securities .......... 30,656 (1,569) 29,087 57,842 (3,017) 54,825
Other securities .................... 7,455 (220) 7,235 27,975 1,281 29,256
Federal funds sold and repurchase
agreements ....................... 1,761 5 1,766 1,394 79 1,473
--------- --------- --------- --------- --------- ---------
Total .................................. 73,203 (5,099) 68,104 189,509 (9,152) 180,357
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Savings ............................. 3,658 55 3,713 11,009 169 11,178
Certificates of deposit ............. 6,775 (1,106) 5,669 23,998 (2,279) 21,719
NOW ................................. 51 -- 51 142 -- 142
Money market ........................ 3,346 77 3,423 9,548 679 10,227
Money manager ....................... 209 -- 209 582 -- 582
Borrowed funds ...................... 34,944 (2,151) 32,793 75,852 (3,356) 72,496
--------- --------- --------- --------- --------- ---------
Total .................................. 48,983 (3,125) 45,858 121,131 (4,787) 116,344
--------- --------- --------- --------- --------- ---------
Net change in net interest
income .............................. $ 24,220 $ (1,974) $ 22,246 $ 68,378 $ (4,365) $ 64,013
========= ========= ========= ========= ========= =========
</TABLE>
20
<PAGE> 22
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
nine months ended September 30, 1998, $6.2 million of such properties were sold.
Of the remaining $5.6 million, the Company has a contract for the sale of a $4.0
million property and is actively seeking a buyer for the $1.6 million property.
Non-performing assets decreased $11.8 million, from $59.1 million at December
31, 1997 to $47.3 million at September 30, 1998. The following table shows a
comparison of delinquent loans as of September 30, 1998 and December 31, 1997.
DELINQUENT LOANS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 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 ............... 59 $1,896 346 $29,365 85 $3,741 365 $27,960
Multi-family ..................... 1 242 14 2,384 2 480 20 7,089
Commercial real estate ........... -- -- 7 3,380 -- -- 12 7,076
Consumer and other loans ......... 10 142 31 596 30 299 35 696
--- ------ --- ------- --- ------ --- -------
Total delinquent loans ... 70 $2,280 398 $35,725 117 $4,520 432 $42,821
=== ====== === ======= === ====== === =======
Delinquent loans to total
loans ....................... 0.05% 0.71% 0.10% 0.99%
</TABLE>
21
<PAGE> 23
The following table sets forth information regarding non-performing
assets at September 30, 1998 and December 31, 1997. In addition to the
non-performing loans, the Company has approximately $2.3 million and $4.5
million of potential problem loans at September 30, 1998 and December 31,
1997, respectively. Such loans are 60-89 days delinquent as shown on page 21.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 (1) 1997 (1)
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual delinquent mortgage loans (2) ........... $32,492 $37,397
Non-accrual delinquent consumer
and other loans ................................ 596 696
Mortgage loans delinquent 90 days or more (3) ....... 2,637 4,728
------- -------
Total non-performing loans ..................... 35,725 42,821
------- -------
Real estate owned, net (4) .......................... 2,689 6,091
Investments in real estate, net (5) ................. 8,853 10,173
------- -------
Total real estate owned and investments
in real estate, net ..................... 11,542 16,264
------- -------
Total non-performing assets ................ $47,267 $59,085
======= =======
Allowance for loan losses to non-performing loans ... 107.72% 93.50%
Allowance for loan losses to total loans ............ 0.77% 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 $2.0
million for the nine months ended September 30, 1998 and $2.9 million
for the year ended December 31, 1997. Actual payments recorded to
interest income totaled $796,000 for the nine months ended September
30, 1998 and $1.2 million for the year ended December 31, 1997.
(2) 16.0% and 27.6% are secured by other than one-to-four family properties
at September 30, 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 are recorded at the lower of cost or fair
value.
22
<PAGE> 24
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 ............................. 880
Charge-offs:
One-to-four family ..................................... (1,117)
Multi-family ........................................... (769)
Commercial ............................................. (1,528)
Consumer and other ..................................... (164)
--------
Total charge-offs ........................................... (3,578)
--------
Recoveries:
One-to-four family ..................................... 526
Multi-family ........................................... 522
Consumer and other ..................................... 94
--------
Total recoveries ............................................ 1,142
--------
Total net charge-offs ....................................... (2,436)
--------
Balance at September 30, 1998 ............................... $ 38,483
========
</TABLE>
<TABLE>
<S> <C>
Ratio of net charge-offs during the period to average loans outstanding during the period ... 0.05%
Ratio of allowance for loan losses to total loans at end of the period ...................... 0.77%
Ratio of allowance for loan losses to non-performing loans at end of the period ............. 107.72%
</TABLE>
<TABLE>
<S> <C>
Allowance for Losses on Investments in Real Estate and REO:
Balance at December 31, 1997 ................................... $ 1,493
Provision charged to operations ........................... 848
Charge-offs ............................................... (553)
Recoveries ................................................ 95
-------
Balance at September 30, 1998 .................................. $ 1,883
=======
</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 September 30, 1998
--------------------------------
% of Loans
in Category to
Amount Total Loans
------ -----------
(In Thousands)
<S> <C> <C>
One-to-four family $27,486 84.99%
Multi-family 3,688 7.68
Commercial 6,522 6.39
Consumer and other loans 787 0.94
------- ------
Total allowances $38,483 100.00%
======= ======
</TABLE>
23
<PAGE> 25
The following table sets forth the composition of the Company's loan portfolio
at September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
At September 30, 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 ................. $ 4,266,116 84.99% $ 3,561,673 82.34%
Multi-family ....................... 385,559 7.68 331,968 7.68
Commercial real estate ............. 320,603 6.39 378,558 8.75
----------- ------ ----------- ------
Total mortgage loans .................... 4,972,278 99.06 4,272,199 98.77
----------- ------ ----------- ------
CONSUMER AND OTHER LOANS:
Home equity ........................ 28,863 0.58 32,652 0.76
Passbook ........................... 6,088 0.12 4,956 0.11
Other .............................. 12,225 0.24 15,678 0.36
----------- ------ ----------- ------
Total consumer and other loans .......... 47,176 0.94 53,286 1.23
----------- ------ ----------- ------
Total loans ............................. 5,019,454 100.00% 4,325,485 100.00%
----------- ====== ----------- ======
LESS:
Unearned discounts, premiums and
deferred loan fees, net .......... 27,441 19,521
Allowance for loan losses .......... (38,483) (40,039)
----------- -----------
Total loans, net ........................ $ 5,008,412 $ 4,304,967
=========== ===========
</TABLE>
24
<PAGE> 26
SECURITIES PORTFOLIO
The following tables set forth the amortized cost and estimated fair value of
mortgage-backed securities and other securities available-for-sale and
held-to-maturity at September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
At September 30, 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 $ 241,296 $ 3,164 $ (465) $ 243,995
FHLMC pass-through certificates 269,657 2,571 (1,169) 271,059
FNMA pass-through certificates 91,618 79 (1,096) 90,601
Other pass-through certificates 306,415 3,794 (1,188) 309,021
REMICs and CMOs:
Agency issuance 2,722,553 4,060 (13,653) 2,712,960
Non agency issuance 414,848 2,083 (219) 416,712
Other 14,827 255 (25) 15,057
---------- ---------- ---------- ----------
Total mortgage-backed securities 4,061,214 16,006 (17,815) 4,059,405
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 281,957 2,723 (451) 284,229
FNMA and FHLMC preferred stock 127,515 1,558 -- 129,073
Equity and other securities 14,855 825 (134) 15,546
---------- ---------- ---------- ----------
Total other securities 424,327 5,106 (585) 428,848
---------- ---------- ---------- ----------
Total Available-for-Sale $4,485,541 $ 21,112 $ (18,400) $4,488,253
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed securities:
GNMA pass-through certificates $ 57,758 $ 2,314 $ (1) $ 60,071
FHLMC pass-through certificates 16,515 476 (12) 16,979
FNMA pass-through certificates 16,800 254 -- 17,054
REMICs and CMOs
Agency issuance 838,271 7,428 (426) 845,273
Non agency issuance 297,894 1,516 (43) 299,367
---------- ---------- ---------- ----------
Total mortgage-backed securities 1,227,238 11,988 (482) 1,238,744
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 974,598 12,079 (1,411) 985,266
Obligations of states and
political subdivisions 48,057 6 (2) 48,061
Corporate debt securities 9,989 36 -- 10,025
---------- ---------- ---------- ----------
Total other securities 1,032,644 12,121 (1,413) 1,043,352
---------- ---------- ---------- ----------
Total Held-to-Maturity $2,259,882 $ 24,109 $ (1,895) $2,282,096
========== ========== ========== ==========
</TABLE>
25
<PAGE> 27
<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>
26
<PAGE> 28
COMPARISON OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
AND OPERATING RESULTS FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
FINANCIAL CONDITION
Total assets increased $2.18 billion, to $12.71 billion at September
30,1998, from $10.53 billion at December 31, 1997. This increase was primarily
due to the Company's strategy of internal growth which resulted in increases in
the mortgage loan and mortgage-backed securities portfolios. Mortgage loans
increased $708.0 million from $4.29 billion at December 31, 1997 to $5.00
billion at September 30, 1998. Gross mortgage loans originated and purchased
during the nine months ended September 30, 1998 totaled $1.54 billion, of which
$1.40 billion were originations and $134.2 million were purchases. This compares
to $882.3 million of originations and $144.6 million of purchases for a total of
$1.03 billion during the nine months ended September 30, 1997. The increase in
the mortgage loan originations was partially offset by loan prepayments, as well
as normal principal repayments. Mortgage-backed securities increased $1.23
billion to $5.29 billion at September 30, 1998, from $4.06 billion at December
31, 1997. In addition to the increases in the mortgage loan and mortgage-backed
securities portfolios, federal funds sold and repurchase agreements increased
$172.4 million to $283.0 million at September 30, 1998, from $110.6 million at
December 31, 1997.
The growth in the loan and mortgage-backed securities portfolios was funded
primarily through additional medium- and long-term callable reverse repurchase
agreements, consistent with the Company's strategy of complementing its growth
through acquisitions by leveraging the Company's excess capital, to achieve
internally generated growth. Reverse repurchase agreements increased $2.34
billion, to $5.22 billion at September 30, 1998, from $2.88 billion at December
31, 1997. Deposits decreased slightly by $127.5 million to $6.09 billion, at
September 30, 1998, from $6.22 billion at December 31, 1997, reflecting a
decrease in certificates of deposit from $3.52 billion at December 31, 1997 to
$3.22 billion at September 30, 1998 and a decrease in savings accounts from
$1.72 billion at December 31, 1997 to $1.67 billion at September 30, 1998,
offset in part by an increase in money market accounts from $823.2 million at
December 31, 1997 to $1.04 billion at September 30, 1998.
Stockholders' equity increased to $960.9 million at September 30, 1998 from
$899.4 million at December 31, 1997, reflecting net income of $71.3 million, the
amortization relating to the allocation of ESOP stock and earned portion of RRP
stock and related tax benefit of $14.6 million and the effect of stock options
exercised and related tax benefit of $11.9 million, offset by dividends paid of
$20.2 million, repurchases of common stock in the first quarter of $9.7 million
and the decrease in net unrealized gains on securities, net of taxes, of $6.4
million.
RESULTS OF OPERATIONS
GENERAL
Net income increased 50.4%, to $25.4 million, or diluted earnings per
common share of $0.92 for the third quarter of 1998, from $16.9 million, or
diluted earnings per common share of $0.83, for the comparable period in 1997.
The return on average assets decreased slightly to 0.84% for the third quarter
of 1998 from 0.87% for the third quarter of 1997. The return on average common
equity decreased to 10.63% for the third quarter of 1998, from 11.18% for the
third quarter of 1997. The return on average tangible equity increased to 14.55%
for the third quarter of 1998, from 13.27% for the third quarter of 1997.
Net income increased 50.1%, to $71.3 million, or diluted earnings per common
share of $2.56 for the nine months ended September 30, 1998, from $47.5 million,
or diluted earnings per common share of $2.31 for the comparable period in 1997.
The return on average assets remained constant at 0.83% for both nine month
periods ended September 30, 1998 and 1997. The return on average common equity
decreased to 10.14% for the nine months ended September 30,
27
<PAGE> 29
1998 from 10.67% for the nine months ended September 30, 1997. The return on
average tangible equity increased to 14.10% for the nine months ended September
30, 1998, from 12.75% for the same period in 1997.
The decrease in the return on average common equity for the three and nine
months ended September 30, 1998 was primarily the result of an increase in
stockholders' equity of $351.1 million, or 57.6%, from $609.8 million at
September 30, 1997 to $960.9 million at September 30, 1998, primarily as a
result of The Greater Acquisition.
NET INTEREST INCOME
The Company's, as with any financial institution, net interest income is
significantly impacted by changes in interest rates and changes in market yield
curves. Over the past two years, interest rates have declined significantly, and
the markets for which related financial instruments trade have become
increasingly volatile. In addition, the decline in interest rates on long-term
instruments has been greater than the decline in rates on short-term
instruments, accentuating the flatness of the Treasury yield curve. As such, the
Company has continued to experience compression on its net interest spread and
net interest margin.
Net interest income increased $22.2 million, or 44.4%, from $50.1 million
in the third quarter of 1997 to $72.3 million in the third quarter of 1998. The
increase is due to the growth in total average interest-earning assets of $4.16
billion, partially 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. Additionally, the Company maintained a strategy
for internal growth which contributed to the increases in interest-earning
assets of mortgage loans, mortgage-backed securities and other securities. The
combined impact of this internally-generated growth and The Greater Acquisition
were increases in the average balances of mortgage loans, mortgage-backed
securities and other securities of 56.2%, 60.4% and 38.1%, respectively, for the
quarter ended September 30, 1998 compared to the quarter ended September 30,
1997. The increase in total average interest-earning assets was substantially
offset by an increase in total average interest-bearing liabilities of $3.90
billion, also partially 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 1998 third
quarter growth in interest-earning assets of $865.0 million compared to the
1998 second quarter was driven primarily by the anticipation of the LIB Merger,
which brought a significant amount of excess capital to the Company. This
growth was funded through borrowings which provide the Company with flexibility
and efficiency which cannot be obtained through deposit growth.
During 1998, the Company has continued to emphasize the origination of
mortgage loans. The average balance of mortgage loans increased $1.77 billion
from $3.16 billion for the three months ended September 30, 1997 to $4.93
billion for the three months ended September 30, 1998. The average yield on
mortgage loans decreased 39 basis points from 7.90% for the third quarter of
1997 to 7.51% for the third quarter of 1998. This decrease is due to the
flattening of the yield curve and the significant decline in market rates, which
has resulted in increased prepayments and refinancing activity. See "Interest
Rate Sensitivity Analysis." The decrease in the average yield on total
average loans was offset in part by the increase in the average volume
of such loans which generally have a higher average yield than many of the
Company's other interest-earning assets. Additionally, the average yield on
consumer and other loans decreased 75 basis points, from 10.18% for the third
quarter of 1997 to 9.43% for the third quarter of 1998, primarily due to the
decrease in interest rates. The average yield on mortgage-backed securities
decreased 20 basis points from 6.85% for the third quarter of 1997 to 6.65% for
the third quarter of 1998 as a result of overall decreases in market rates
coupled with accelerated prepayments, resulting in reinvestments at lower rates.
The average yield on other securities decreased 8 basis points to 7.14% for the
third quarter of 1998 from 7.22% for the third quarter of 1997 as a result of
the overall decreases in rates during the third quarter of 1998.
The Company also significantly increased borrowings with lower interest
rates which were primarily utilized to fund the asset growth discussed above.
The average cost of borrowed funds decreased from 5.98% for the third quarter of
1997 to 5.65% for the third quarter of 1998. The average cost of money market
accounts increased from 4.70% for the third quarter of 1997 to 4.78% for the
third quarter of 1998. Interest paid on money market accounts is on a tiered
basis with over 86.5% of the balance in the highest tier. The yield on this top
tier will be at least equal to the discount rate for the three-month Treasury
bill. While interest rates have fallen, the short end of the yield curve has
been the least affected and has not always moved as quickly as the remaining
portion of the yield curve. Additionally, the Company has used the customer
base from money market accounts as a core customer and has not always reduced
the rate with the yield curve, thereby attracting deposits. Customers shifting
deposits into the money market accounts to obtain the higher rates offered
contributed to an increase in the average balance of money market accounts by
$280.0 million to
28
<PAGE> 30
$661.2 million for the third quarter of 1998 from $381.2 million for the third
quarter of 1997. Offsetting this increase was a decrease in the average cost of
certificates of deposit from 5.55% to 5.39% for the quarters ended September 30,
1997 and 1998, respectively.
Rapidly falling interest rates, significant loan and security prepayments
and a relatively flat U.S. Treasury yield curve continue to reduce the Company's
net interest spread and net interest margin. The Company's net interest spread
decreased to 2.17% for the quarter ended September 30, 1998 from 2.35% for the
quarter ended September 30, 1997, which was primarily the result of a decrease
in the average yield on total average interest-earning assets, from 7.36% for
the quarter ended September 30, 1997 to 7.07% for the quarter ended September
30, 1998 offset by the decrease in the average cost of total average
interest-bearing liabilities, from 5.01% for the quarter ended September 30,
1997 to 4.90% for the quarter ended September 30, 1998. The net interest margin
decreased to 2.49% for the third quarter of 1998 from 2.69% for the third
quarter of 1997 which was the result of the decrease in the net interest rate
spread, coupled with the Company's accelerated growth of average
interest-earning assets during the third quarter.
For the nine months ended September 30, 1998, net interest income increased
$64.0 million, or 43.0%, to $213.0 million from $149.0 million for the nine
months ended September 30, 1997. During the nine months ended September 30,
1998, total average interest-earning assets increased $3.50 billion from the
comparable 1997 period. The interest-earning asset growth was offset by an
increase in total average interest-bearing liabilities of $3.29 billion for
these same periods. These substantial increases for the nine month period ended
September 30, 1998 compared to 1997, were also attributable to the Company's
internal growth strategy and The Greater Acquisition, as discussed above. The
average yield on mortgage loans decreased 32 basis points from 7.91% for the
nine months ended September 30, 1997 to 7.59% for the nine months ended
September 30, 1998, due to the decline in market rates which resulted in
increased prepayments and refinancing activities. Additionally, the average
yield on consumer and other loans decreased 70 basis points, from 10.05% for the
nine months ended September 30, 1997 to 9.35% for the nine months ended
September 30, 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 13.80% for the nine months ended September 30, 1997.
The average yield on mortgage-backed securities decreased 12 basis points
from 6.80% for the nine months ended September 30, 1997 to 6.68% for the nine
months ended September 30, 1998. This decrease is attributable to the overall
decrease in market rates in the third quarter of 1998 partially offset by
purchases made in the first half of the year when rates were higher. The average
yield on other securities increased 17 basis points from 7.02% for the nine
months ended September 30, 1997 to 7.19% for the nine months ended September 30,
1998 as a result of the Company's purchases of higher-yielding long-term U.S.
government and agency securities with call features during the second half of
1997 and the first half of 1998 offset by the decrease in market rates during
the third quarter of 1998.
The average cost of borrowed funds decreased from 5.86% for the nine months
ended September 30, 1997 to 5.68% for the nine months ended September 30, 1998.
The average cost of money market accounts increased from 4.53% for the nine
months ended September 30, 1997 to 4.79% for the nine months ended September 30,
1998. Offsetting this increase was a decrease in the average cost of
certificates of deposit from 5.46% to 5.35% for the nine months ended September
30, 1997 and 1998, respectively. These changes in cost of funds are reflective
of the third quarter changes discussed above.
The Company's net interest spread for the nine months ended September 30,
1998 decreased to 2.29% from 2.36% for the same period in 1997, which was the
result of the decrease in the average yield on total average interest-earning
assets, from 7.27% for the nine months ended September 30, 1997 to 7.14% for the
nine months ended September 30, 1998 offset by a decrease in the average cost of
total average interest-bearing liabilities, from 4.91% for the nine months ended
September 30, 1997 to 4.85% for the nine months ended September 30, 1998. The
net interest margin decreased from 2.70% for the first nine months of 1997 to
2.61% for the first nine months of 1998.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased to $266,000 for the third quarter of
1998 from $895,000 for the comparable 1997
29
<PAGE> 31
period. For the nine months ended September 30, 1998 and 1997, the provision for
loan losses was $880,000 and $2.8 million, respectively. The allowance for loan
losses decreased from $40.0 million at December 31, 1997 to $38.5 million at
September 30, 1998 reflecting, in part, net charge-offs of $2.4 million during
the nine months ended September 30, 1998. For the three months ended September
30, 1998, the Company recognized a net recovery of $356,000. For the three and
nine months ended September 30, 1997, net charge-offs totaled $1.3 million and
$2.4 million, respectively. Non-performing loans decreased from $42.8 million at
December 31, 1997 to $35.7 million at September 30, 1998. The reduction in
non-performing loans improved the Company's percentage of allowance for loan
losses to non-performing loans from 93.50% at December 31, 1997 to 107.72% at
September 30, 1998. The allowance for loan losses as a percentage of total loans
decreased from 0.93% at December 31, 1997 to 0.77% at September 30, 1998
primarily as a result of the $694.0 million increase in gross loans receivable
from December 31, 1997 to September 30, 1998. The decreases in the provision
primarily reflect the improvement in non-performing loans. See "Asset Quality."
NON-INTEREST INCOME
Non-interest income for the quarter ended September 30, 1998, excluding net
gains on sales of securities and loans, increased 72.3% to $6.1 million from
$3.6 million for the comparable quarter of 1997. Non-interest income for the
nine months ended September 30, 1998, excluding net gains on sales of securities
and loans, increased 67.8% to $17.1 million from $10.2 million for the
comparable 1997 period. The increases are primarily in customer service and loan
fees, from the addition of The Greater's operations in the fourth quarter of
1997, which totaled $4.9 million and $12.9 million for the three and nine months
ended September 30, 1998, respectively, compared to $2.8 million and $8.1
million for the three and nine months ended September 30, 1997, respectively.
The increases in customer service and loan fees are also due in part to the
Company's increased loan originations and overall growth in the loan portfolio
during the three and nine months ended September 30, 1998. Other non-interest
income also increased to $1.3 million and $4.1 million for the three and nine
months ended September 30, 1998, respectively, from $735,000 and $2.1 million
for the three and nine months ended September 30, 1997, respectively. These
increases were primarily a result of increased rental income generated from The
Greater's properties acquired. Net gains on sales of securities and loans for
the quarter and nine months ended September 30, 1998 totaled $3.3 million and
$8.7 million, respectively, compared to $3.2 million and $4.7 million,
respectively, for the comparable 1997 periods.
NON-INTEREST EXPENSE
Non-interest expense for the quarter ended September 30, 1998 increased
$10.7 million, to $37.1 million, from $26.4 million for the quarter ended
September 30, 1997, primarily as a result of the addition of The Greater's
operations in the 1997 fourth quarter. For the nine months ended September 30,
1998 non-interest expense increased $33.8 million, to $112.8 million from $79.0
million for the nine months ended September 30, 1997. General and
administrative expense increased $8.1 million, from $24.1 million for the third
quarter of 1997 to $32.2 million for the third quarter of 1998. For the nine
months ended September 30, 1998, general and administrative expense increased
$26.0 million to $98.0 million from $72.0 million for the comparable period in
1997. Compensation and benefits increased $3.5 million for the three months
ended September 30, 1998, as compared to the comparable 1997 period due to the
increase in the number of employees as a result of The Greater Acquisition. For
the nine months ended September 30, 1998, compensation and benefits increased
$12.8 million, from the comparable 1997 period, also due to The Greater
Acquisition, coupled with an increase in amortization expense relating to
employee stock plans. The amortization expense increased $1.7 million for the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. The increase in amortization expense relating to employee
stock plans includes an increase relating to the allocation of ESOP stock due
to a higher average market value of the Common Stock from $42.49 per share for
the nine months ended September 30, 1997 to $52.60 per share for the nine
months ended September 30, 1998.
Occupancy, equipment and systems expense also increased $3.2 million and
$9.7 million, respectively, for the three and nine months ended September 30,
1998 as compared to the same periods in 1997. In addition, goodwill amortization
increased $2.8 million and $8.2 million as a result of The Greater Acquisition,
to $4.9 million and $14.5 million for the three and nine months ended September
30, 1998 from $2.1 million and $6.3 million for the comparable
30
<PAGE> 32
1997 periods. The Company's percentage of general and administrative expense to
average assets improved to 1.06% and 1.14% for the three and nine months ended
September 30, 1998, respectively, from 1.24% and 1.26% for the three and nine
months ended September 30, 1997, respectively. For the quarter ended September
30, 1998, the Company's efficiency ratio improved to 41.09% from 44.91% for the
quarter ended September 30, 1997. The Company's efficiency ratio also improved
for the nine months ended September 30, 1998 to 42.62% from 45.22% for the nine
months ended September 30, 1997.
INCOME TAX EXPENSE
Income tax expense increased $6.3 million to $19.0 million for the third
quarter of 1998 from $12.7 million for the comparable quarter in 1997, primarily
due to the increase in income before taxes of $14.8 million. Income tax expense
for the nine months ended September 30, 1998 increased $19.3 million to $53.8
million from $34.5 million for the comparable 1997 period, primarily due to the
increase in income before taxes of $43.0 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 third quarter of 1998 totaled
$34.6 million, an increase of $11.2 million over $23.4 million cash earnings for
the third quarter of 1997. For the nine month period ended September 30, 1998,
cash earnings increased $34.4 million to $100.5 million from $66.1 million for
the nine months ended September 30, 1997. Cash returns on average tangible
equity and average assets for the third quarter of 1998 were 19.81% and 1.14%,
respectively, compared to 18.41% and 1.21%, respectively, for the comparable
1997 period. Cash returns on average tangible equity and average assets for the
nine months ended September 30, 1998 were 19.86% and 1.17%, respectively,
compared to 17.72% and 1.16%, respectively for the same period in 1997. The cash
efficiency ratio also improved to 36.90% and 37.62% for the three and nine
months ended September 30, 1998, respectively, from 38.15% and 39.05% for the
three and nine months ended September 30, 1997, respectively.
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<PAGE> 33
Presented below are the Company's Condensed Consolidated Schedules of Cash
Earnings for the three and nine months ended September 30, 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 25,403 $ 16,892 $ 71,335 $ 47,533
Add back:
Employee stock plans amortization expense 3,285 3,626 11,486 9,834
Amortization of goodwill 4,866 2,110 14,519 6,330
Income tax benefit on amortization expense of
earned portion of RRP stock 1,038 805 3,114 2,378
-------- -------- -------- --------
Cash Earnings 34,592 23,433 100,454 66,075
-------- -------- -------- --------
Preferred dividends declared 1,500 -- 4,500 --
-------- -------- -------- --------
Cash earnings available to common shareholders $ 33,092 $ 23,433 $ 95,954 $ 66,075
======== ======== ======== ========
Basic earnings per common share (1) $ 1.32 $ 1.24 $ 3.86 $ 3.44
======== ======== ======== ========
Diluted earnings per common share (1) $ 1.27 $ 1.15 $ 3.68 $ 3.21
======== ======== ======== ========
</TABLE>
(1) Based on the weighted average shares used to calculate earnings per
share on the Consolidated Statements of Income. Prior year amounts
have been restated as a result of the implementation of SFAS No. 128.
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.)
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<PAGE> 34
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. By motion dated July 15, 1998,
the government moved to stay further proceedings related to the Association's
motion for partial summary judgment which has been granted through January 4,
1999. The Association intends to aggressively object to any further stay. The
Association's motion for partial summary judgment 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.
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 moved to dismiss the amended complaint. On
June 1, 1998 the Court granted defendant's motion to dismiss the amended
complaint without prejudice. On or about July 1, 1998, the plaintiffs filed a
pleading styled "Second Amended Class Action Complaint," without making a formal
motion for leave to amend. The defendants, which include The Greater, the
Association, the Company and the directors of The Greater, moved to strike on or
about July 21, 1998 the complaint or in the alternative to deny leave to amend
or to dismiss it for failure to state a claim on which relief may be granted. On
July 27, 1998, the Court notified the parties that the plaintiffs' letter to the
Court dated July 1, 1998 accompanying the amended complaint would be deemed a
motion for leave to file an amended complaint and that defendants' motions would
be treated as opposition to plaintiffs' request for leave. The motion was argued
by the Court on October 21, 1998 and the Court reserved its decision on the
matters pending.
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<PAGE> 35
The Company and the Association believe the allegations made in the second
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. The Association, AF Roosevelt Avenue Corporation,
Messrs. Drewitz and Engelke and certain other defendants 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 completed 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 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 reinhabited. In the interim, both the City of New York and the Association
moved for appointment of a receiver to take control of the management and repair
of the property. The Board of Managers opposed such motions.
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 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, were not served on any Association related defendant and, therefore,
under Federal law is deemed dismissed.
34
<PAGE> 36
The Association, AF Roosevelt Avenue Corporation, Henry Drewitz and George
L. Engelke, Jr. entered into a settlement agreement with the Board of Managers
on August 7, 1998. The settlement closed after September 30, 1998. In accordance
with the terms of the settlement, the Association transferred assets having a
book value of $10.1 million prior to the application of reserves to the Board of
Managers. The Board executed and delivered stipulations of discontinuance and a
release in favor of the Association, AF Roosevelt Corporation, 149 Roosevelt
Avenue Associates, Henry Drewitz and George L. Engelke, Jr. as part of the
settlement. In addition, the Board delivered releases executed by 120 unit
owners in favor of the Association, AF Roosevelt Avenue Corporation, 149
Roosevelt Avenue Associates, Henry Drewitz and George L. Engelke, Jr. As a
result of the settlement, the Association, AF Roosevelt Avenue Corporation,
Henry Drewitz and George L. Engelke, Jr. withdrew their summary judgment
motions. While the settlement resolved the claims brought by the Board of
Managers against the Association, AF Roosevelt Avenue Corporation, Henry
Drewitz, George L. Engelke, Jr., the claims brought by the City and cross-claims
brought by co-defendants in this matter remain pending. In the event no remedy
is found with regard to any remaining claims, the Association intends to
continue to defend such remaining actions vigorously.
No other material events occurred with respect to legal proceedings during
the quarter ended September 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on August 19, 1998 (the "Special
Meeting"). At the Special Meeting, shareholders approved the Agreement and Plan
of Merger, dated as of the 2nd day of April 1998, as amended, by and between the
Company and LIB, which provides, among other things, for (i) the merger of LIB
with and into the Company and (ii) the conversion of each share of LIB Common
Stock, par value $0.01 per share, outstanding immediately prior to the LIB
Merger, into the right to receive 1.15 shares of the Company's Common Stock, par
value $0.01 per share, plus cash in lieu of any fractional share interest.
The number of votes cast as to the above matter acted upon at the Special
Meeting was as follows:
<TABLE>
<S> <C>
For 20,059,417
Against 377,972
Abstained 58,127
Broker Non-Vote 314,983
</TABLE>
35
<PAGE> 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4. Bylaws of Astoria Federal Savings and Loan Association, as
amended.
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
September 30, 1998:
1) Form 8-K, dated July 9, 1998 (filed July 10, 1998), which
includes the second amendment to the agreement and plan of merger
pursuant to which the Company proposes to acquire Long Island
Bancorp, Inc.
2) Form 8-K, dated July 17, 1998 (filed July 20, 1998), which
includes the Company's announcement of its earnings for the
quarter ended June 30, 1998.
36
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: November 13, 1998 By: /s/ Monte N. Redman
--------------------- -----------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
37
<PAGE> 39
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
<S> <C>
4. Bylaws of Astoria Federal Savings and Loan Association, as
amended
11. Statement Regarding Computation of Per Share Earnings
27. Financial Data Schedule
</TABLE>
38
<PAGE> 1
EXHIBIT 4.
BYLAWS
OF
ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION
Amended and Restated Effective as of January 31, 1995
As Amended Effective July 17, 1996
As Amended Effective September 30, 1997
As Amended Effective September 30, 1998
39
<PAGE> 2
BYLAWS OF
ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION
ARTICLE I. HOME OFFICE
The home office of Astoria Federal Savings and Loan ("ASSOCIATION")
is 37-16 30th Avenue, Long Island City, New York 11103.
ARTICLE II. SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the administrative office of the ASSOCIATION
located at One Astoria Federal Plaza, Lake Success, New York or at such other
place in the State in which the principal place of business of the ASSOCIATION
is located as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
ASSOCIATION for the election of directors and for the transaction of any other
business of the ASSOCIATION shall be held annually within 120 days after the end
of the ASSOCIATION's fiscal year.
Section 3. Special Meetings. For a period of five years from the
date of the completion of the conversion of the ASSOCIATION from mutual to stock
form, special meetings of the shareholders relating to a change in control of
the ASSOCIATION or to an amendment of the Charter of the ASSOCIATION may be
called only by the board of directors. Thereafter, special meetings of the
shareholders for any purpose or purposes, unless otherwise prescribed by the
regulations of the Office of Thrift Supervision ("OTS"), may be called at any
time by the chairman of the board, the president, or a majority of the board of
directors, and shall be called by the chairman of the board, the president or
the secretary upon the written request of the holders of not less than one-tenth
of all the outstanding capital stock of the ASSOCIATION entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered at the home office of the ASSOCIATION addressed to the
chairman of the board, the president or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the OTS or these bylaws. The board
of directors shall designate, when present, either the chairman of the board or
president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, the secretary, or the directors calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the mail, addressed to
the shareholder at the address as it appears on the stock transfer books or
records of the ASSOCIATION as of the record date prescribed in Section 6 of this
Article II, with postage prepaid. When any shareholders' meeting, either annual
or special, is adjourned for 30 days or more, notice of the adjourned meeting
shall be given as in the case of an original meeting. It shall not be necessary
to give any notice of the time and place of any meeting adjourned for less than
30 days or of the business to be transacted at the meeting, other than an
announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting
40
<PAGE> 3
2
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the ASSOCIATION shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the ASSOCIATION and
shall be subject to inspection by any shareholder at any time during usual
business hours, for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection by any shareholder during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in Section 552.6(d) of the OTS's
Regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the
ASSOCIATION entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid more
than eleven months from the date of its execution except for a proxy coupled
with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons.
When ownership stands in the name of two or more persons, in the absence of
written directions to the ASSOCIATION to the contrary, at any meeting of the
shareholders of the ASSOCIATION any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by him,
either in person or by proxy, without a transfer of such shares into his name.
Shares standing in the name of a trustee may be voted by him, either in person
or by proxy, but no trustee shall be entitled to vote shares held by him without
a transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer into his name
if authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee
and thereafter the pledgee, shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the ASSOCIATION,
nor shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
ASSOCIATION, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any
41
<PAGE> 4
3
given time for purposes of any meeting.
Section 12. Cumulative Voting. Shareholders shall not be entitled to
cumulate their votes for election of directors.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting, or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the OTS, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act
as a nominating committee for selecting the nominees for election as directors.
Except in the case of a nominee substituted as a result of the death or other
incapacity of a nominee, the nominating committee shall deliver written
nominations to the secretary at least 20 days prior to the date of the annual
meeting. Upon delivery, such nominations shall be posted in a conspicuous place
in each office of the ASSOCIATION. No nominations for directors except those
made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by shareholders are made in writing and delivered to
the secretary of the ASSOCIATION at least five days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the ASSOCIATION. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
ASSOCIATION at least five days before the date of the annual meeting, and all
business so stated, proposed, and filed shall be considered at the annual
meeting, but no other proposal shall be acted upon at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
secretary at least five days before the meeting, such proposal shall be laid
over for action at an adjourned, special, or annual meeting of the shareholders
taking place 30 days or more thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees; but in connection with such reports no new
business shall be acted upon at such annual meeting unless stated and filed as
herein provided.
Section 16. Informal Action by Shareholders. Any action required to
be taken at a meeting of shareholders, or any other action which may be taken at
a meeting of the shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III. BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the
ASSOCIATION shall be under the direction of its board of directors. The board of
directors shall annually elect a chairman of the board and a president from
among its
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<PAGE> 5
4
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
fifteen members and shall be divided into three classes as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. One class
shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place, within the
ASSOCIATION's normal lending territory, for the holding of additional regular
meetings without other notice than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the ASSOCIATION
unless the ASSOCIATION is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman of the board, the
president or one-third of the directors. The persons authorized to call special
meetings of the board of directors may fix any place, within the ASSOCIATION's
normal lending territory, as the place for holding any special meeting of the
board of directors called by such persons.
Members of the board of directors may participate in special
meetings by means of conference telephone, or by means of similar communications
equipment by which all persons participating in the meeting can hear each other.
Such participation shall constitute presence in person but shall not constitute
attendance for the purpose of compensation pursuant to Section 12 of this
Article.
Section 6. Notice. Written notice of any special meeting shall be
given to each director at least two days prior thereto when delivered personally
or by telegram, or at least five days prior thereto when delivered by mail at
the address at which the director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the mail so addressed, with
postage prepaid if mailed, or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by regulation of
the OTS or by these bylaws.
Section 9. Action Without a Meeting. Any action required or
permitted to be taken by the board of directors at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the
ASSOCIATION addressed to the chairman of the board or president. Unless
otherwise specified such resignation shall take effect upon receipt by the
chairman of the board or president. More than three consecutive absences from
regular meetings of the board of directors, unless excused by resolution of the
board of directors, shall automatically constitute a resignation, effective when
such resignation is accepted by the board of directors.
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<PAGE> 6
5
Section 11. Vacancies. Any vacancy occurring in the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 13. Presumption of Assent. A director of the ASSOCIATION who
is present at a meeting of the board of directors at which action on any
ASSOCIATION matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of the
meeting or unless he shall file a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the ASSOCIATION
within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 14. Removal of Directors. At a meeting of shareholders
called expressly for that purpose, any director may be removed for cause by a
vote of the holders of a majority of the shares then entitled to vote at an
election of directors. Whenever the holders of the shares of any class are
entitled to elect one or more directors by the provisions of the Charter or
supplemental sections thereto, the provisions of this section shall apply, in
respect to the removal of a director or directors so elected, to the vote of the
holders of the outstanding shares of that class and not to the vote of the
outstanding shares as a whole.
Section 15. Age Limitation of Directors. No person 75 or above years
of age shall be eligible for election, reelection, appointment, or reappointment
to the board of directors of the ASSOCIATION. No director shall serve as such
beyond the regular meeting of the ASSOCIATION which immediately precedes the
director becoming 75 years of age. This age limitation does not apply to an
advisory director.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and the
delegation of authority shall not operate to relieve the board of directors, or
any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
Charter or bylaws of the ASSOCIATION, or recommending to the shareholders a plan
of merger, consolidation, or conversion; the sale, lease or other disposition of
all or substantially all of the property and assets of the ASSOCIATION otherwise
than in the usual and regular course of its business; a voluntary dissolution of
the ASSOCIATION; a revocation of any of the foregoing; or the approval of a
transaction in which any member of the executive committee, directly or
indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may
be held without notice at such times and places as the executive committee may
fix from time to time by resolution. Special meetings of the executive committee
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6
may be called by any member thereof upon not less than one day's notice stating
the place, date and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the ASSOCIATION. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the board of directors for its
information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by
resolution establish an audit, loan, or other committees composed of directors
as they may determine to be necessary or appropriate for the conduct of the
business of the ASSOCIATION and may prescribe the duties, constitution and
procedures thereof.
ARTICLE V. OFFICERS
Section 1. Positions. The officers of the ASSOCIATION shall be a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer, unless the board of directors designates the chairman
of the board as chief executive officer. The president shall be a director of
the ASSOCIATION. The offices of the secretary and treasurer may be held by the
same person and a vice president may also be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors may
also elect or authorize the appointment of such other officers as the business
of the ASSOCIATION may require. The officers shall have such authority and
perform such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the
ASSOCIATION shall be elected annually at the first meeting of the board of
directors held after each annual meeting of the shareholders. If the election of
officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor has
been duly elected and qualified or until the officer's death, resignation or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee or agent shall not of itself create contractual rights. The
board of directors may authorize the ASSOCIATION to enter into an employment
contract with any officer in accordance with regulations of the OTS; but no such
contract shall impair the right of the board of directors to remove any officer
at any time in accordance with Section 3 of this Article V.
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<PAGE> 8
7
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the ASSOCIATION will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the
OTS, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the ASSOCIATION to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the ASSOCIATION. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
ASSOCIATION and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued in the
name of the ASSOCIATION shall be signed by one or more officers, employees or
agents of the ASSOCIATION in such manner as shall from time to time be
determined by the board of directors.
Section 4. Deposits. All funds of the ASSOCIATION not otherwise
employed shall be deposited from time to time to the credit of the ASSOCIATION
in any duly authorized depositories as the board of directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares
of capital stock of the ASSOCIATION shall be in such form as shall be determined
by the board of directors and approved by the OTS. Such certificates shall be
signed by the chief executive officer or by any other officer of the ASSOCIATION
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar,
other than the ASSOCIATION itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares and date of issue, shall be entered on the stock transfer books
of the ASSOCIATION. All certificates surrendered to the ASSOCIATION for transfer
shall be canceled and no new certificate shall be issued until the former
certificate for a like number of shares has been surrendered and canceled,
except that in case of a lost or destroyed certificate, a new certificate may be
issued upon such terms and indemnity to the ASSOCIATION as the board of
directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock
of the ASSOCIATION shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
ASSOCIATION. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the ASSOCIATION shall be deemed by the ASSOCIATION
to be the owner for all purposes.
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8
ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the ASSOCIATION shall end on December 31 of each
year. The ASSOCIATION shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors. The appointment of such accountants shall be subject to
annual ratification by the shareholders.
ARTICLE IX. DIVIDENDS
Subject to the terms of the ASSOCIATION's Charter and the
regulations and orders of the OTS, the board of directors may, from time to
time, declare, and the ASSOCIATION may pay, dividends on its outstanding shares
of capital stock.
ARTICLE X. CORPORATE SEAL
The board of directors shall provide an ASSOCIATION seal, which
shall be two concentric circles between which shall be the name of the
ASSOCIATION. The year of incorporation or an emblem may appear in the center.
ARTICLE XI. AMENDMENTS
These bylaws may be amended in a manner consistent with regulations
of the OTS at any time by a majority vote of the full board of directors, or by
a majority vote of the votes cast by the shareholders of the ASSOCIATION at any
legal meeting.
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EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
(In Thousands,
Except Per Share Data)
<S> <C>
1. Net Income $71,335
Less: Preferred stock dividends declared 4,500
-------
Net income available to common shareholders $66,835
=======
2. Weighted average common shares outstanding 26,465
3. ESOP shares not committed to be released (1,621)
4. RRP shares purchased but unallocated (11)
-------
5. Total weighted average common shares outstanding 24,833
=======
6. Basic earnings per common share $ 2.69
========
7. Total weighted average common shares outstanding 24,833
8. Dilutive effect of stock options using the treasury
stock method 1,255
-------
9. Total average common and common equivalent
shares 26,088
========
10. Diluted earnings per common share $ 2.56
========
</TABLE>
48
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,244
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 283,016
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,488,253
<INVESTMENTS-CARRYING> 2,259,882
<INVESTMENTS-MARKET> 2,282,096
<LOANS> 5,046,895
<ALLOWANCE> 38,483
<TOTAL-ASSETS> 12,713,056
<DEPOSITS> 6,093,440
<SHORT-TERM> 465,000
<LIABILITIES-OTHER> 168,551
<LONG-TERM> 5,025,142
0
2,000
<COMMON> 266
<OTHER-SE> 958,657
<TOTAL-LIABILITIES-AND-EQUITY> 12,713,056
<INTEREST-LOAN> 270,711
<INTEREST-INVEST> 311,106
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 581,817
<INTEREST-DEPOSIT> 190,125
<INTEREST-EXPENSE> 368,811
<INTEREST-INCOME-NET> 213,006
<LOAN-LOSSES> 880
<SECURITIES-GAINS> 7,772
<EXPENSE-OTHER> 12,904
<INCOME-PRETAX> 125,124
<INCOME-PRE-EXTRAORDINARY> 71,335
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,335
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.56
<YIELD-ACTUAL> 2.61
<LOANS-NON> 33,088
<LOANS-PAST> 2,637
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,280
<ALLOWANCE-OPEN> 40,039
<CHARGE-OFFS> 3,578
<RECOVERIES> 1,142
<ALLOWANCE-CLOSE> 38,483
<ALLOWANCE-DOMESTIC> 38,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
