<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, 1999
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)
<TABLE>
<CAPTION>
Delaware 11-3170868
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
</TABLE>
<TABLE>
<CAPTION>
One Astoria Federal Plaza, Lake Success, New York 11042-1085
------------------------------------------------- ----------
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
(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.
<TABLE>
<CAPTION>
Classes of Common Stock Number of Shares Outstanding, October 29, 1999
----------------------- ----------------------------------------------
<S> <C>
.01 Par Value 54,383,927
------------- ----------
</TABLE>
<PAGE> 2
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition at September 30, 1999 2
and December 31, 1998.
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 1999 and September 30, 1998. 3
Consolidated Statement of Stockholders' Equity for the Nine Months 4
Ended September 30, 1999.
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and September 30, 1998. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 34
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
(a) Exhibits
(4) Amendment No. 2 to Rights Agreement dated as of
September 15, 1999, between Astoria Financial Corporation
and Chase Mellon Shareholder Services, L.L.C., as
Rights Agent.
(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
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
(In Thousands, Except Share Data) 1999 1998
- --------------------------------- ---- ----
<S> <C> <C>
Assets
Cash and due from banks $ 114,328 $ 126,945
Federal funds sold and repurchase agreements 127,209 266,437
Mortgage-backed securities available-for-sale 8,887,451 7,553,834
Other securities available-for-sale 667,498 642,610
Mortgage-backed securities held-to-maturity (estimated fair value of
$1,129,039 and $1,141,145, respectively) 1,131,636 1,136,799
Other securities held-to-maturity (estimated fair value
of $781,393 and $982,295, respectively) 829,020 972,012
Federal Home Loan Bank of New York stock 262,000 210,250
Loans held-for-sale 38,478 212,909
Loans receivable held-for-investment:
Mortgage loans, net 9,823,261 8,583,355
Consumer and other loans, net 184,299 230,367
------------ ------------
10,007,560 8,813,722
Less allowance for loan losses 74,332 74,403
------------ ------------
Loans receivable held-for-investment, net 9,933,228 8,739,319
Mortgage servicing rights, net 49,957 50,237
Accrued interest receivable 115,563 102,288
Premises and equipment, net 177,557 161,629
Goodwill 228,778 245,862
Other assets 301,055 166,610
------------ ------------
Total assets $ 22,863,758 $ 20,587,741
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Savings $ 2,645,132 $ 2,815,681
Money market 1,113,816 857,295
Money manager 578,380 626,832
NOW 245,448 325,726
Certificates of deposit 4,857,447 5,042,752
------------ ------------
Total deposits 9,440,223 9,668,286
Reverse repurchase agreements 9,776,800 7,291,800
Federal Home Loan Bank of New York advances 1,410,087 1,210,170
Other borrowings 477,685 520,827
Mortgage escrow funds 143,001 116,106
Accrued expenses and other liabilities 257,219 318,168
------------ ------------
Total liabilities 21,505,015 19,125,357
------------ ------------
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 shares authorized; 55,498,296 and
54,655,095 shares issued, respectively; and
54,340,443 and 54,655,095 shares outstanding, respectively) 555 547
Additional paid-in capital 797,541 767,846
Retained earnings - substantially restricted 864,741 742,679
Treasury stock (1,157,853 shares, at cost) (50,086) --
Accumulated other comprehensive income:
Net unrealized loss on securities, net of taxes (222,258) (14,566)
Unallocated common stock held by ESOPs (33,645) (35,908)
Unearned common stock held by RRP (105) (214)
------------ ------------
Total stockholders' equity 1,358,743 1,462,384
------------ ------------
Total liabilities and stockholders' equity $ 22,863,758 $ 20,587,741
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998 1999 1998
- --------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 172,208 $ 155,824 $ 502,014 $ 457,959
Consumer and other loans 4,726 6,192 14,797 18,596
Mortgage-backed securities 167,422 113,025 497,287 314,356
Other securities 31,854 34,080 96,871 99,965
Federal funds sold and repurchase agreements 2,237 3,921 5,586 11,134
------------ ------------ ------------ ------------
Total interest income 378,447 313,042 1,116,555 902,010
------------ ------------ ------------ ------------
Interest expense:
Deposits 91,496 100,530 271,103 306,134
Borrowed funds 153,714 100,242 439,630 262,717
------------ ------------ ------------ ------------
Total interest expense 245,210 200,772 710,733 568,851
------------ ------------ ------------ ------------
Net interest income 133,237 112,270 405,822 333,159
Provision for loan losses 1,026 5,166 3,119 8,780
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 132,211 107,104 402,703 324,379
------------ ------------ ------------ ------------
Non-interest income:
Customer service and other loan fees 10,435 9,127 29,310 25,047
Loan servicing fees (costs), net 2,813 (5,810) 12,135 (2,127)
Gain on sales of securities -- 4,132 714 15,253
Gain (loss) on sales of loans 209 (844) 3,255 1,364
Net gain on disposition of banking and loan production offices 20,447 -- 19,206 --
Operating income from real estate joint ventures 2,084 -- 2,768 1,735
Other 790 1,674 2,471 6,877
------------ ------------ ------------ ------------
Total non-interest income 36,778 8,279 69,859 48,149
------------ ------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 22,542 26,601 70,586 78,194
Employee stock plans amortization 2,234 3,983 8,075 14,559
Occupancy, equipment and systems 13,215 14,460 40,356 43,055
Federal deposit insurance premiums 1,055 1,713 3,452 4,474
Advertising 2,085 1,261 5,938 4,116
Other 6,862 18,949 21,944 38,647
------------ ------------ ------------ ------------
Total general and administrative 47,993 66,967 150,351 183,045
Real estate operations and provision for real estate losses, net 116 (646) (60) 36
Goodwill litigation 1,094 421 4,041 1,120
Amortization of goodwill 4,843 4,962 14,592 14,809
------------ ------------ ------------ ------------
Total non-interest expense 54,046 71,704 168,924 199,010
------------ ------------ ------------ ------------
Income before income tax expense 114,943 43,679 303,638 173,518
Income tax expense 47,995 18,815 127,514 72,929
------------ ------------ ------------ ------------
Net income 66,948 24,864 176,124 100,589
Preferred dividends declared (1,500) (1,500) (4,500) (4,500)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 65,448 $ 23,364 $ 171,624 $ 96,089
============ ============ ============ ============
Basic earnings per common share $ 1.27 $ 0.46 $ 3.32 $ 1.90
============ ============ ============ ============
Diluted earnings per common share $ 1.25 $ 0.44 $ 3.24 1.82
============ ============ ============ ============
Dividends per common share $ 0.24 $ 0.20 $ 0.72 $ 0.60
============ ============ ============ ============
Basic weighted average common shares 51,417,820 51,011,647 51,736,485 50,595,090
Diluted weighted average common and common equivalent shares 52,376,642 52,894,829 52,988,352 52,818,974
</TABLE>
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, 1999
<TABLE>
<CAPTION>
Retained
Additional Earnings
Preferred Common Paid-In Substantially
(In Thousands, Except Share Data) Total Stock Stock Capital Restricted
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 1,462,384 $ 2,000 $ 547 $ 767,846 $ 742,679
Net income 176,124 -- -- -- 176,124
Other comprehensive income, net of tax:
Net unrealized loss on securities,
net of reclassification adjustment (207,692) -- -- -- --
Common stock repurchased
(1,503,700 shares) (66,729) -- -- -- --
Dividends on common and preferred
stock and amortization of purchase
premium (42,791) -- -- (978) (41,813)
Exercise of stock options and
related tax benefit 26,469 -- 8 22,067 (12,249)
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit 10,978 -- -- 8,606 --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 $ 1,358,743 $ 2,000 $ 555 $ 797,541 $ 864,741
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Unallocated Unearned
Accumulated Common Common
Other Stock Stock
Treasury Comprehensive Held Held
(In Thousands, Except Share Data) Stock Income by ESOPs by RRP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 -- $ (14,566) $ (35,908) $ (214)
Net income -- -- -- --
Other comprehensive income, net of tax:
Net unrealized loss on securities,
net of reclassification adjustment -- (207,692) -- --
Common stock repurchased
(1,503,700 shares) (66,729) -- -- --
Dividends on common and preferred
stock and amortization of purchase
premium -- -- -- --
Exercise of stock options and
related tax benefit 16,643 -- -- --
Amortization relating to allocation
of ESOP stock and earned portion
of RRP stock and related tax benefit -- -- 2,263 109
----------- ----------- ----------- -----------
Balance at September 30, 1999 $ (50,086) $ (222,258) $ (33,645) $ (105)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
(IN THOUSANDS) 1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 176,124 $ 100,589
----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Net accretion of discounts, premiums and deferred loan fees (41,718) (17,397)
Provision for loan and real estate losses 3,164 9,985
Depreciation and amortization 10,471 13,642
Net gain on sales of securities and loans (3,969) (16,617)
Net gain on sales of premises and equipment (487) --
Net gain on disposition of banking and loan production offices (19,206) --
Proceeds from sales of loans held-for-sale, net of originations 126,503 (128,979)
Amortization of goodwill 14,592 14,809
Allocated and earned shares from ESOPs and RRP 8,075 14,559
Increase in accrued interest receivable (13,275) (14,083)
Capitalized mortgage servicing rights, net of amortization
and valuation allowance 280 563
Decrease in other assets 12,505 6,183
(Decrease) increase in accrued expenses and other liabilities (51,540) 60,935
----------- -----------
Net cash provided by operating activities 221,519 44,189
----------- -----------
Cash flows from investing activities:
Origination of loans held-for-investment, net of principal payments (876,658) (931,162)
Loan purchases through third parties (279,792) (147,641)
Principal payments on mortgage-backed securities held-to-maturity 287,604 207,535
Principal payments on mortgage-backed securities available-for-sale 2,091,974 1,134,240
Purchases of mortgage-backed securities held-to-maturity (281,165) (72,651)
Purchases of mortgage-backed securities available-for-sale (3,869,950) (3,485,945)
Purchases of other securities held-to-maturity (42,078) (213,456)
Purchases of other securities available-for-sale (158,421) (1,014,929)
Proceeds from maturities of other securities available-for-sale 58,884 611,136
Proceeds from maturities of other securities held-to-maturity 212,660 457,613
Purchases of FHLB stock, net (51,750) (40,524)
Proceeds from sales of securities available-for-sale 176,362 1,096,181
Proceeds from sales of real estate owned and investments in
real estate, net 11,989 10,942
Proceeds from disposition of loan production offices 4,208 --
Purchases of premises and equipment, net of proceeds from sales (22,780) (19,641)
----------- -----------
Net cash used in investing activities (2,738,913) (2,408,302)
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (208,584) (286,128)
Net increase in reverse repurchase agreements 2,485,000 2,886,035
Net increase (decrease) in FHLB of New York advances 200,000 (120,000)
Net (decrease) increase in other borrowings (43,261) 93,963
Increase in mortgage escrow funds 26,895 40,433
Costs to repurchase common stock (66,729) (16,633)
Cash dividends paid to stockholders (42,791) (32,224)
Cash received for options exercised 15,019 12,227
----------- -----------
Net cash provided by financing activities 2,365,549 2,577,673
----------- -----------
Net (decrease) increase in cash and cash equivalents (151,845) 213,560
Adjustment to conform fiscal year of Long Island
Bancorp, Inc. to the Company -- 77,323
Cash and cash equivalents at beginning of period 393,382 159,195
----------- -----------
Cash and cash equivalents at end of period $ 241,537 $ 450,078
=========== ===========
Supplemental disclosures:
Cash paid during the period:
Interest $ 698,569 $ 550,928
=========== ===========
Income taxes $ 83,447 $ 25,078
=========== ===========
Additions to real estate owned $ 9,372 $ 11,196
=========== ===========
Securitization of loans $ -- $ 387,071
=========== ===========
</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 and our wholly-owned subsidiary, Astoria Federal
Savings and Loan Association, or Astoria Federal, and its subsidiaries. As used
in this quarterly report, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, including Astoria Federal,
depending on the context. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Following the close of business on September 30, 1998, we completed the
acquisition of Long Island Bancorp, Inc., or LIB, the holding company of The
Long Island Savings Bank, FSB, or LISB, a federally chartered savings bank. LIB
was merged with us and LISB was merged with Astoria Federal. We refer to this
transaction as the LIB Acquisition. All subsidiaries of LISB became subsidiaries
of Astoria Federal. The acquisition was accounted for as a pooling-of-interests,
and accordingly, all prior year consolidated financial results have been
restated to combine LIB with us.
In our opinion, the accompanying consolidated financial statements contain
all adjustments necessary for a fair presentation of our financial condition as
of September 30, 1999 and December 31, 1998, and our results of operations for
the three and nine months ended September 30, 1999 and 1998, cash flows for the
nine months ended September 30, 1999 and 1998 and stockholders' equity for the
nine months ended September 30, 1999. In preparing the financial statements, we
are required to make estimates and assumptions that affect the reported amounts
of assets and liabilities for the consolidated statements of financial condition
as of September 30, 1999 and December 31, 1998, and amounts of revenues and
expenses for the consolidated statements of income for the three and nine month
periods ended September 30, 1999 and 1998. The results of operations for the
three and nine months ended September 30, 1999 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, or GAAP,
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
our December 31, 1998 audited consolidated financial statements, interim
statements and related notes.
2. EARNINGS PER SHARE, OR EPS
--------------------------
Basic EPS is computed by dividing net income less preferred dividends by
the weighted-average common shares outstanding during the period. 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 our Employee Stock Ownership Plans, or ESOPs, and the
Recognition and Retention Plan, or RRP.
Diluted EPS is computed by dividing net income less preferred dividends by
the weighted-average common shares and common equivalent shares outstanding
during the period. 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 ESOPs and the RRP and the dilutive effect of
unexercised stock options using the treasury stock method. When applying the
treasury stock method, our average stock price is utilized, and we add 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 Statement of Financial Accounting Standards No. 128, "Earnings
Per Share":
<TABLE>
For the Three Months Ended September 30,
----------------------------------------
1999 1998
--------------------------------------- --------------------------------
(In Thousands, Average Per Share Average Per Share
Except Share Data) Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income $66,948 $24,864
Less: preferred stock dividends 1,500 1,500
----- -----
Basic EPS:
Income available to common
stockholders 65,448 51,417,820 $1.27 23,364 51,011,647 $0.46
===== =====
Effect of dilutive unexercised
stock options 958,822 1,883,182
------- ---------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $65,448 52,376,642 $1.25 $23,364 52,894,829 $0.44
======= ========== ===== ======= ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
------------------------------------ ----------------------------------
(In Thousands, Average Per Share Average Per Share
Except Share Data) Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $176,124 $100,589
Less: preferred stock dividends 4,500 4,500
----- -----
Basic EPS:
Income available to common
stockholders 171,624 51,736,485 $3.32 96,089 50,595,090 $1.90
===== =====
Effect of dilutive unexercised
stock options 1,251,867 2,223,884
--------- ---------
Diluted EPS:
Income available to common
stockholders plus assumed
conversions $171,624 52,988,352 $3.24 $ 96,089 52,818,974 $1.82
======== ========== ===== ======== ========== =====
</TABLE>
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
--------------------
Comprehensive income (loss) for the three and nine months ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 66,948 $ 24,864 $ 176,124 $100,589
Net unrealized losses on securities,
net of reclassification adjustment (a) (19,209) (8,122) (207,692) (12,710)
-------- -------- ---------- ---------
Comprehensive income (loss) $ 47,739 $ 16,742 $ (31,568) $ 87,879
======== ======== ========== =========
a) Disclosure of reclassification adjustment:
Net unrealized losses arising during period $(19,209) $(10,477) $(208,098) $ (21,405)
Less: reclassification adjustment for net gains
included in net income - 2,355 406 8,695
-------- -------- ---------- ---------
Net unrealized losses on securities $(19,209) $ (8,122) $(207,692) $ (12,710)
======== ========= ========= =========
</TABLE>
7
<PAGE> 9
5. IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or 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 derivative and the resulting designation. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," or SFAS No. 137. SFAS No.137
defers the effective date of SFAS No. 133 from fiscal quarters of fiscal
years beginning after June 15, 1999 to June 15, 2000. SFAS No. 133 does not
require restatement of prior periods. We believe the implementation of SFAS
No. 133 will not have a material impact on our financial condition or results
of operations.
Effective January 1, 1999, we adopted 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," or SFAS No. 134. SFAS No. 134, which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," requires that, after
the securitization of a mortgage loan held for sale, any retained
mortgage-backed security should be classified in accordance with the
provisions of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." However, SFAS No. 134 requires that a mortgage banking
enterprise classify as trading any retained mortgage-backed security that it
commits to sell before or during the securitization process. The
implementation of SFAS No. 134 did not have a material impact on our
financial condition or results of operations.
6. SUBSEQUENT EVENT
----------------
On October 25, 1999, we announced the completion of a private placement of
$125.0 million of 9.75% capital securities due November 1, 2029, which are fully
and unconditionally guaranteed by us. The securities were issued by our recently
formed trust affiliate, Astoria Capital Trust I. The capital securities have
been rated "BBB-" by Duff & Phelps Credit Rating Co., "BBB-" by Thomson
Financial BankWatch and "ba2" by Moody's Investors Service. Proceeds of the
offering were invested by Astoria Capital Trust I in 9.75% junior subordinated
debentures issued by us. Net proceeds from the sale of the debentures will be
used to increase Astoria Federal's capital level and for general corporate
purposes, including the repurchase of our common stock.
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 our financial condition, results of operations and business 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 our
operations, pricing, products and services.
GENERAL
-------
We are headquartered in Lake Success, New York and our principal
business currently consists of the operation of our wholly-owned subsidiary,
Astoria Federal. We have acquired, and may continue to acquire, either directly
or indirectly through Astoria Federal, other operating subsidiaries, including
other financial institutions. Astoria Federal's primary business is attracting
retail deposits from the general public and investing those deposits, together
with borrowed funds, funds generated from operations and principal repayments,
primarily in one-to-four family residential mortgage loans, mortgage-backed
securities and, to a lesser extent, commercial real estate loans, multi-
8
<PAGE> 10
family mortgage loans and consumer loans. In addition, Astoria Federal invests
in securities issued by the U.S. Government and federal agencies and other
securities.
Our results of operations are dependent primarily on our net interest
income, which is the difference between the interest earned on our assets,
primarily our loan and securities portfolios, and our cost of funds, which
consists of the interest paid on our deposits and borrowings. Our net income is
also affected by our 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, employee stock plans amortization, 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, goodwill litigation
expenses and amortization of goodwill. Our earnings 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
We continue to consider mergers and acquisitions an integral part of our
strategic objective for our long-term growth. Following the close of business on
September 30, 1998, we completed the LIB Acquisition. The transaction was
accounted for as a pooling-of-interests. Accordingly, we recorded the assets,
liabilities and stockholders' equity as reported by LIB immediately prior to
consummation. No goodwill was created as a result of the LIB Acquisition. Under
the terms of the merger agreement, holders of LIB common stock, par value $.01
per share, or LIB Common Stock, received 1.15 shares of our common stock, par
value $.01 per share, for each share of LIB Common Stock, resulting in the
issuance of 27,876,636 shares of our common stock.
Acquisition Costs and Restructuring Charges
From the period between initiation of the LIB Acquisition and the
consummation date, we developed formal plans to integrate LIB's business into
our business. Such plans included, among other things, the termination of
employees, disposal of duplicate facilities, consolidation and relocation of
equipment and facilities, integration of information systems and cancellation of
lease contracts and other executory contracts. We have recognized as liabilities
only those items that qualify for recognition under the consensus reached on
Issue No. 94-3 by the Emerging Issues Task Force, or EITF, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit An
Activity (including Certain Costs Incurred in a Restructuring)," or EITF 94-3.
We have recorded all direct costs related to the LIB Acquisition as
liabilities as of the consummation date, and the total pre-tax charge of $124.2
million has been classified as acquisition costs and restructuring charges in
our consolidated statement of income for the year ended December 31, 1998. Such
costs relate to restructuring plans and/or exit plans we formally adopted.
The following table sets forth the activity in the balances of accrued
acquisition costs and restructuring charges for the nine months ended September
30, 1999:
<TABLE>
<CAPTION>
ACCRUED BALANCE AT CASH PAYMENTS THROUGH ACCRUED BALANCE
(IN THOUSANDS) DECEMBER 31, 1998 SEPTEMBER 30, 1999 AT SEPTEMBER 30, 1999
------------------ --------------------- ----------------------
<S> <C> <C> <C>
Employee termination costs $10,326 $ 5,140 $ 5,186 (a)
Facilities, equipment and
systems cost 12,428 4,650 7,778 (b)
Transaction fees & other costs 8,557 7,275 1,282 (c)
----- ----- -----
Total $31,311 $17,065 $14,246
======= ======= =======
</TABLE>
- --------------------
(a) The remaining accrued balance primarily represents voluntary early
retirement charges for pension and postretirement benefits for certain
former employees of LIB. Such benefits will remain as accrued pension and
postretirement benefit costs until all such benefits are paid during these
former LIB employees' lifetimes.
(b) The remaining accrued balance primarily represents the present value of net
operating costs for our former mortgage headquarters.
(c) The remaining accrued balance primarily represents accrued legal fees which
we will incur to restructure the various employee benefit plans of LIB and
the subsidiaries of LISB.
9
<PAGE> 11
1999 Cost Savings Initiatives
As part of our strategy of improving operating efficiency and achieving
cost savings targets following the LIB Acquisition, we have entered into various
transactions in 1999. Such transactions include, but are not limited to, the
disposition of loan production offices, banking offices and the former
headquarters of LIB. In order to refocus our mortgage loan origination efforts
toward portfolio growth rather than sale in the secondary market, we have also
decided to close or otherwise dispose of all retail loan production offices, or
LPOs.
In the third quarter of 1999, Astoria Federal sold its five upstate New
York banking offices in Otsego and Chenango counties with deposits totaling
$156.4 million to CNB Financial Corporation, the parent company of Central
National Bank, headquartered in Canajoharie, New York. As a result of the
transaction, we recognized a $20.4 million gain during the third quarter of
1999. Additionally, we have entered into a contract to sell the former
headquarters of LIB which is expected to close in the fourth quarter of 1999.
YEAR 2000 PROJECT
The "Year 2000 Problem" centers on the inability of some computer systems
to properly 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, our operations may be significantly and
adversely affected by the Year 2000 Problem due to the nature of financial
information. In addition, software, hardware, and equipment outside our direct
control and with which we electronically or operationally interface (e.g.,
including, but not limited to, third party vendor provided data processing,
information system management, maintenance of computer system, and credit
bureau information) may 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 calculations, payment amounts or
due dates and other operating functions, may generate results which could be
significantly misstated, and we could experience an inability for a 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 our suppliers and creditors and the creditworthiness of our
borrowers. If not adequately addressed, the Year 2000 Problem could result in a
material adverse impact on our products, services and competitive condition and
therefore, our results of operations and could be deemed to imperil the safety
and soundness of Astoria Federal. There has been limited litigation filed
against corporations regarding the Year 2000 Problem and their compliance
efforts. Nonetheless, the law in this area will likely continue to develop well
into the new millennium. Should we experience a Year 2000 failure, our exposure
could be significant and material.
On July 20, 1999, the federal government enacted the Year 2000 Readiness
and Responsibility Act, P.L.106-37. Among the goals of the legislation are: (1)
to establish uniform legal standards that give businesses and users of
technology products reasonable incentives to solve the Year 2000 problems before
they develop, (2) to encourage remediation and testing efforts, (3) to promote
alternative dispute resolution, and (4) to discourage insubstantial lawsuits
while preserving remedies of plaintiffs who suffer genuine injury. No assurance
can be given at this time that the legislation will have the effect of limiting
our potential liability.
The Office of Thrift Supervision, or OTS, our 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 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 actions, 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.
We have developed and implemented a Year 2000 project plan, or the Plan, to
address the Year 2000 Problem and its effects on us. The Plan includes five
components which address issues involving awareness, assessment, renovation,
validation and implementation. We have completed, in all material respects, all
five phases of the Plan.
10
<PAGE> 12
During the assessment and renovation phases of the Plan, we inventoried all
material information systems and reviewed them for Year 2000 readiness. Among
the systems reviewed were computer hardware and systems software, applications
software and communications hardware and software as well as physical
infrastructure including identification of embedded chips 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. We then renovated or replaced the systems that may have posed a
Year 2000-related problem. Following renovation, the functionality of the new
systems were validated and implemented.
Our mission critical hardware and software systems have also been
renovated, tested and implemented within the OTS' suggested time frame. We
completed testing of our mission critical vendor provided systems prior to
September 30, 1998. We substantially completed testing of core mission critical
internal systems as of December 31,1998 and also substantially completed tests
of the renovations made of both internally and externally supplied systems, as
of June 30, 1999. As part of the Plan, we had formal communications with all of
our significant suppliers to determine the extent to which we are vulnerable to
those third parties' failure to remediate their own Year 2000 Problem and have
been following the progress of those vendors in becoming Year 2000 compliant.
Where practical, we have scheduled and conducted end-to-end Year 2000 tests as
well as participated in proxy testing with our business partners, allowing us
additional opportunities to test readiness of internal and external systems.
Despite our best efforts to ensure Year 2000 compliance, it is possible
that one or more of our internal or external systems may fail to operate.
Although we are Year 2000 ready, the potential that circumstances beyond our
control may result in an interruption of normal business operations cannot be
determined with complete certainty. As a result, we have formulated contingency
plans for our mission critical systems where deemed feasible. These systems
include retail deposit processing, check clearing and wire transfer
capabilities, loan origination processing, loan servicing, investment monitoring
and accounting, accounting operations and payroll processing. We have developed
manual processes to ameliorate situations that may result from a loss of
telecommunications, power, and/or isolated business systems. We expect to
maintain the ability to conduct essential business transactions whenever
possible, regardless of the loss of automated systems. All business units have
also been involved in the review and, where necessary, amendment of the existing
disaster recovery plans in addition to developing Year 2000 contingency plans,
in order to address the possible failure of one or more mission critical
systems.
We have reviewed our customer base to determine whether they pose
significant Year 2000 risks. Our customers consist primarily of individual
depositors and residential mortgage loan borrowers who utilize our services for
personal, household or consumer uses. These types of customers, individually and
in the aggregate, are not likely to pose significant direct Year 2000 risks to
us. Significant risks could occur if customers' employers or other third parties
suffer significant disruptions caused by the Year 2000 Problem.
Additionally, public concerns over the Year 2000 Problem could adversely
impact our deposit flows near the end of 1999. Although we have made every
effort to inform our deposit customers of the efforts taken in order to ensure
that our computer systems will not be adversely effected by the Year 2000
Problem, there still exists a likelihood that some customers will remove their
deposit funds. While we believe that deposit outflows related solely to the Year
2000 Problem will likely be both minimal and short-term in nature, we have
planned for potential additional funding sources in the event that such deposit
outflows occur.
Monitoring and managing the Year 2000 Project has resulted in direct and
indirect costs to us. Direct costs include 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 may fail. Indirect costs principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing,
developing and implementing any necessary contingency plans. The direct and
indirect costs of addressing the Year 2000 Problem continue to be charged to
earnings as incurred, but have not been material to date. We do not believe that
such costs will have a material effect on the results of operations, although
there can be no assurance that such costs may not become material in the future.
It is currently estimated that total Year 2000 compliance efforts will cost us,
excluding reallocation of internal resources, approximately $2.2 million. We
have incurred $1.9 million to date, which includes $750,000 expensed by LISB
prior to the LIB Acquisition.
11
<PAGE> 13
IMPACT OF PROPOSED LEGISLATION
The U.S. Congress recently passed legislation intended to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies and other financial
service providers. The legislation is being forwarded to the President for his
approval. Generally, the legislation would (1) repeal the historical
restrictions and eliminate many federal and state law barriers to affiliations
among banks and securities firms, insurance companies and other financial
service providers, (2) provide a uniform framework for the activities of banks,
savings institutions and their holding companies, (3) broaden the activities
that may be conducted by national banks and banking subsidiaries of bank
holdings companies, (4) provide an enhanced framework for protecting the privacy
of consumer's information (5) adopt a number of provisions related to the
capitalization, membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system, (6) modify the laws governing the
implementation of the Community Reinvestment Act and (7) address a variety of
other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions, including the functional
regulation of bank securities activities.
In particular, the pending legislation would restrict certain of the
powers that unitary savings and loan association holding companies currently
have. Unitary savings and loan holding companies that are "grandfathered,"
i.e., became a unitary savings and loan holding company pursuant to an
application filed with the OTS before May 4, 1999, would retain their authority
under current law. All other savings and loan holding companies would be
limited to financially related activities permissible for bank holding
companies, as defined under the new law. We have been a unitary savings and
loan holding company since 1993. The proposed legislation would prohibit
non-financial companies from acquiring savings and loan association holding
companies.
Bank holding companies would be permitted to engage in a wider variety of
financial activities than is permitted under current law, particularly with
respect to insurance and securities activities. In addition, in a change from
current law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially related
activities.
We do not believe that the proposed legislation, as publicly reported,
would have a material adverse affect on our operations in the near term.
However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in an increased number of
larger financial institutions that both offer a wider variety of financial
services than we currently offer and can aggressively compete in the markets we
currently serve.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is cash provided by investing activities, which
includes principal and interest payments on loans, mortgage-backed securities
and other securities. Principal payments on loans, mortgage-backed securities
and proceeds from maturities of other securities totaled $4.39 billion for the
nine months ended September 30, 1999 and $4.08 billion for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, we received
$188.4 million of funds from the sale of securities available-for-sale and real
estate versus $1.11 billion from sales during the nine months ended September
30, 1998. Our other sources of funds are provided by operating and financing
activities. Net cash provided from operating activities totaled $221.5 million
during the nine months ended September 30, 1999 and $44.2 million during the
nine months ended September 30, 1998. The net increase in borrowings during the
nine months ended September 30, 1999 totaled $2.64 billion reflecting the
funding of our asset growth discussed below. The net decrease in deposits
totaled $208.6 million during the nine months ended September 30, 1999. During
the nine months ended September 30, 1998, the net increase in borrowings totaled
$2.86 billion and the net decrease in deposits totaled $286.1 million.
Our primary use of funds in our investing activities are for the purchase and
origination of mortgage loans and the purchase of mortgage-backed and other
securities. During the nine months ended September 30, 1999, our gross
originations and purchases of mortgage loans totaled $3.11 billion, compared to
$3.86 billion during the nine months ended September 30, 1998. Our purchases of
mortgage-backed and other securities totaled $4.35 billion during the nine
months ended September 30, 1999 and $4.79 billion during the comparable 1998
period.
Stockholders' equity totaled $1.36 billion at September 30, 1999 and $1.46
billion at December 31, 1998. Decreases to stockholders' equity included a
$207.7 million increase in the unrealized loss on securities, net of taxes,
primarily due to increases in interest rates during the nine months ended
September 30, 1999, which adversely
12
<PAGE> 14
affected the market values of our available-for-sale securities. Additional
decreases in stockholders' equity were the result of repurchases of our
common stock of $66.7 million and dividends declared of $42.8 million. These
decreases were partially offset by $176.1 million of net income, the effect
of options exercised and related tax benefit of $26.5 million and the
amortization for the allocated portion of shares held by the ESOPs and the
related tax benefit on the earned portion of the shares held by the RRP of
$11.0 million.
Astoria Federal is required by the OTS to maintain a minimum liquidity ratio,
calculated as an average daily balance of liquid assets as a percentage of net
withdrawable deposit accounts plus short-term borrowings, of 4.00%. Astoria
Federal's liquidity ratios were 6.63% at September 30, 1999 and 11.29% at
December 31, 1998. The levels of Astoria Federal's liquid assets are dependent
on Astoria Federal's operating, investing and financing activities during any
given period.
On April 21, 1999, our Board of Directors approved our sixth stock repurchase
plan authorizing the purchase, at our management's discretion, of up to 10% of
our common stock then outstanding, or 5,528,000 shares, over a two year
period in open-market or privately negotiated transactions. Under this plan,
1,503,700 shares of our common stock have been repurchased during the second
and third quarters of 1999 at an aggregate cost of $66.7 million.
On September 1, 1999, we paid a quarterly cash dividend equal to $0.24 per
share on shares of our common stock outstanding as of the close of business on
August 13, 1999, totaling $12.6 million. On October 20, 1999, we declared a
quarterly cash dividend of $0.24 per share on shares of our common stock payable
on December 1, 1999 to stockholders of record as of the close of business on
November 15, 1999. Beginning October 15, 1997, we have paid quarterly cash
dividends equal to $0.75 per share on shares of our Series B Preferred Stock,
aggregating $1.5 million per quarter.
At September 30, 1999, Astoria Federal's total capital exceeded all of its
regulatory capital requirements with a tangible ratio of 5.55%, leverage ratio
of 5.55%, and risk-based capital ratio of 14.50%. The minimum regulatory
requirements were a tangible ratio of 1.50%, leverage ratio of 4.00%, and
risk-based capital ratio of 8.00%.
INTEREST RATE SENSITIVITY ANALYSIS
As a financial institution, our primary component of market risk is
interest rate volatility. Our net interest income, the primary component of our
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 our assets and the liabilities which fund
them. We seek to manage interest rate risk by monitoring and controlling the
variation in repricing intervals between our assets and liabilities. To a lesser
extent, we also monitor our interest rate sensitivity by analyzing the estimated
changes in market value of our assets and liabilities assuming various interest
rate scenarios. As discussed more fully below, a variety of factors influence
the repricing characteristics and the market value of any given asset or
liability.
The matching of the repricing characteristics of assets and liabilities may
be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period, either by contractual terms or based upon certain assumptions made by
management, including, but not limited to, estimated prepayments. The interest
rate sensitivity gap is 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. A gap is considered positive when the amount of interest
rate sensitive assets maturing or repricing within a specific time frame exceeds
the amount of interest rate sensitive liabilities maturing or repricing within
that same time frame. Conversely, a gap is considered negative when the amount
of interest rate sensitive liabilities maturing or repricing within a specific
time frame exceeds the amount of interest rate sensitive assets maturing or
repricing within that same time frame. In a rising interest rate environment, an
institution with a positive gap would generally be expected, absent the effects
of other factors, to experience a greater increase in the yields of its assets
relative to the costs of its liabilities and thus an increase in the
institution's net interest income, whereas an institution with a negative gap
would generally be expected to experience the opposite results. Conversely,
during a period of falling interest rates, a positive gap would tend to result
in a decrease in net interest income while a negative gap would tend to increase
net interest income.
13
<PAGE> 15
The actual duration of mortgage loans and mortgage-backed securities can be
significantly impacted by changes in mortgage prepayments. Mortgage prepayment
rates will vary due to a number of factors, including the regional economy
in the area where the underlying mortgages were originated, seasonal factors,
demographic variables and the assumability of the underlying mortgages.
However, the major factors affecting prepayment rates are prevailing interest
rates and related mortgage refinancing opportunities.
We monitor interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely basis. Purchases
of fixed-rate mortgage-backed securities are concentrated on those securities
with short- and medium-term average lives. Originations of thirty-year fixed
rate mortgages and, more recently, fifteen-year fixed rate mortgages are
originated and sold in the secondary market, while those with shorter durations,
primarily adjustable-rate mortgages are held-for-investment.
At September 30, 1999, our net interest-earning assets maturing or
repricing within one year exceeded interest-bearing liabilities maturing or
repricing within the same time period by $522.6 million, representing a positive
cumulative one-year gap of 2.29% of total assets. This compares to net
interest-earning assets maturing or repricing within one year exceeding
interest-bearing liabilities maturing or repricing within the same time period
by $1.07 billion, representing a positive cumulative one-year gap of 5.18% of
total assets at December 31, 1998. Our September 30, 1999 and December 31, 1998
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, 1999 were classified within the one-year or less
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 $7.40 billion,
representing a positive cumulative one-year gap of 32.35% of total assets.
Using this method at December 31, 1998, 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 $6.46 billion,
representing a positive cumulative one-year gap of 31.39% of total assets. The
available-for-sale securities may or may not be sold, subject to our
discretion.
The following table, referred to as the Gap Table, sets forth the amount of
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 1999, that we anticipate, using certain assumptions based on our
historical experience and other data available to us 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 our 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 this table are
$1.31 billion of callable other securities at their amortized cost, classified
according to their maturity dates, which are primarily within the more than five
years maturity category. Of such securities, $1.01 billion are callable within
one year and at various other times thereafter. These securities are not
included in the one year or less category in the Gap Table. Also included in
this table are $10.68 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,
$3.13 billion are callable within one year and at various other times
thereafter. These borrowings are not included in the one year or less category
in the Gap Table. The use of these callable borrowings during our periods of
rapid growth and the low absolute level of interest rates, has allowed us to
maintain a low cost of funding. As of September 30, 1999, the weighted average
rate on these borrowings was 5.21%. While the majority of those borrowings which
have already reached their first call date have not been called, there can be no
assurances that these borrowings will not be called in the future, particularly
in a rising interest rate environment. If those securities and borrowings had
been categorized according to their call dates, our cumulative one-year gap
would have been negative at September 30, 1999.
14
<PAGE> 16
<TABLE>
<CAPTION>
At September 30, 1999
-----------------------------------------------------------------------------------
More than More than
One Year Three Years
One Year to to More than
(Dollars in Thousands) or Less Three Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) $2,455,738 $2,520,869 $ 2,247,226 $2,527,938 $9,751,771
Consumer and other loans (1) 148,120 33,375 - - 181,495
Federal funds sold and
repurchase agreements 127,209 - - - 127,209
Mortgage-backed and other
securities available-for-sale (2) 2,681,472 2,043,059 1,787,633 3,042,785 9,554,949
Mortgage-backed and other
securities held-to-maturity (2) 553,538 377,307 151,899 1,143,636 2,226,380
------- ------- ------- --------- ---------
Total interest-earning assets 5,966,077 4,974,610 4,186,758 6,714,359 21,841,804
Add:
Net unamortized purchase
premiums and deferred fees (3) 13,063 13,728 12,497 14,213 53,501
---------- ---------- ----------- ---------- -----------
Net interest-earning assets $5,979,140 $4,988,338 $ 4,199,255 $6,728,572 $21,895,305
---------- ---------- ----------- ---------- -----------
Interest-bearing liabilities:
Savings $ 158,708 $ 317,416 $ 317,416 $1,851,592 $ 2,645,132
NOW 6,471 12,943 12,943 97,069 129,426
Money market 977,107 14,390 14,390 107,929 1,113,816
Money manager 18,162 36,324 36,324 272,432 363,242
Certificates of deposit 3,301,250 1,305,859 250,338 - 4,857,447
Borrowed funds (2) 994,848 1,699,724 5,790,000 3,180,000 11,664,572
---------- ---------- ----------- ---------- -----------
Total interest-bearing liabilities $ 5,456,546 $3,386,656 $ 6,421,411 $5,509,022 $20,773,635
---------- ---------- ----------- ---------- -----------
Interest sensitivity gap $ 522,594 $1,601,682 $(2,222,156) $1,219,550 $ 1,121,670
---------- ---------- ----------- ---------- -----------
Cumulative interest sensitivity gap
$ 522,594 $2,124,276 $ (97,880) $1,121,670
----------- ---------- ------------ ----------
Cumulative interest sensitivity gap
as a percentage of total assets 2.29% 9.29% (0.43)% 4.91%
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities 109.58% 124.02% 99.36% 105.40%
</TABLE>
(1) Mortgage, consumer and other loans exclude non-performing loans, but are
not reduced for the allowance for loan losses.
(2) Includes $1.01 billion of other securities and $3.13 billion of borrowings,
callable within one year and at various other times thereafter and not
included in the one year or less category, which are each 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).
(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 our estimates as to periods to repricing at a particular point in
time. Among the factors considered, are current trends and historical repricing
experience with respect to similar products. As a result, different assumptions
may be used at different points in time.
15
<PAGE> 17
We also monitor Astoria Federal's interest rate sensitivity through
analysis of the change in the net portfolio value, or 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 value of an
institution's net worth. Increases in the value of assets will increase the NPV
whereas decreases in value of assets will decrease the NPV. Conversely,
increases in the value of liabilities will decrease NPV whereas decreases in
the value of liabilities will increase the NPV. The changes in 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 value of a fixed rate asset will
decline, whereas the fair 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 value of
assets in the same scenario. This analysis, presented in the following table,
or 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 Astoria Federal's quarterly Thrift Financial
Reports, the results of which may vary from our internal model primarily
because of differences in assumptions utilized between our 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 the Gap Table were used. However, we have
utilized different assumptions with respect to the borrowings with imbedded
call features for the NPV Table. Specifically, for the scenarios involving no
change or an increase in interest rates, we have assumed that those borrowings
with imbedded call options will be called at their next available call date.
Since the NPV Table reflects a hypothetical value of net assets based on
present value of cash flows, utilizing the shorter life by call date instead of
maturity date would result in the most conservative value of Astoria Federal's
borrowings and, therefore, the most conservative view of its NPV ratio. Despite
the recent increase in interest rates during the first nine months of 1999,
many of these borrowings which are currently in their call periods have not had
those options exercised, thereby allowing us to maintain our low borrowing
cost. However, no assurance can be given that this will continue in the future.
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, U.S. 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 those we would incur to replace such funding 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.
The following represents Astoria Federal's NPV Table as of September 30,
1999.
<TABLE>
<CAPTION>
Net Portfolio Value ("NPV") Portfolio Value of Assets
Rates in ------------------------------------------ -------------------------
Basis Points Dollar Dollar Percentage NPV Sensitivity
(Rate Shock) Amount Change Change Ratio Change
------------ ------ ------ ------ ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+200 $1,333,102 $(866,393) (39.39)% 6.30% (3.46)%
+100 1,814,472 (385,023) (17.51) 8.30 (1.46)
-0- 2,199,495 - - 9.76 -
-100 2,600,015 400,520 18.21 11.22 1.46
-200 2,379,136 179,641 8.17 10.15 0.39
</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 model assumes that the composition of our
interest sensitive assets and liabilities existing at the beginning of
16
<PAGE> 18
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 our 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 Astoria Federal's NPV and will differ from actual results.
From time to time, in an attempt to further reduce volatility in our
earnings caused by changes in interest rates, we will enter into financial
derivative agreements with third parties. At September 30, 1999, we had $60.0
million of interest rate floor agreements and $450.0 million of interest rate
swap agreements outstanding based on their notional amount. Additionally, we are
not subject to foreign currency exchange or commodity price risk and do not own
any trading assets.
LOAN PORTFOLIO
- --------------
The following table sets forth the composition of our loan portfolio at
September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
--------------------- ---------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
----------- ------- ----------- ------
MORTGAGE LOANS GROSS (1):
<S> <C> <C> <C> <C>
One-to-four family $ 8,841,211 88.49% $ 7,857,964 87.37%
Multi-family 550,003 5.51 452,854 5.03
Commercial 416,287 4.17 453,973 5.05
------- ---- ------- ----
Total mortgage loans 9,807,501 98.17 8,764,791 97.45
--------- ----- --------- -----
CONSUMER AND OTHER LOANS:
Home equity 118,812 1.19 142,437 1.58
Passbook 7,186 0.07 6,653 0.07
Other 57,292 0.57 80,287 0.90
------ ---- ------ ----
Total consumer and other loans 183,290 1.83 229,377 2.55
------- ---- ------- ----
TOTAL LOANS 9,990,791 100.00% 8,994,168 100.00%
========= ====== ========= ======
LESS:
Unearned discounts, premiums and
deferred loan fees, net 55,247 32,463
Allowance for loan losses (74,332) (74,403)
------------ ----------
TOTAL LOANS, NET $ 9,971,706 $8,952,228
=========== ==========
</TABLE>
1. These amounts include $38.5 million and $212.9 million of mortgage loans
held-for-sale at September 30, 1999 and December 31, 1998, respectively.
17
<PAGE> 19
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, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
At September 30, 1999
---------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -------------- --------- ---------- ---------- ---------
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
GNMA pass-through certificates $ 135,829 $ 874 $ (1,345) $ 135,358
FHLMC pass-through certificates 242,647 1,426 (1,810) 242,263
FNMA pass-through certificates 466,093 5,826 (1,639) 470,280
REMICs and CMOs:
Agency issuance 6,713,217 952 (291,889) 6,422,280
Non agency issuance 1,659,816 702 (43,248) 1,617,270
--------- ----- -------- ---------
Total mortgage-backed securities 9,217,602 9,780 (339,931) 8,887,451
--------- ----- -------- ---------
Other securities:
Obligations of the U.S.
Government and agencies 546,902 162 (53,709) 493,355
Corporate debt securities 51,603 - (4,377) 47,226
FNMA and FHLMC preferred stock 127,515 1,111 (4,000) 124,626
Equity and other securities 2,268 24 (1) 2,291
--------- ----- -------- ---------
Total other securities 728,288 1,297 (62,087) 667,498
--------- ----- -------- ---------
Total Available-for-Sale $ 9,945,890 $ 11,077 $ (402,018) $ 9,554,949
============= ========= ============ ===========
HELD-TO-MATURITY:
Mortgage-backed securities:
GNMA pass-through certificates $ 4,630 $ 281 $ - $ 4,911
FHLMC pass-through certificates 48,187 1,184 (25) 49,346
FNMA pass-through certificates 13,510 35 (460) 13,085
REMICs and CMOs:
Agency issuance 699,165 2,723 (3,220) 698,668
Non agency issuance 366,144 260 (3,375) 363,029
--------- ----- -------- ---------
Total mortgage-backed securities 1,131,636 4,483 (7,080) 1,129,039
--------- ----- -------- ---------
Other securities:
Obligations of the U.S.
Government and agencies 763,076 32 (47,328) 715,780
Obligations of states and
political subdivisions 46,173 - (28) 46,145
Corporate debt 19,771 61 (364) 19,468
--------- ----- -------- ---------
Total other securities 829,020 93 (47,720) 781,393
--------- ----- -------- ---------
Total Held-to-Maturity $ 1,960,656 $ 4,576 $ (54,800) $ 1,910,432
============= ======== =========== ===========
</TABLE>
18
<PAGE> 20
Securities Portfolio, Continued
<TABLE>
<CAPTION>
At December 31, 1998
--------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -------------- ---- ----- ------ -----
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
GNMA pass-through certificates $ 163,731 $ 2,795 $ (10) $ 166,516
FHLMC pass-through certificates 342,311 2,079 (1,668) 342,722
FNMA pass-through certificates 608,842 8,513 (1,561) 615,794
REMICs and CMOs:
Agency issuance 4,961,157 1,363 (42,020) 4,920,500
Non agency issuance 1,509,402 3,689 (4,789) 1,508,302
--------- ------ --------- ---------
Total mortgage-backed securities 7,585,443 18,439 (50,048) 7,553,834
--------- ------ --------- ---------
Other securities:
Obligations of the U.S.
Government and agencies 462,302 4,910 (13) 467,199
Corporate debt securities 21,048 -- (322) 20,726
FNMA and FHLMC preferred stock 127,515 1,325 -- 128,840
Equity and other securities 25,904 41 (100) 25,845
--------- ------ --------- ---------
Total other securities 636,769 6,276 (435) 642,610
--------- ------ --------- ---------
Total Available-for-Sale $ 8,222,212 $ 24,715 $ (50,483) $ 8,196,444
=========== =========== =========== ===========
HELD-TO-MATURITY:
Mortgage-backed securities:
GNMA pass-through certificates $ 53,455 $ 2,122 $ -- $ 55,577
FHLMC pass-through certificates 14,738 493 (4) 15,227
FNMA pass-through certificates 15,954 135 -- 16,089
REMICs and CMOs:
Agency issuance 785,314 3,427 (1,138) 787,603
Non agency issuance 267,338 1,404 (2,093) 266,649
--------- ------ --------- ---------
Total mortgage-backed securities 1,136,799 7,581 (3,235) 1,141,145
--------- ----- ------ ---------
Other securities:
Obligations of the U.S.
Government and agencies 925,074 10,412 (128) 935,358
Obligations of states and
political subdivisions 46,938 -- (1) 46,937
--------- ------ ---------- ---------
Total other securities 972,012 10,412 (129) 982,295
--------- ------ ---------- ---------
Total Held-to-Maturity $ 2,108,811 $ 17,993 $ (3,364) $ 2,123,440
=========== =========== ========== ===========
</TABLE>
19
<PAGE> 21
COMPARISON OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
AND OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
FINANCIAL CONDITION
Total assets increased $2.27 billion, to $22.86 billion at September 30,
1999, from $20.59 billion at December 31, 1998. This increase was primarily due
to our objective of effectively deploying capital through asset growth, which
resulted in increases in the mortgage loan and mortgage-backed securities
portfolios, primarily during the first quarter of 1999. Mortgage loans
held-for-investment, net, increased $1.24 billion, from $8.58 billion at
December 31, 1998 to $9.82 billion at September 30, 1999. Gross mortgage loans
originated and purchased during the nine months ended September 30, 1999 totaled
$3.11 billion, of which $2.83 billion were originations and $280.6 million were
purchases. These originations and purchases consisted primarily of one-to-four
family residential mortgage loans. This compares to $3.69 billion of
originations and $171.1 million of purchases for a total of $3.86 billion during
the nine months ended September 30, 1998. The decrease in the mortgage loan
originations was primarily a result of the increase in interest rates, which
decreased the levels of mortgage refinance activity. Additionally, we are
focusing on originating loans for portfolio rather than for sale in the
secondary market. The closing and disposal of all the LPOs acquired from LIB
also contributed to the significant reduction in our volume of loan
originations. This was offset by a slowdown in loan prepayments, also a result
of the increase in interest rates, as well as a decrease in loans held-for-
sale. Mortgage-backed securities increased $1.33 billion to $10.02 billion at
September 30, 1999, from $8.69 billion at December 31, 1998. This increase was
primarily the result of significant purchases during the nine months ended
September 30, 1999, primarily agency-issued REMICs and CMOs purchased in the
first quarter of 1999, of $4.15 billion, offset by principal payments received
of $2.38 billion. Other assets increased $134.5 million from $166.6 million at
December 31, 1998 to $301.1 million at September 30, 1999, primarily due to the
increase in the deferred tax asset directly related to the increase in the
unrealized loss on securities available-for-sale.
The growth in the loan and mortgage-backed securities portfolios was funded
primarily through additional medium-term borrowings, which is consistent with
our strategy of complementing our growth through acquisitions by leveraging our
excess capital. Reverse repurchase agreements increased $2.49 billion, to $9.78
billion at September 30, 1999, from $7.29 billion at December 31, 1998. Federal
Home Loan Bank of New York advances increased $199.9 million to $1.41 billion at
September 30, 1999 from $1.21 billion at December 31, 1998. Deposits decreased
$228.1 million from $9.67 billion at December 31, 1998 to $9.44 billion at
September 30, 1999 primarily due to the sale of our five upstate New York
banking offices with deposits totaling $156.4 million in the third quarter of
1999. Competition with equity markets, coupled with a low interest rate
environment, created minimal opportunities for deposit growth.
Stockholders' equity totaled $1.36 billion at September 30, 1999 and $1.46
billion at December 31, 1998. Decreases to stockholders' equity included a
$207.7 million increase in the unrealized loss on securities, net of taxes,
primarily due to increases in interest rates during the nine months ended
September 30, 1999, which adversely affected the market values of our
available-for-sale securities. Additional decreases in stockholders' equity
were the result of repurchases of our common stock of $66.7 million and
dividends declared of $42.8 million. These decreases were partially offset by
$176.1 million of net income, the effect of options exercised and related tax
benefit of $26.5 million and the amortization for the allocated portion of
shares held by the ESOPs and the related tax benefit on the earned portion of
the shares held by the RRP of $11.0 million.
We believe that we have been successful in achieving our strategy of growth
through deployment of our excess capital and are now focused on maintaining our
current capital ratio levels, which are currently at "well capitalized" amounts.
As such, we have de-emphasized further growth during the 1999 second and third
quarters. We expect to continue to emphasize the origination of one-to-four
family mortgage loans in an effort to utilize funds from anticipated mortgage
loan and mortgage-backed security repayments. In addition, we have begun to
sell, in the secondary market, our 15-year fixed-rate mortgage loan production,
but will continue to retain, in our portfolio, our adjustable-rate mortgage loan
production. By doing so, we intend to shift our asset mix towards adjustable
rate mortgage loans in response to the current rising interest rate
environment.
20
<PAGE> 22
RESULTS OF OPERATIONS
GENERAL
Net income increased $42.0 million, or 169.3%, to $66.9 million, or diluted
earnings per common share of $1.25 for the third quarter of 1999, from $24.9
million, or diluted earnings per common share of $0.44, for the comparable
period in 1998. The return on average assets increased to 1.16% for the third
quarter of 1999, from 0.53% for the third quarter of 1998. The return on average
equity increased to 20.27% for the 1999 third quarter, from 6.49% for the 1998
third quarter. The return on average tangible equity increased to 24.59% for the
quarter ended September 30, 1999, from 7.79% for the comparable 1998 period.
For the nine months ended September 30, 1999, net income increased $75.5
million, or 75.1%, to $176.1 million, or diluted earnings per common share of
$3.24, from $100.6 million, or diluted earnings per common share of $1.82 for
the nine months ended September 30, 1998. The return on average assets increased
to 1.03% for the nine months ended September 30, 1999, from 0.75% for the nine
months ended September 30, 1998. The return on average equity increased to
16.83% for the nine months ended September 30, 1999, from 8.93% for the
comparable 1998 period. The return on average tangible equity increased to
20.28% for the nine months ended September 30, 1999, from 10.80% for the nine
months ended September 30, 1998.
Net income for the quarter ended September 30, 1999, excluding the net gain
on disposition of banking and loan production offices, net of taxes, of $11.9
million, or $0.23 diluted earnings per common share, was $55.0 million, or
$1.02 diluted earnings per common share. Excluding such gain, for the third
quarter of 1999, the return on average assets was 0.96%, the return on average
equity was 16.66% and the return on average tangible equity was 20.22%. For the
nine months ended September 30, 1999, net income, excluding the net gain on
disposition of banking and loan production offices, net of taxes, of $11.1
million, or $0.21 diluted earnings per common share, was $165.0 million, or
diluted earnings per common share of $3.03. Excluding such gain, for the nine
months ended September 30, 1999, the return on average assets was 0.97%, the
return on average equity was 15.76% and the return on average tangible equity
was 19.00%.
NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned or
paid.
Our net interest income is significantly impacted by changes in interest
rates and market yield curves. Over the past two years, interest rates have
declined significantly, and various financial instrument markets have become
increasingly volatile. In addition, the decline in interest rates on long-term
instruments has generally been greater than the decline in interest rates on
short-term instruments, accentuating the flatness of the U.S. Treasury yield
curve. During the nine months ended September 1999, however, interest rates in
general have increased from the fourth quarter of 1998, and the increase in
interest rates on long-term instruments has been greater than the increase in
interest rates on short-term instruments, resulting in a steepening of the U.S.
Treasury yield curve. Despite this change in the U.S. Treasury yield curve, we
have continued to experience compression on our net interest spread and net
interest margin for both the third quarter and the nine months ended September
30, 1999 versus the comparable 1998 periods. This compression was a result of
the growth of interest-earning assets and interest-bearing liabilities during
the 1998 lower interest rate environment.
Net interest income increased $20.9 million, or 18.7%, to $133.2 million
for the three months ended September 30, 1999, from $112.3 million for the three
months ended September 30, 1998. The increase in total average interest-earning
assets of $4.48 billion was offset by an increase in total average
interest-bearing liabilities of $4.46 billion. Our net interest rate spread
decreased to 2.08% for the third quarter of 1999, from 2.13% for the third
quarter of 1998. This decrease in net interest rate spread was the result of the
average yield on total interest-earning assets decreasing to 6.78% for the third
of 1999, from 7.02% for the third quarter of 1998, partially offset by the
average cost of interest-bearing liabilities decreasing to 4.70% for the third
quarter of 1999, from 4.89% for the third quarter of 1998. Our net interest
margin decreased to 2.39% for the third quarter of 1999 as compared to 2.52% for
the third quarter of 1998.
For the nine months ended September 30, 1999, net interest income increased
$72.6 million, or 21.8%, to
21
<PAGE> 23
$405.8 million, from $333.2 million for the nine months ended September 30,
1998. This change was a result of an increase in total average interest-earning
assets of $4.92 billion, offset by an increase in total average interest-bearing
liabilities of $4.90 billion. This increase in average net interest-earning
assets was partially offset by a decrease in the net interest rate spread to
2.17% for the nine months ended September 30, 1999, from 2.21% for the nine
months ended September 30, 1998. The change in the net interest rate spread
resulted from a decrease in the average yield on total interest-earning assets
to 6.80% for the nine months ended September 30, 1999, from 7.08% for the nine
months ended September 30, 1998, partially offset by a decrease in the average
cost of interest-bearing liabilities to 4.63% for the nine months ended
September 30, 1999, from 4.87% for the comparable 1998 period. The net interest
margin was 2.47% for the nine months ended September 30, 1999 and 2.62% for the
same period in 1998.
ANALYSIS OF NET INTEREST INCOME
The following table sets forth certain information for the three and nine
months ended September 30, 1999 and 1998. Yields are derived by dividing income
by the average balance of the related assets and costs are derived by dividing
expense by the average balance of the related liabilities, for the periods
shown, except where otherwise noted. Average balances are derived from average
daily balances. The average balance of loans receivable includes loans on which
we have discontinued accruing interest. The yields and costs include fees,
premiums and discounts which are considered adjustments to interest rates.
22
<PAGE> 24
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ---------------------- ------- -------- ---- ------- -------- ----
ASSETS: (Annualized) (Annualized)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 9,723,462 $ 172,208 7.08% $ 8,457,351 $ 155,824 7.37%
Consumer and other loans 192,741 4,726 9.81 264,112 6,192 9.38
Mortgage-backed securities (1) 10,434,731 167,422 6.42 6,903,916 113,025 6.55
Other securities (1) 1,809,690 31,854 7.04 1,939,627 34,080 7.03
Federal funds sold and
repurchase agreements 171,470 2,237 5.22 280,137 3,921 5.60
----------- ----------- ----------- ----------- ----
Total interest-earning assets 22,332,094 378,447 6.78 17,845,143 313,042 7.02
----------- -----------
Non-interest-earning assets 656,870 834,563
----------- -----------
Total assets $22,988,964 $18,679,706
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,688,840 $ 13,718 2.04% $ 2,888,979 $ 18,762 2.60%
Certificates of deposit 4,883,535 64,517 5.28 5,204,569 71,503 5.50
NOW 117,747 294 1.00 124,974 455 1.46
Money market 1,096,111 11,979 4.37 758,915 8,590 4.53
Money manager 395,928 988 1.00 356,720 1,220 1.37
----------- ----------- ----------- -----------
Total deposits 9,182,161 91,496 3.99 9,334,157 100,530 4.31
Borrowed funds 11,684,305 153,714 5.26 7,072,755 100,242 5.67
----------- ----------- ----------- -----------
Total interest-bearing liabilities 20,866,466 245,210 4.70 16,406,912 200,772 4.89
----------- -----------
Non-interest-bearing liabilities 801,327 739,693
----------- -----------
Total liabilities 21,667,793 17,146,605
Stockholders' equity 1,321,171 1,533,101
----------- ----------
Total liabilities and stockholders'
equity $22,988,964 $18,679,706
=========== ===========
Net interest income/net interest
rate spread $ 133,237 2.08% $ 112,270 2.13%
=========== ==== ========== ====
Net interest-earning assets/net
interest margin $ 1,465,628 2.39% $ 1,438,231 2.52%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.07x 1.09x
==== ====
</TABLE>
- -----------------------
(1) Securities available-for-sale are reported at average amortized cost.
23
<PAGE> 25
<TABLE>
Nine Months Ended September 30,
-------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ----------------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans $ 9,374,928 $ 502,014 7.14% $ 8,224,446 $ 457,959 7.42%
Consumer and other loans 207,328 14,797 9.52 265,346 18,596 9.34
Mortgage-backed securities (1) 10,333,972 497,287 6.42 6,339,109 314,356 6.61
Other securities (1) 1,841,231 96,871 7.01 1,893,548 99,965 7.04
Federal funds sold and
repurchase agreements 150,831 5,586 4.94 263,336 11,134 5.64
----------- ----------- ------------ -----------
Total interest-earning assets 21,908,290 1,116,555 6.80 16,985,785 902,010 7.08
----------- -----------
Non-interest-earning assets 790,341 885,117
----------- ------------
Total assets $22,698,631 $ 17,870,902
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,726,939 $ 41,085 2.01% $ 2,912,184 $ 56,903 2.61%
Certificates of deposit 4,964,526 194,136 5.21 5,369,395 220,610 5.48
NOW 128,246 951 0.99 126,045 1,391 1.47
Money market 1,004,608 32,071 4.26 697,393 23,501 4.49
Money manager 386,159 2,860 0.99 352,841 3,729 1.41
----------- ----------- ------------ -----------
Total deposits 9,210,478 271,103 3.92 9,457,858 306,134 4.32
Borrowed funds 11,270,505 439,630 5.20 6,119,113 262,717 5.72
----------- ----------- ------------ -----------
Total interest-bearing liabilities 20,480,983 710,733 4.63 15,576,971 568,851 4.87
----------- -----------
Non-interest-bearing liabilities 822,089 792,432
----------- -------------
Total liabilities 21,303,072 16,369,403
Stockholders' equity 1,395,559 1,501,499
----------- -------------
Total liabilities and stockholders'
equity $22,698,631 $17,870,902
=========== ===========
Net interest income/net interest
rate spread $ 405,822 2.17% $ 333,159 2.21%
=========== ==== =========== ====
Net interest-earning assets/net
interest margin $ 1,427,307 2.47% $ 1,408,814 2.62%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.07x 1.09x
==== ====
</TABLE>
(1) Securities available-for-sale are reported at average amortized cost.
24
<PAGE> 26
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 our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to: (1)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (2) changes attributable to changes in rate (changes in rate multiplied
by prior volume), and (3) 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, 1999 Nine Months Ended September 30, 1999
Compared to Compared to
Quarter Ended September 30, 1998 Nine Months Ended September 30, 1998
-------------------------------- ------------------------------------
(In Thousands) Increase (Decrease) Increase (Decrease)
- -----------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .................. $ 22,685 $ (6,301) $ 16,384 $ 61,899 $ (17,844) $ 44,055
Consumer and other loans ........ (1,739) 273 (1,466) (4,149) 350 (3,799)
Mortgage-backed securities ...... 56,685 (2,288) 54,397 192,229 (9,298) 182,931
Other securities ................ (2,274) 48 (2,226) (2,681) (413) (3,094)
Federal funds sold and repurchase
agreements ................... (1,433) (251) (1,684) (4,299) (1,249) (5,548)
--------- --------- --------- --------- --------- ---------
Total .............................. 73,924 (8,519) 65,405 242,999 (28,454) 214,545
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Savings ......................... (1,228) (3,816) (5,044) (3,428) (12,390) (15,818)
Certificates of deposit ......... (4,237) (2,749) (6,986) (16,012) (10,462) (26,474)
NOW ............................. (25) (136) (161) 23 (463) (440)
Money market .................... 3,702 (313) 3,389 9,833 (1,263) 8,570
Money manager ................... 124 (356) (232) 326 (1,195) (869)
Borrowed funds .................. 61,186 (7,714) 53,472 202,748 (25,835) 176,913
--------- --------- --------- --------- --------- ---------
Total .............................. 59,522 (15,084) 44,438 193,490 (51,608) 141,882
--------- --------- --------- --------- --------- ---------
Net change in net interest
income .......................... $ 14,402 $ 6,565 $ 20,967 $ 49,509 $ 23,154 $ 72,663
========= ========= ========= ========= ========= =========
</TABLE>
INTEREST INCOME
Interest income for the three months ended September 30, 1999 increased
$65.4 million, or 20.9%, to $378.4 million, from $313.0 million for the three
months ended September 30, 1998. This increase was the result of a $4.48 billion
increase in average interest-earning assets to $22.33 billion for the three
months ended September 30, 1999, from $17.85 billion for the comparable period
in 1998. This increase was partially offset by a decrease in the average yield
of interest-earning assets to 6.78% for the third quarter of 1999, from 7.02%
for the third quarter of 1998. The increase in average interest-earning assets,
for both the three and nine month periods, was primarily due to increases in
mortgage loans and mortgage-backed securities resulting from our strategy of
deploying excess capital through growth.
Interest income on mortgage loans increased $16.4 million to $172.2 million
for the third quarter of 1999, from $155.8 million for the third quarter of
1998, which was the result of an increase in the average balance of $1.27
billion, partially offset by a decrease in the average yield on mortgage loans
to 7.08% for the third quarter of 1999, from 7.37% for the third quarter of
1998. The increase in the average balance of mortgage loans reflects our
continued emphasis on originations of primarily one-to-four family residential
mortgage loans. The decrease in the average yield was due to the continued
decline in market interest rates during the later half of 1998, coupled with the
accelerated prepayments and refinancing activity during 1998, which continued
through the first quarter of 1999. Although rising interest rates during the
first nine months of 1999 have caused a deceleration of this prepayment
25
<PAGE> 27
and refinancing activity, the overall levels of interest rates did not surpass
prior year levels until late in the second quarter of 1999. Additionally, the
rising interest rate environment has created a shift in consumer demand from
fixed rate products to adjustable rate products. As such, the impact of these
rising rates has not yet been reflected in the overall average yield on our
mortgage loan portfolio. Interest income on consumer and other loans decreased
$1.5 million resulting from a decrease in the average balance of $71.4 million,
partially offset by an increase in the yield to 9.81% for the third quarter of
1999, from 9.38% for the third quarter of 1998.
Interest income on mortgage-backed securities increased $54.4 million to
$167.4 million for the third quarter of 1999, from $113.0 million for the third
quarter of 1998. This increase was the result of a $3.53 billion increase in the
average balance of this portfolio, partially offset by a decrease in the average
yield to 6.42% for the third quarter of 1999, from 6.55% for the third quarter
of 1998. The decrease in the average yield of our mortgage-backed securities
portfolio is reflective of the changes in the interest rate environment
discussed above. Interest income on other securities decreased $2.2 million to
$31.9 million for the quarter ended September 30, 1999, from $34.1 million for
the quarter ended September 30, 1998. This was the result of a decrease in the
average balance of this portfolio of $129.9 million, slightly offset by an
increase in the average yield to 7.04% for the third quarter of 1999, from 7.03%
for the third quarter of 1998. Interest income on federal funds sold and
repurchase agreements decreased $1.7 million as a result of a decrease in the
average balance of $108.7 million and a decrease in the average yield to 5.22%
for the third quarter of 1999, from 5.60% for the comparable 1998 period.
For the nine months ended September 30, 1999, interest income increased
$214.5 million, or 23.8%, to $1.12 billion, from $902.0 million for the nine
months ended September 30,1998. This increase was the result of a $4.92 billion
increase in average interest-earning assets to $21.91 billion for the nine
months ended September 30, 1999, from $16.99 billion for the comparable period
in 1998. This increase was partially offset by a decrease in the average yield
on interest-earning assets to 6.80% for the nine months ended September 30,
1999, from 7.08% for the nine months ended September 30, 1998.
Interest income on mortgage loans increased $44.0 million to $502.0 million
for the nine months ended September 30, 1999, from $458.0 million for the nine
months ended September 30, 1998, which was the result of an increase in the
average balance of $1.15 billion, partially offset by a decrease in the average
yield on mortgage loans to 7.14% for the nine months ended September 30, 1999,
from 7.42% for the comparable period in 1998. Interest income on other loans
decreased $3.8 million resulting from a decrease in the average balance of $58.0
million, partially offset by an increase in the average yield to 9.52% for the
nine months ended September 30, 1999, from 9.34% for the nine months ended
September 30, 1998.
Interest income on mortgage-backed securities increased $182.9 million to
$497.3 million for the nine months ended September 30, 1999, from $314.4 million
for the nine months ended September 30, 1998. This increase was the result of a
$3.99 billion increase in the average balance of the portfolio, partially offset
by a decrease in the average yield to 6.42% for the nine months ended September
30, 1999, from 6.61% for the nine months ended September 30, 1998. Interest
income on other securities decreased $3.1 million to $96.9 million for the nine
months ended September 30, 1999, from $100.0 million for the nine months ended
September 30, 1998, resulting from a decrease in the average balance of $52.3
million and a decrease in the average yield to 7.01% for the nine months ended
September 30, 1999, from 7.04% for the comparable period in 1998. Interest
income on federal funds sold and repurchase agreements decreased $5.5 million as
a result of a decrease in the average balance of $112.5 million and a decrease
in the average yield to 4.94% for the nine months ended September 30, 1999, from
5.64% for the nine months ended September 30, 1998.
The changes in the average balances and average yields on interest-earning
assets for the nine months ended September 30, 1999 were consistent with the
changes for the three months ended September 30, 1999.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1999 increased
$44.4 million, to $245.2 million, from $200.8 million for the three months ended
September 30, 1998. This increase was attributable to an increase in the average
balance of interest-bearing liabilities of $4.46 billion, to $20.87 billion for
the quarter ended September 30, 1999, from $16.41 billion for the quarter ended
September 30, 1998, partially offset by a decrease in the average cost of such
liabilities to 4.70% for the third quarter of 1999 from 4.89% for the third
quarter of 1998. The increase in average interest-bearing liabilities was
primarily attributable to an increase in the average
26
<PAGE> 28
balance of borrowings of $4.61 billion, discussed below. The decline in the
overall average costs of our interest-bearing liabilities reflects the lower
interest rate environment that has prevailed in the first half of 1999 versus
the comparable 1998 period. Although interest rate levels continued to increase
during the third quarter of 1999, we were able to maintain the lower average
costs by maintaining stable volume levels of borrowings during the rising
interest rate environment.
Interest expense on borrowed funds increased $53.5 million, to $153.7
million for the three months ended September 30, 1999, from $100.2 million for
the three months ended September 30, 1998. This increase was attributable to an
increase in the average balance of borrowings of $4.61 billion, partially offset
by a decrease in the average cost of borrowings to 5.26% for the third quarter
of 1999, from 5.67% for the third quarter of 1998. The significant growth we
experienced during the second half of 1998 and first quarter of 1999 was funded
primarily through cost effective medium-term borrowings.
Interest expense on deposits decreased $9.0 million to $91.5 million for
the three months ended September 30, 1999, from $100.5 million for the three
months ended September 30, 1998, reflecting a decrease in the average cost of
interest-bearing deposits to 3.99% for the third quarter of 1999 from 4.31% for
the same period in 1998 coupled with a decrease in the average balance of total
interest-bearing deposits of $152.0 million. Interest expense on savings
accounts decreased $5.0 million as a result of a decrease in the average cost
to 2.04% for the third quarter of 1999, from 2.60% for the same period in 1998
and a decrease in the average balance of $200.1 million. The decrease in
average cost of savings accounts was a result of us lowering the rates paid on
these accounts during the fourth quarter of 1998. Interest expense on
certificates of deposit decreased $7.0 million from the combined effect of a
decrease in the average balance of $321.0 million and a decrease in the average
cost to 5.28% for the third quarter of 1999, from 5.50% for the third quarter
of 1998, primarily due to the lower interest rate environment. Interest expense
on money market accounts increased $3.4 million to $12.0 million for the third
quarter of 1999, from $8.6 million for the third quarter of 1998, as a result
of an increase in the average balance of $337.2 million, offset by a decrease
in the average cost to 4.37% for the third quarter of 1999, from 4.53% for the
same period in 1998. Interest paid on money market accounts is on a tiered
basis with 86.01% of the balance in the highest tier (accounts with balances of
$50,000 and higher). The yield on the top tier is by policy at least equal to
the discount rate for the three-month U.S. Treasury bill. As previously
mentioned, despite the increase in rates during the nine months ended September
30, 1999, the actual levels of interest rates did not surpass those of the
prior year until late in the second quarter of 1999. Interest expense on NOW
and money manager accounts decreased $393,000, because we lowered the rates
paid on these accounts during the third quarter of 1998.
Interest expense for the nine months ended September 30,1999 increased
$141.8 million, to $710.7 million, from $568.9 million for the nine months ended
September 30,1998. This increase was the result of a $4.90 billion increase in
average interest-bearing liabilities to $20.48 billion for the nine months ended
September 30, 1999, from $15.58 billion for the comparable period in 1998,
partially offset by a decrease in the average cost of these liabilities to 4.63%
for the nine months ended September 30, 1999, from 4.87% for the nine months
ended September 30, 1998.
Interest expense on borrowed funds for the nine months ended September 30,
1999 increased $176.9 million, to $439.6 million, from $262.7 million for the
nine months ended September 30, 1998, resulting from an increase in the average
balance of borrowings of $5.15 billion, partially offset by a decrease in the
average cost of borrowings to 5.20% for the nine months ended September 30,
1999, from 5.72% for the comparable 1998 period.
Interest expense on deposits decreased $35.0 million, to $271.1 million for
the nine months ended September 30, 1999, from $306.1 million for the nine
months ended September 30, 1998, reflecting a decrease in the average balance of
total interest-bearing deposits of $247.4 million, coupled with a decrease in
the average cost of interest bearing-deposits to 3.92% for the nine months ended
September 30, 1999, from 4.32% for the same period in 1998. Interest expense on
savings accounts decreased $15.8 million which was attributable to a decrease in
the average balance of $185.2 million and a decrease in the average cost to
2.01% for the nine months ended September 30, 1999, from 2.61% for the nine
months ended September 30, 1998. Interest expense on certificates of deposit
decreased $26.5 million resulting from a decrease in the average balance of
$404.9 million and a decrease in the average cost to 5.21% for the nine months
ended September 30, 1999, from 5.48% for the nine months ended September 30,
1998. Interest expense on money market accounts increased $8.6 million
reflecting an increase in the average balance of $307.2 million, offset by a
decrease in the average cost to 4.26% for the nine months ended September 30,
1999, from 4.49% for the 1998 comparable period. Interest expense on NOW and
money manager
27
<PAGE> 29
accounts decreased $1.3 million, because we lowered the rates paid on these
accounts during the third quarter of 1998, as mentioned above.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased to $1.0 million for the third quarter
of 1999, from $5.2 million for the third quarter of 1998. The third quarter 1998
provision for loan losses reflects a $4.0 million charge due to increased
delinquencies experienced in the consumer loan portfolio. For the nine months
ended September 30, 1999, provision for loan losses decreased to $3.1 million,
from $8.8 million for the 1998 comparable period. The allowance for loan losses
decreased slightly to $74.3 million at September 30, 1999, from $74.4 million at
December 31, 1998. Net loan charge-offs totaled $2.1 million for the quarter
ended September 30, 1999 and $3.2 million for the nine months ended September
30, 1999. Non-performing loans decreased $53.6 million to $57.5 million at
September 30, 1999, from $111.1 million at December 31, 1998. This reduction in
non-performing loans improved the percentage of allowance for loan losses to
non-performing loans from 66.99% at December 31, 1998 to 129.21% at September
30, 1999. The allowance for loan losses as a percentage of total loans decreased
from 0.83% at December 31, 1998 to 0.74% at September 30, 1999 primarily due to
the increase of $996.6 million in gross loans receivable from December 31, 1998
to September 30, 1999. The decline in the provision and in the allowance for
loan losses generally reflects the decline in non-performing loans. For further
discussion of non-performing loans and allowance for loan losses, see "Asset
Quality."
NON-INTEREST INCOME
Non-interest income for the quarter ended September 30, 1999 increased to
$36.8 million from $8.3 million for the quarter ended September 30, 1998.
Excluding gains on sales of securities and the net gain on disposition of
banking and loan production offices, non-interest income for the third quarter
of 1999 increased $12.2 million to $16.3 million from $4.1 million for the third
quarter of 1998. Non-interest income totaled $69.9 million for the nine months
ended September 30, 1999 and $48.1 million for the nine months ended September
30, 1998. Excluding gains on sales of securities and the net gain on disposition
of banking and loan production offices, non-interest income increased $17.0
million, or 51.8%, to $49.9 million for the nine months ended September 30, 1999
from $32.9 million for the comparable 1998 period.
Customer service and other loan fees totaled $10.4 million for the three
months ended September 30, 1999 and $29.3 million for the nine months ended
September 30, 1999, compared to $9.1 million for the three months ended
September 30, 1998 and $25.0 million for the nine months ended September 30,
1998. This increase is due in part to our changes in customer service fees in
1998 and the overall growth in the loan portfolio. Loan servicing fees totaled
$2.8 million for the three months ended September 30, 1999 and $12.1 million for
the nine months ended September 30, 1999 compared to loan servicing costs of
$5.8 million for the quarter ended September 30, 1998 and $2.1 million for the
nine months ended September 30, 1998.
Loan servicing fees include all contractual and ancillary servicing revenue
we receive net of amortization of mortgage servicing rights and valuation
allowance adjustments for the impairment of mortgage servicing rights. The
increase in loan servicing fees was the result of a decrease in amortization of
servicing rights coupled with changes in the market valuation of servicing
rights. We recorded a $1.9 million decrease in the amortization of mortgage
servicing rights for the three months ended September 30, 1999 and a $4.4
million decrease for the nine months ended September 30, 1999, compared to the
same periods in 1998. In addition, as a result of a change in prepayment speeds
in 1999, we recognized a recovery of portions of the valuation allowance for
mortgage servicing rights of $2.5 million for the nine months ended September
30, 1999. In contrast, for the quarter ended September 30, 1998, we recorded a
$7.4 million provision for impairment on our mortgage servicing rights due to
increased mortgage refinance activity and accelerating prepayment speeds.
Net gains on sales of loans totaled $209,000 for the three months ended
September 30, 1999 and $3.3 million for the nine months ended September 30,
1999, compared to an $844,000 net loss on sales of loans for the 1998 third
quarter and a $1.4 million net gain for the nine months ended September 30,
1998. Other non-interest income totaled $790,000 for the three months ended
September 30, 1999 and $2.5 million for the nine months ended September 30,
1999, compared to $1.7 million for the quarter ended September 30, 1998 and $6.9
million for the nine months ended September 30, 1998. The decreases are
primarily due to a $1.6 million gain on the settlement of a real estate dispute
recorded in the second quarter of 1998 and $470,000 of rental income for the
nine months
28
<PAGE> 30
ended September 30, 1998 recognized from a sublease from our former mortgage
headquarters which expired in January 1999.
Net gain on sales of securities totaled $4.1 million for the third quarter
of 1998. There were no security sales during the third quarter of 1999. For the
nine months ended September 30, 1999, net gain on sales of securities totaled
$714,000 compared to $15.3 million for the comparable 1998 period. The sales
activity in 1998 was concentrated on the sale of mortgage-backed securities
created from the securitizations of mortgage loans. During the nine months ended
September 30, 1999, however, with the exception of thirty-year fixed-rate loans,
and, more recently, fifteen year fixed-rate loans, our loan originations were
added to our portfolio, rather than being securitized and sold. During the nine
months ended September 30, 1999, we recognized a loss of $1.2 million on various
transactions relating to the LPOs previously acquired from LIB. During the
quarter ended September 30, 1999, we recognized a $20.4 million gain on the sale
of our five upstate New York banking offices. See further discussion under
"Mergers and Acquisitions - 1999 Cost Savings Initiatives."
NON-INTEREST EXPENSE
Non-interest expense decreased $17.7 million, or 24.6%, to $54.0 million
for the third quarter of 1999 compared to $71.7 million for the third quarter of
1998. For the nine months ended September 30, 1999, non-interest expense
decreased $30.1 million, to $168.9 million, from $199.0 million for the nine
months ended September 30, 1998. During the third quarter of 1998, included in
other general and administrative expense, were $9.1 million of various accruals
for expenses incurred and for differences between the general ledger and various
subsidiary ledgers relating to the LIB Acquisition. The remaining reduction was
primarily the result of the consolidation of LIB's operations into ours which
resulted in significant cost savings. General and administrative expense
decreased $19.0 million to $48.0 million for the third quarter of 1999, from
$67.0 million for the third quarter of 1998. For the nine months ended September
30, 1999, general and administrative expense decreased $32.6 million to $150.4
million, from $183.0 million for the comparable 1998 period.
Compensation and benefits totaled $22.5 million for the three months ended
September 30, 1999, and $70.6 million for the nine months ended September 30,
1999, compared to $26.6 million for the three months ended September 30, 1998
and $78.2 million for the nine months ended September 30, 1998. Employee stock
plans amortization expense totaled $2.2 million for the three months ended
September 30, 1999 and $8.1 million for the nine months ended September 30,
1999, compared to $4.0 million for the three months ended September 30, 1998 and
$14.6 million for the nine months ended September 30,1998. The decrease in
employee stock plans amortization expense includes a decrease relating to the
allocation of ESOP stock due to a lower average market value of our common stock
from $46.51 per share for the three months ended September 30, 1998 and $52.60
per share for the nine months ended September 30, 1998, to $35.85 per share for
the three months ended September 30, 1999 and $43.38 per share for the nine
months ended September 30, 1999. In addition, our vesting period for the
majority of shares granted under the RRP was completed in January 1999. The
amortization period for these grants was primarily completed in fiscal 1998,
resulting in a decrease in amortization expense to $36,000 for the third quarter
of 1999, compared to $914,000 for the third quarter of 1998. The amortization
expense for the nine month period ended September 30, 1999 decreased to
$109,000, compared to $3.8 million for the respective 1998 period.
Occupancy, equipment and systems expense totaled $13.2 million for the
quarter ended September 30, 1999 and $40.4 million for the nine months ended
September 30, 1999, as compared to $14.5 million for the quarter ended September
30, 1998 and $43.1 million for the nine months ended September 30, 1998.
Advertising expense increased $824,000 for the quarter ended September 30, 1999
and $1.8 million for the nine months ended September 30, 1999 from the
comparable 1998 periods. Other expenses decreased $12.1 million for the quarter
ended September 30, 1999 and $16.7 million for the nine months ended September
30, 1999 as compared to the same periods in 1998. This decrease is primarily a
result of $9.1 million of various accruals for expenses incurred and for
differences between the general ledger and various subsidiary ledgers relating
to the LIB Acquisition, as previously mentioned. Goodwill litigation expense
increased to $1.1 million for the third quarter of 1999 compared to $421,000 for
the third quarter of 1998 and increased to $4.0 million for the nine months
ended September 30, 1999 compared to $1.1 million for the nine months ended
September 30, 1998. For further discussion on the goodwill litigation
proceedings, see "Part II - Other Information, Item 1 - Legal Proceedings." Our
percentage of general and administrative expense to average assets improved to
0.84% for the three months ended September 30, 1999 and 0.88% for the nine
months ended September 30, 1999, from 1.43% for the three months ended September
29
<PAGE> 31
30, 1998 and 1.37% for the nine months ended September 30, 1998. The efficiency
ratios also improved to 32.09% for the three months ended September 30, 1999 and
33.02% for the nine months ended September 30, 1999, from 57.53% for the three
months ended September 30, 1998 and 50.01% for the nine months ended September
30, 1998.
INCOME TAX EXPENSE
Income tax expense increased $29.2 million to $48.0 million for the third
quarter of 1999, representing an effective tax rate of 41.8%, from $18.8 million
for the third quarter of 1998, representing an effective tax rate of 43.1%,
primarily due to an increase in income before taxes of $71.3 million. Income tax
expense increased $54.6 million to $127.5 million for the nine months ended
September 30, 1999, from $72.9 million, for the comparable 1998 period,
primarily due to an increase in income before taxes of $130.1 million. The
effective tax rate for the nine months ended September 30, 1999 and 1998
remained constant at 42.0%.
CASH EARNINGS
Tangible stockholders' equity (stockholders' equity less goodwill) totaled
$1.13 billion at September 30, 1999 and $1.22 billion at December 31, 1998.
Tangible equity is a critical measure of a company's ability to repurchase
shares, pay dividends and continue to grow. Astoria Federal 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 GAAP.
Although reported earnings and return on equity are traditional measures
of a company's performance, we believe that the change in tangible equity, or
"cash earnings," is also a significant measure of a company's performance. Cash
earnings exclude the effects of various non-cash expenses, such as the
amortization for the allocation of ESOP and RRP stock and related tax benefit,
as well as the amortization of goodwill. In the case of tangible equity, 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.
We believe that cash earnings and cash returns on average tangible equity
reflect our ability to generate tangible capital that can be leveraged for
future growth. The following comparisons exclude the net gain on disposition of
banking and loan production offices recognized during the quarter and nine
months ended September 30, 1999. Operating cash earnings for the third quarter
of 1999 totaled $63.1 million, an increase of $24.6 million over $38.5 million
operating cash earnings for the third quarter of 1998. For the nine months ended
September 30, 1999, operating cash earnings increased $53.4 million to $190.6
million, from $137.2 million for the nine months ended September 30, 1998.
Operating cash return on average tangible equity was 23.17% for the third
quarter of 1999 and 12.06% for the third quarter of 1998. Operating cash return
on average assets was 1.10% for the quarter ended September 30, 1999 and 0.82%
for the quarter ended September 30, 1998. Operating cash return on average
tangible equity was 21.94% for the nine months ended September 30, 1999 and
14.73% for the nine months ended September 30, 1998. Operating cash return on
average assets was 1.12% for the period ended September 30, 1999 and 1.02% for
the same period in 1998. Additionally, the cash general and administrative
expense (general and administrative expense, excluding non-cash amortization
expense relating to certain employee stock plans) to average assets ratio also
improved to 0.80% for the three months ended September 30, 1999 as compared to
1.35% for the three months ended September 30, 1998. The operating cash
efficiency ratio improved to 30.59% for the third quarter of 1999 from 54.11%
for the third quarter of 1998. For the nine months ended September 30, 1999, the
cash general and administrative expense to average assets ratio was 0.84% as
compared to 1.26% for the comparable 1998 period. The operating cash efficiency
ratio was 31.25% for the nine months ended September 30, 1999 versus 46.03% for
the nine months ended September 30, 1998.
30
<PAGE> 32
Presented below are our Condensed Consolidated Schedules of Operating Cash
Earnings for the three and nine months ended September 30, 1999 and 1998.
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED SCHEDULES OF OPERATING CASH EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 66,948 $ 24,864 $176,124 $100,589
Less: Net gain on disposition of banking and loan
production offices, net of tax 11,909 -- 11,140 --
-------- -------- -------- --------
Operating income 55,039 24,864 164,984 100,589
Add back:
Employee stock plans amortization expense 2,234 3,983 8,075 14,559
Amortization of goodwill 4,843 4,962 14,592 14,809
Income tax benefit on amortization expense of
earned portion of RRP stock 968 4,698 2,903 7,264
-------- -------- -------- --------
Operating cash earnings 63,084 38,507 190,554 137,221
Preferred dividends declared 1,500 1,500 4,500 4,500
-------- -------- -------- --------
Operating cash earnings available to common
shareholders $ 61,584 $ 37,007 $186,054 $132,721
======== ======== ======== ========
Basic operating cash earnings per common share(1) $ 1.20 $ 0.73 $ 3.60 $ 2.62
======== ======== ======== ========
Diluted operating cash earnings per common share (1) $ 1.18 $ 0.70 $ 3.51 $ 2.51
======== ======== ======== ========
</TABLE>
(1) Based on the weighted average shares used to calculate earnings per share on
the Consolidated Statements of Income.
ASSET QUALITY
One of our 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 borrower workout arrangements and aggressive
marketing of foreclosed properties, we have been proactive in addressing problem
and non-performing assets which, in turn, has helped to build the strength of
our financial condition. Such strategies, as well as our concentration on
one-to-four family mortgage lending and maintaining sound credit standards for
new loan originations, and in particular a generally strong and stable economy
and real estate market, have resulted in a steady reduction in non-performing
assets to total assets from December 31, 1994 through September 30, 1999.
Non-performing assets decreased from $120.4 million at December 31, 1998 to
$64.0 million at September 30, 1999. The ratio of non-performing assets to total
assets decreased from 0.58% at December 31, 1998 to 0.28% at September 30, 1999.
The decrease in non-performing assets was primarily due to a $53.6 million
decrease in non-performing loans from $111.1 million at December 31, 1998 to
$57.5 million at September 30, 1999. Following the LIB Acquisition, we conformed
LIB's collection policies and procedures to those of ours. These efforts, aided
by a stable economy, resulted in this significant decrease in non-performing
loans, particularly during the second and third quarters of 1999. The decrease
in investments in real estate is a result of the sale of the property which
comprised this balance at December 31, 1998. The following table shows a
comparison of delinquent loans as of September 30, 1999 and December 31, 1998.
31
<PAGE> 33
<TABLE>
<CAPTION>
DELINQUENT LOANS
-----------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1999 AT DECEMBER 31, 1998
---------------------------------------------- ---------------------------------------------
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 ....... 46 $ 2,419 424 $ 53,095 77 $ 2,422 804 $ 94,078
Multi-family ............. 2 374 5 630 1 203 14 2,224
Commercial real estate ... 1 326 6 2,008 2 221 23 8,776
Consumer and other loans . 168 3,278 176 1,795 246 2,058 279 5,995
-------- -------- -------- -------- -------- -------- -------- --------
Total delinquent loans ... 217 $ 6,397 611 $ 57,528 326 $ 4,904 1,120 $111,073
======== ======== ======== ======== ======== ======== ======== ========
Delinquent loans to total
loans ............. 0.06 % 0.58% 0.05% 1.23%
</TABLE>
The following table sets forth information regarding non-performing assets
at September 30, 1999 and December 31, 1998. In addition to the non-performing
loans, we had approximately $6.4 million of potential problem loans at September
30, 1999 and $4.9 million at December 31, 1998. Such loans are 60-89 days
delinquent as shown above.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1999 (1) 1998 (1)
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual delinquent mortgage loans (2) ..... $ 52,856 $100,302
Non-accrual delinquent consumer and other loans 1,795 5,995
Mortgage loans delinquent 90 days or more (3) . 2,877 4,776
-------- --------
Total non-performing loans ............... 57,528 111,073
-------- --------
Real estate owned, net (4) .................... 6,495 6,071
Investments in real estate, net (5) ........... -- 3,266
-------- --------
Total real estate owned and investments
in real estate, net ........................ 6,495 9,337
-------- --------
Total non-performing assets (6) .......... $ 64,023 $120,410
======== ========
Allowance for loan losses to non-performing loans 129.21% 66.99%
Allowance for loan losses to total loans ......... 0.74% 0.83%
</TABLE>
(1) If all non-accrual loans had been performing in accordance with their
original terms, we would have recorded interest income of $3.2 million for
the nine months ended September 30, 1999 and $6.8 million for the year
ended December 31, 1998. Actual payments recorded to interest income
totaled $1.4 million for the nine months ended September 30, 1999 and $1.6
million for the year ended December 31, 1998.
(2) Consists primarily of loans secured by one-to-four family properties.
(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 we acquired 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.
(6) Excluded from non-performing assets are $9.9 million and $6.9 million at
September 30, 1999 and December 31, 1998, respectively, of restructured
loans that have complied with the terms of their restructure agreement for
a satisfactory period and have, therefore, been returned to performing
status.
32
<PAGE> 34
The following table sets forth the change in allowance for loan,
investments in real estate and REO losses.
(Dollars in Thousands)
<TABLE>
<S> <C>
Allowance for Loan Losses:
Balance at December 31, 1998 .................................................... $ 74,403
Provision charged to operations ............................................ 3,119
Charge-offs:
One-to-four family .................................................. (1,255)
Multi-family ........................................................ (12)
Commercial .......................................................... (845)
Consumer and other .................................................. (3,695)
--------
Total charge-offs .......................................................... (5,807)
--------
Recoveries:
One-to-four family .................................................. 1,102
Multi-family ........................................................ 270
Commercial .......................................................... 53
Consumer and other .................................................. 1,192
--------
Total recoveries ........................................................... 2,617
--------
Total net charge-offs ...................................................... (3,190)
--------
Balance at September 30, 1999 ................................................... $ 74,332
========
Allowance for Losses on Investments in Real Estate and REO:
Balance at December 31, 1998 ............................................... $ 689
Provision charged to operations ..................................... 45
Charge-offs ......................................................... (482)
Recoveries .......................................................... 68
--------
Balance at September 30, 1999 .............................................. $ 320
========
</TABLE>
The following table sets forth an 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, 1999
------------------------------
% of Loans
in Category to
Amount Total Loans
------- ------
(In Thousands)
<S> <C> <C>
One-to-four family $42,666 88.49%
Multi-family 4,515 5.51
Commercial 10,495 4.17
Consumer and other loans 16,656 1.83
------- ------
Total allowances $74,332 100.00%
======= ======
</TABLE>
33
<PAGE> 35
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of our quantitative and qualitative disclosures about
market risk, see the information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Sensitivity Analysis."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 24, 1994, our predecessor, LISB, received notice that it had been
named as a defendant in a class action lawsuit filed in the United States
District Court for the Eastern District of New York. Other defendants included
James J. Conway, Jr., former Chairman and Chief Executive Officer of LISB who
resigned from LISB in June 1992, his former law firm, certain predecessor firms
of that law firm, and certain partners of that law firm. The lawsuit is
entitled Ronnie Weil Also Known as Ronnie Moore, for Herself and on Behalf of
All Other Persons Who Obtained Mortgage Loans from The Long Island Savings
Bank, FSB during the period January 1, 1983 through December 31, 1992 vs. The
Long Island Savings Bank, FSB, et al. The complaint alleges that the defendants
caused mortgage loan commitments to be issued to mortgage loan borrowers,
submitted legal invoices to the borrowers at the closing of mortgage loans
which falsely represented the true legal fees charged for representing LISB in
connection with the mortgage loans and failed to advise that a part of the
listed legal fee would be paid to Mr. Conway, thereby defrauding the borrowers.
The complaint does not specify the amount of damages sought.
On or about June 9, 1994, the Bank was served with an Amended Summons and
Amended Complaint adding LISB's directors as individual defendants. On or about
July 29, 1994, LISB and the individual director defendants served on plaintiffs
a motion to dismiss the Amended Complaint. On or about August 29, 1994, the
plaintiffs served papers in response to the motion. The remaining schedule on
the motion was held in abeyance pending certain discovery.
On January 4, 1999, we were served with a second amended complaint alleging
essentially the same claims and adding as additional defendants, us, as
successor to LISB, and certain members of James J. Conway, Jr.'s family. The
second amended complaint seeks damages of at least $11.0 million trebled. On or
about February 22, 1999, we, on behalf of ourselves and LISB, and the individual
directors of LISB filed motions to dismiss the second amended complaint. The
Court has not yet rendered a decision on the motion.
We believe that the likelihood is remote that this case will have a
material adverse impact on our consolidated financial condition and results of
operations.
On July 18, 1997, a purported class action, or 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. against The
Greater, The Greater's directors and certain of its executive officers, and us.
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 breached their fiduciary duties by entering
into The Greater Acquisition and related arrangements. The suit further alleged,
without specification, that we 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, or 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
34
<PAGE> 36
parties, all claims against the non-director, executive officers of The Greater,
except one, were 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.
In July 1998, the plaintiffs filed a second amended complaint, which the
defendants moved to dismiss on July 21, 1998. The motion was argued before the
Court on October 21, 1998 and after supplemental submissions by the parties, the
Court on January 25, 1999 dismissed the second amended complaint in all
respects.
On or about February 18, 1999, plaintiffs filed a Notice of Appeal to the
United States Court of Appeals for the Second Circuit. Briefs were submitted on
the appeal and oral argument was held on October 12, 1999. The Court has not yet
rendered a decision on the appeal.
We believe the allegations made in the second amended complaint in the
Federal Action are without merit and intend to aggressively defend the Greater's
and our interests with respect to such matters.
On August 15, 1989, LISB, and its former wholly owned subsidiary, The Long
Island Savings Bank of Centereach, FSB, or Centereach, filed suit against the
United States seeking damages and/or other appropriate relief on the grounds,
among others, that the government had breached the terms of the 1983 assistance
agreement between LISB and the Federal Savings and Loan Insurance Corporation
pursuant to which LISB acquired Centereach, or the Assistance Agreement. The
Assistance Agreement, among other things, provided for the inclusion of
supervisory goodwill as an asset on Centereach's balance sheet to be included in
capital and amortized over 40 years for regulatory purposes.
The suit is pending before Chief Judge Loren Smith in the United States
Court of Federal Claims and is entitled The Long Island Savings Bank, FSB et al.
vs. The United States, or the LISB Goodwill Litigation.
Similarly, on July 21, 1995, we commenced an action, Astoria Federal
Savings and Loan Association vs. United States, or the Astoria Goodwill
Litigation, in the United States Court of Federal Claims against the United
States seeking in excess of $250.0 million in damages arising from the
government's breach of an assistance agreement entered into by our 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, or FIRREA, in 1989. In
addition to its breach of contract claim, Astoria Federal's complaint also
asserts claims based on promissory estoppel, failure of consideration and
frustration of purpose, and a taking of Astoria Federal's property without just
compensation in violation of the Fifth Amendment to the United States
Constitution.
Initially, both the LISB Goodwill Litigation and the Astoria Goodwill
Litigation had been stayed pending disposition by the United States Supreme
Court of three related supervisory goodwill cases, or the Winstar Cases. On July
1, 1996, the Supreme Court ruled in the Winstar Cases that the government had
breached its contracts in the Winstar Cases and was liable in damages for those
breaches.
On September 18, 1996, Judge Smith issued an Omnibus Case Management Order,
or Case Management Order, applicable to all Winstar-related cases. The Case
Management Order addresses certain timing and procedural matters with respect to
the administration of the Winstar-related cases, including organization of the
parties, initial discovery, initial determinations regarding liability, and the
resolution of certain common issues. The Case Management Order provides that the
parties will attempt to agree upon a Master Litigation Plan, which may be in
phases, to govern all further proceedings, including the resolution of common
issues (other than common issues covered by the Case Management Order),
dispositive motions, trials, discovery schedules, protocols for depositions,
document production, expert witnesses, and other matters.
On November 1, 1996, LISB filed a motion for partial summary judgment
against the government on the issues of whether LISB 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 LISB's contract claims.
On November 6, 1996, we also 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
35
<PAGE> 37
our contract claims.
On August 7 and 8, 1997, the United States Court of Federal Claims heard
oral arguments on eleven 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 four specific
summary judgment motions, not including the LISB Goodwill Litigation or the
Astoria Goodwill Litigation. 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 sixty days why partial summary judgment should not
be entered in all cases which have partial summary judgment motions pending,
including the LISB Goodwill Litigation and the Astoria Goodwill Litigation.
The government responded in the LISB Goodwill Litigation that if the Court
will not consider case specific facts, then it has no defense to LISB's motion
for partial summary judgment. The government further indicated that if the Court
will consider case specific facts, then it asserts among other things that there
are factual issues in dispute concerning the assistance agreement regarding
Centereach which render the granting of partial summary judgment inappropriate.
LISB's motion for partial summary judgment remains pending before the Court. The
Court has not yet ruled on the motion in the LISB Goodwill Litigation.
On September 14, 1999, the government moved to dismiss Counts II through V
of the complaint in the LISB Goodwill Litigation. These counts are based on
breach of implied contract, promissory estoppel, failure of consideration and
frustration of purpose, and takings under the Fifth Amendment of the United
States Constitution. The defendants also sought to supplement their cross motion
for summary judgment.
The Court has directed the parties in the "First Thirty Cases," including
the LISB Goodwill Litigation, to meet and attempt to agree on open issues under
the pending partial summary judgment motions and for plaintiffs in such cases
to submit a proposed order listing all pending damage, as opposed to liability,
claims. The government will then be given twenty-one days to respond. Those
claims identified by the Court as solely damage claims will not be resolved in
the current limited summary judgment procedure. The Court stayed all claims
based on takings under the Fifth Amendment of the United States Constitution
and pending completion of this identification procedure, all responses to
damage issues.
The government has responded in the Astoria Goodwill Litigation that if the
Court will not consider case specific facts, then it has no defense to Astoria
Federal's motion for partial summary judgment. 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 Astoria Federal's motion. Astoria Federal 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, that the contractual language in the Fidelity's
Assistance Agreement and other operative documents is factually
indistinguishable from that ruled upon in the Winstar Cases, and thus, that
Astoria Federal's motion for partial summary judgment should be granted. Astoria
Federal's response further requests reimbursement of Astoria Federal's
attorneys' fees from the government for seeking to relitigate the capital credit
issue. By motion dated July 16, 1998, the government moved to stay further
proceedings related to Astoria Federal's motion which has been granted through
July 31, 1999. Astoria Federal's motion for partial summary judgment remains
pending before the Court.
Pursuant to the Case Management Order, the LISB Goodwill Litigation has
been designated as one of the "First Thirty Cases". As a result of this
designation, discovery has been underway for approximately one year and a half.
Both sides have exchanged documents and directed interrogatories to each other
which have been answered. Our attorneys have taken depositions of key former
government regulators who had supervisory authority over LISB. The government
has taken depositions of a number of former LISB directors, officers and
employees.
The Astoria Goodwill Litigation has been designated as one of the "Second
Thirty Cases." As a result, discovery in such case commenced on August 23, 1999.
On April 9, 1999 and on April 16, 1999, damage decisions were rendered by
the United States Court of Federal Claims in the cases of Glendale Federal Bank,
FSB v. The United States, Case No. 90-772C and California Federal Bank v. United
States of America, Case No. 92-138C, respectively. The former was rendered by
Chief Judge Loren A. Smith while the latter decision was rendered by Judge
Robert H. Hodges, Jr. Both of these decisions have been appealed. Similarly, on
September 30, 1999, Judge Eric G. Bruggink rendered a damage decision in the
case of LaSalle
36
<PAGE> 38
Talman Bank, F.S.B. v. The United States, Case No. 92-652C. Based upon our
review of these decisions, we are unable to predict with any degree of certainty
the outcome of our claims against the United States and the amount of damages
that may be awarded in connection with either the LISB Goodwill Litigation or
the Astoria Goodwill Litigation, if any. No assurance can be given as to the
results of these claims or the timing of any proceedings in relation thereto.
ITEM 2. NOT APPLICABLE
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4. Amendment No. 2 to Rights Agreement dated as of September 15,
1999, between Astoria Financial Corporation and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent.
11. Statement Regarding Computation of Per Share Earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
1. Form 8-K dated October 20, 1999 which includes our
announcement of earnings for the quarter ended September 30,
1999.
2. Form 8-K dated October 25, 1999 which includes our
announcement of our sale of $125.0 million of Trust Preferred
Securities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: November 12, 1999 By: /s/ Monte N. Redman
----------------- -----------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
37
<PAGE> 39
Exhibit Index
Exhibit No Identification of Exhibit
- ---------- -------------------------
4. Amendment No. 2 to Rights Agreement dated as of
September 15, 1999, between Astoria Financial
Corporation and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent.
11. Statement Regarding Computation of Per Share Earnings
27. Financial Data Schedule
38
<PAGE> 1
EXHIBIT 4.
AMENDMENT NO. 2 TO RIGHTS AGREEMENT BETWEEN ASTORIA FINANCIAL
CORPORATION AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS
RIGHTS AGENT
This Amendment No. 2 to Rights Agreement, dated as of September 15, 1999
(the "Amendment"), is entered into by and between Astoria Financial Corporation,
a Delaware corporation, having an office at One Astoria Federal Plaza, Lake
Success, New York 11042-1085 (the "Corporation"), and ChaseMellon Shareholder
Services, L.L.C., a New Jersey limited liability company, with an office at 85
Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey 07660 (the "Rights
Agent").
WITNESSETH:
WHEREAS, the Corporation and the Rights Agent desire to amend certain
sections of the Rights Agreement, as and to the extent set forth in this
Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereby agree as follows:
Section 1. Definitions. Except to the extent otherwise specified
herein, capitalized terms used in this Agreement shall have the meanings
ascribed to them in the Rights Agreement.
Section 2. Amendments.
(a) Section 1(h) of the Rights Agreement is hereby amended by
deleting the section in its entirety and renumbering Sections 1(i) through (bb)
to be Sections 1(h) through (aa),respectively.
(b) Section 3(b) of the Rights Agreement is hereby amended by
deleting the words "by at least a majority of the Continuing Directors,".
(c) Section 11(b) of the Rights Agreement is hereby amended by
deleting the words "by at least a majority of the Continuing Directors".
(d) Section 11(c) of the Rights Agreement is hereby amended by
deleting the words "by at least a majority of the Continuing Directors".
(e) Section 27 of the Rights Agreement is hereby amended and
restated in its entirety as follows:
Section 27. Supplements and Amendments.
The Corporation may, at any time prior to the time a Person becomes an
Acquiring Person, by resolution of its Board of Directors, from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in any respect, any such supplement or amendment to be evidenced by
a writing signed by the Corporation and the Rights Agent; provided, however,
that from and after such time as any Person becomes an Acquiring Person, this
Agreement may be amended by the Board of Directors of the Corporation in any
manner which would not adversely affect the interests of any holders of Right
Certificates (other than an Acquiring Person or an Affiliate of Associate
thereof.). Upon the delivery of a certificate from an executive officer of the
Corporation which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment, provided that the Rights Agent shall not be
required to consent to any amendment or supplement that is adverse to its
interests. Without limiting the foregoing, the Corporation may, at any time
prior to such time as any Person becomes an Acquiring Person, amend this
Agreement to lower the thresholds set forth in Sections 1(a) and 3(b) hereof to
not less than the largest percentage of the outstanding Common Shares then known
by the Corporation to be beneficially owned by any Person."
39
<PAGE> 2
(f) Section 29(a) of the Rights Agreement is hereby amended by deleting
the parenthetical "(including, where specifically provided for herein, the
Continuing Directors)" in both places in the first sentence of subsection (a).
(g) Section 29(a)(ii) of the Rights Agreement is hereby amended by
deleting the words "or the Continuing Director".
(h) Section 29(a)(ii)(y) of the Rights Agreement is hereby amended by
deleting the parenthetical "(or the Continuing Directors)".
(i) Section 29(b) of the Rights Agreement is hereby amended by deleting
the words "and the Continuing Directors".
Section 3. Condition Precedent to Amendment. The amendment contemplated by
Section 2 hereof is subject to the satisfaction of the following condition
precedent:
(a) Amendment. This Amendment shall have been duly executed and
delivered by each of the parties hereto.
Section 4. Reference to and Effect Upon the Rights Agreement.
(a) Except as specifically amended in Section 2 above, the Rights
Agreement and each exhibit thereto shall remain in full force and effect and
each is hereby ratified and confirmed.
(b) The execution, delivery and effect of this Amendment shall be
limited precisely as written and shall not be deemed to (i) be a consent to any
waiver of any term or condition, or to any amendment or modification of any term
or condition (except as specifically amended in Section 2 above) of the Rights
Agreement or (ii) prejudice any right, power or remedy which the Rights Agent
now has or may have in the future under or in connection with the Rights
Agreement. Each reference in the Rights Agreement to "this Agreement",
"hereunder", "hereof', "herein" or any other word or words of similar import
shall mean and be a reference to the Rights Agreement as amended hereby.
Section 5. Counterparts. This Amendment may be executed in any number of
counterparts, and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 6. Governing Law. This Amendment shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
Section 7. Descriptive Headings. Descriptive headings of the several
Sections of this Amendment are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[Signature Pages Follow]
40
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
ASTORIA FINANCIAL CORPORATION
By: /s/ George L. Engelke, Jr.
---------------------------------
Name: George L. Engelke, Jr.
Title: Chairman, President and
Chief Executive Officer
Attest:
By: /s/ William K. Sheerin
----------------------------
Name: William K. Sheerin
Title: Executive Vice President and Secretary
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C., as Rights Agent
By: /s/ Robert Kavanagh
-------------------------
Name: Robert Kavanagh
Title: Vice President
Attest:
By: /s/ Jared Fassler
---------------------------------
Name: Jared Fassler
Title: Assistant Vice President
41
<PAGE> 1
EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
---------------------
(In Thousands, Except
Per Share Data)
<S> <C>
1. Net Income $ 176,124
Less: Preferred stock dividends declared 4,500
---------
Net income available to common shareholders $ 171,624
=========
2. Weighted average common shares outstanding 54,876
3. ESOP shares not committed to be released (3,140)
---------
4. Total weighted average common shares outstanding 51,736
=========
5. Basic earnings per common share $ 3.32
=========
6. Total weighted average common shares outstanding 51,736
7. Dilutive effect of stock options using the treasury
stock method 1,252
---------
8. Total average common and common equivalent
shares 52,988
=========
9. Diluted earnings per common share $ 3.24
=========
</TABLE>
42
<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, 1999
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 114,328
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 127,209
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,554,949
<INVESTMENTS-CARRYING> 1,960,656
<INVESTMENTS-MARKET> 1,910,432
<LOANS> 10,046,038
<ALLOWANCE> 74,332
<TOTAL-ASSETS> 22,863,758
<DEPOSITS> 9,440,223
<SHORT-TERM> 400,000
<LIABILITIES-OTHER> 400,220
<LONG-TERM> 11,264,572
0
2,000
<COMMON> 555
<OTHER-SE> 1,356,188
<TOTAL-LIABILITIES-AND-EQUITY> 22,863,758
<INTEREST-LOAN> 516,811
<INTEREST-INVEST> 599,744
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,116,555
<INTEREST-DEPOSIT> 271,103
<INTEREST-EXPENSE> 710,733
<INTEREST-INCOME-NET> 405,822
<LOAN-LOSSES> 3,119
<SECURITIES-GAINS> 714
<EXPENSE-OTHER> 21,944
<INCOME-PRETAX> 303,638
<INCOME-PRE-EXTRAORDINARY> 176,124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176,124
<EPS-BASIC> 3.32
<EPS-DILUTED> 3.24
<YIELD-ACTUAL> 2.47
<LOANS-NON> 54,651
<LOANS-PAST> 2,877
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,397
<ALLOWANCE-OPEN> 74,403
<CHARGE-OFFS> 5,807
<RECOVERIES> 2,617
<ALLOWANCE-CLOSE> 74,332
<ALLOWANCE-DOMESTIC> 74,332
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
