-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SmV/ONiOFAVFqLR/5TeAdN2eKjIbY2/FyHxbpcl5rS+Pk16RUMIgMznO0z2Ei028 zi3sI45+f1lGNhgQanwWeg== 0000950123-99-007563.txt : 19990813 0000950123-99-007563.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950123-99-007563 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTORIA FINANCIAL CORP CENTRAL INDEX KEY: 0000910322 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113170868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22228 FILM NUMBER: 99686220 BUSINESS ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 BUSINESS PHONE: 5163273000 MAIL ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 10-Q 1 ASTORIA FINANCIAL CORPORATION 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 June 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) Delaware 11-3170868 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Astoria Federal Plaza, Lake Success, New York 11042-1085 (Address of principal executive offices) (Zip Code) (516) 327-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, July 30, 1999 - ----------------------- ------------------------------------------- .01 Par Value 54,796,398
2 PART I -- FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Financial Condition at June 30, 1999 and December 31, 1998. 2 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 1999 and June 30, 1998. 3 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 1999. 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and June 30, 1998. 5 Notes to Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 33 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securities and Use of Proceeds 36 Item 3. Defaults Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 37 Item 6. Exhibits and Reports on Form 8-K 37 (a) Exhibits (11) Statement Regarding Computation of Per Share Earnings (27) Financial Data Schedule (b) Reports on Form 8-K Signatures 37 1 3 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT AT JUNE 30, DECEMBER 31, (In Thousands, Except Share Data) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 96,035 $ 126,945 Federal funds sold and repurchase agreements 149,226 266,437 Mortgage-backed securities available-for-sale 9,536,624 7,553,834 Other securities available-for-sale 692,393 642,610 Mortgage-backed securities held-to-maturity (estimated fair value of $928,789 and $1,141,145, respectively) 926,303 1,136,799 Other securities held-to-maturity (estimated fair value of $801,925 and $982,295, respectively) 827,868 972,012 Federal Home Loan Bank of New York stock 260,250 210,250 Loans held-for-sale 39,393 212,909 Loans receivable held-for-investment: Mortgage loans, net 9,549,268 8,583,355 Consumer and other loans, net 200,093 230,367 ------------ ------------ 9,749,361 8,813,722 Less allowance for loan losses 75,382 74,403 ------------ ------------ Loans receivable held-for-investment, net 9,673,979 8,739,319 Mortgage servicing rights, net 51,728 50,237 Accrued interest receivable 116,060 102,288 Premises and equipment, net 179,967 161,629 Goodwill 233,977 245,862 Other assets 313,543 166,610 ------------ ------------ Total assets $ 23,097,346 $ 20,587,741 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits: Savings $ 2,718,970 $ 2,815,681 Money market 1,672,239 1,484,127 NOW 262,474 325,726 Certificates of deposit 4,972,414 5,042,752 ------------ ------------ Total deposits 9,626,097 9,668,286 Reverse repurchase agreements 10,026,800 7,291,800 Federal Home Loan Bank of New York advances 1,210,116 1,210,170 Other borrowings 488,823 520,827 Mortgage escrow funds 140,886 116,106 Accrued expenses and other liabilities 264,630 318,168 ------------ ------------ Total liabilities 21,757,352 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 54,732,044 and 54,655,095 shares outstanding, respectively) 555 547 Additional paid-in capital 793,560 767,846 Retained earnings - substantially restricted 818,300 742,679 Treasury stock (766,252 shares, at cost) (36,836) -- Accumulated other comprehensive income: Net unrealized loss on securities, net of taxes (203,049) (14,566) Unallocated common stock held by ESOP (34,395) (35,908) Unearned common stock held by RRPs (141) (214) ------------ ------------ Total stockholders' equity 1,339,994 1,462,384 ------------ ------------ Total liabilities and stockholders' equity $ 23,097,346 $ 20,587,741 ============ ============
See accompanying notes to consolidated financial statements. 2 4 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ------------------------------ (In Thousands, Except Per Share Data) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Mortgage loans $ 167,919 $ 153,828 $ 329,806 $ 302,135 Consumer and other loans 4,794 6,180 10,071 12,404 Mortgage-backed securities 170,988 101,388 329,865 201,331 Other securities 31,985 32,840 65,017 65,885 Federal funds sold and repurchase agreements 1,527 4,885 3,349 7,213 ------------ ------------ ------------ ------------ Total interest income 377,213 299,121 738,108 588,968 ------------ ------------ ------------ ------------ Interest expense: Deposits 90,041 102,122 179,607 205,604 Borrowed funds 150,382 86,335 285,916 162,475 ------------ ------------ ------------ ------------ Total interest expense 240,423 188,457 465,523 368,079 ------------ ------------ ------------ ------------ Net interest income 136,790 110,664 272,585 220,889 Provision for loan losses 1,032 1,814 2,093 3,614 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 135,758 108,850 270,492 217,275 ------------ ------------ ------------ ------------ Non-interest income: Customer service and other loan fees 9,447 8,682 18,875 15,920 Loan servicing fees 4,073 1,781 9,322 3,683 Gain on sales of securities 839 6,011 714 11,121 Gain on sales of loans 773 1,196 3,046 2,208 Loss on disposition of loan production offices -- -- (1,241) -- Other 550 3,213 1,681 5,203 ------------ ------------ ------------ ------------ Total non-interest income 15,682 20,883 32,397 38,135 ------------ ------------ ------------ ------------ Non-interest expense: General and administrative: Compensation and benefits 23,352 26,010 48,044 51,593 Employee stock plans amortization 2,869 4,756 5,841 10,576 Occupancy, equipment and systems 13,068 13,512 27,141 28,595 Federal deposit insurance premiums 1,068 1,478 2,397 2,761 Advertising 2,623 1,558 3,853 2,855 Other 7,401 9,870 15,082 19,698 ------------ ------------ ------------ ------------ Total general and administrative 50,381 57,184 102,358 116,078 Real estate operations and provision for real estate losses, net (859) (1,290) (860) (1,053) Goodwill litigation 1,798 583 2,947 699 Amortization of goodwill 4,843 4,962 9,749 9,847 ------------ ------------ ------------ ------------ Total non-interest expense 56,163 61,439 114,194 125,571 ------------ ------------ ------------ ------------ Income before income tax expense 95,277 68,294 188,695 129,839 Income tax expense 39,555 28,775 79,519 54,114 ------------ ------------ ------------ ------------ Net income 55,722 39,519 109,176 75,725 Preferred dividends declared (1,500) (1,500) (3,000) (3,000) ------------ ------------ ------------ ------------ Net income available to common shareholders $ 54,222 $ 38,019 $ 106,176 $ 72,725 ============ ============ ============ ============ Basic earnings per common share $ 1.04 $ 0.75 $ 2.05 $ 1.44 ============ ============ ============ ============ Diluted earnings per common share $ 1.02 $ 0.72 $ 1.99 1.38 ============ ============ ============ ============ Dividends per common share $ 0.24 $ 0.20 $ 0.48 $ 0.40 ============ ============ ============ ============ Basic weighted average common shares 51,968,462 50,609,190 51,898,459 50,441,555 Diluted weighted average common and common equivalent shares 53,225,914 52,923,168 53,296,848 52,840,682
See accompanying notes to consolidated financial statements. 3 5 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999
Retained Additional Earnings Preferred Common Paid-In Substantially (In Thousands, Except Share Data) Total Stock Stock Capital Restricted - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 1,462,384 $ 2,000 $ 547 $ 767,846 $ 742,679 Net income 109,176 -- -- -- 109,176 Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment (188,483) -- -- -- -- Common stock repurchased (917,200 shares) (44,319) -- -- -- -- Dividends on common and preferred stock and amortization of purchase premium (28,657) -- -- (652) (28,005) Exercise of stock options and related tax benefit 22,117 -- 8 20,176 (5,550) Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit 7,776 -- -- 6,190 -- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1999 $ 1,339,994 $ 2,000 $ 555 $ 793,560 $ 818,300 =========== =========== =========== =========== ===========
Unallocated Unearned Accumulated Common Common Other Stock Stock Treasury Comprehensive Held Held (In Thousands, Except Share Data) Stock Income by ESOP by RRPs - ----------------------------------------------------------------------------------------------------------------- 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 -- (188,483) -- -- Common stock repurchased (917,200 shares) (44,319) -- -- -- Dividends on common and preferred stock and amortization of purchase premium -- -- -- -- Exercise of stock options and related tax benefit 7,483 -- -- -- Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit -- -- 1,513 73 ----------- ----------- ----------- ----------- Balance at June 30, 1999 $ (36,836) $ (203,049) $ (34,395) $ (141) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 6 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------- (IN THOUSANDS) 1999 1998 - --------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 109,176 $ 75,725 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Net accretion of discounts, premiums and deferred loan fees (27,066) (8,200) Provision for loan and real estate losses 2,085 4,705 Depreciation and amortization 7,083 16,558 Net gain on sales of securities and loans (3,760) (13,329) Net gain on sales of premises and equipment (490) -- Net loss on disposition of loan production offices 1,241 -- Proceeds from sales of loans held-for-sale, net of originations 127,902 (172,257) Amortization of goodwill 9,749 9,847 Allocated and earned shares from ESOP and RRPs 5,841 10,576 Increase in accrued interest receivable (13,772) (6,235) Capitalized mortgage servicing rights, net of amortization and valuation allowance (1,491) (3,518) (Increase) decrease in other assets (7,498) 7,178 (Decrease) increase in accrued expenses and other liabilities (46,630) 79,891 ----------- ----------- Net cash provided by operating activities 162,370 941 ----------- ----------- Cash flows from investing activities: Origination of loans held-for-investment, net of principal payments (706,508) (692,365) Loan purchases through third parties (185,627) (106,873) Principal payments on mortgage-backed securities held-to-maturity 211,454 134,015 Principal payments on mortgage-backed securities available-for-sale 1,453,234 715,041 Purchases of mortgage-backed securities held-to-maturity -- (72,651) Purchases of mortgage-backed securities available-for-sale (3,869,950) (1,699,662) Purchases of other securities held-to-maturity -- (215,280) Purchases of other securities available-for-sale (158,421) (664,883) Proceeds from maturities of other securities available-for-sale 51,520 421,715 Proceeds from maturities of other securities held-to-maturity 162,457 301,373 Purchases of FHLB stock, net (50,000) (13,700) Proceeds from sales of securities available-for-sale 169,313 687,519 Proceeds from sales of real estate owned and investments in real estate, net 6,032 8,041 Proceeds from disposition of loan production offices 4,208 -- Purchases of premises and equipment, net of proceeds from sales (23,665) (9,278) ----------- ----------- Net cash used in investing activities (2,935,953) (1,206,988) ----------- ----------- Cash flows from financing activities: Net decrease in deposits (41,816) (191,946) Net increase in reverse repurchase agreements 2,735,000 1,557,235 Net decrease in FHLB of New York advances -- (120,000) Net (decrease) increase in other borrowings (32,083) 108,600 Increase in mortgage escrow funds 24,780 30,281 Costs to repurchase common stock (44,319) (16,633) Cash dividends paid to stockholders (28,657) (20,559) Cash received for options exercised 12,557 9,479 ----------- ----------- Net cash provided by financing activities 2,625,462 1,356,457 ----------- ----------- Net (decrease) increase in cash and cash equivalents (148,121) 150,410 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 $ 245,261 $ 386,928 =========== =========== Supplemental disclosures: Cash paid during the period: Interest $ 450,217 $ 358,279 =========== =========== Income taxes $ 65,165 $ 31,027 =========== =========== Additions to real estate owned $ 5,812 $ 8,874 =========== =========== Securitization of loans $ -- $ 208,073 =========== ===========
See accompanying notes to consolidated financial statements. 5 7 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Astoria Financial Corporation (the "Company") and its wholly-owned subsidiary, Astoria Federal Savings and Loan Association (the "Association") and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Following the close of business on September 30, 1998, the Company completed the acquisition of Long Island Bancorp, Inc. ("LIB"), a federally chartered savings bank, with LIB merging with and into the Company and LIB's subsidiary, The Long Island Savings Bank, FSB ("LISB"), merging with and into the Association (the "LIB Acquisition"). All subsidiaries of LISB became subsidiaries of the Association. The acquisition was accounted for as a pooling-of-interests, and accordingly, all prior year consolidated financial results of the Company have been restated to combine the Company with LIB. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation of the Company's financial condition as of June 30, 1999 and December 31, 1998 and its results of operations for the three and six months ended June 30, 1999 and 1998, cash flows for the six months ended June 30, 1999 and 1998 and stockholders' equity for the six months ended June 30, 1999. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities of the consolidated statements of financial condition as of June 30, 1999 and December 31, 1998 and amounts of revenues and expenses for the three and six month periods ended June 30, 1999 and 1998. The results of operations for the three and six months ended June 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 have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the December 31, 1998 audited consolidated financial statements, interim statements and notes thereto of the Company. 2. EARNINGS PER SHARE ("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 the Company's Employee Stock Ownership Plan (the "ESOP") and the Recognition and Retention Plans ("RRPs"). Diluted EPS is computed by dividing net income less preferred dividends by the weighted-average common shares and common equivalent shares outstanding during the 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 ESOP and the RRPs and the dilutive effect of unexercised stock options using the treasury stock method. When applying the treasury stock method, the Company's average stock price is utilized, and the Company adds to the proceeds the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options. 6 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":
For the Three Months Ended June 30, ----------------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------------------- (In Thousands, Average Per Share Average Per Share Except Share Data) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 55,722 $ 39,519 Less: preferred stock dividends 1,500 1,500 ----------- ----------- Basic EPS: Income available to common stockholders 54,222 51,968,462 $1.04 38,019 50,609,190 $0.75 ===== ====== Effect of dilutive unexercised stock options 1,257,452 2,313,978 ----------- ----------- Diluted EPS: Income available to common stockholders plus assumed conversions $ 54,222 53,225,914 $1.02 $ 38,019 52,923,168 $0.72 =========== =========== ===== =========== =========== =====
For the Six Months Ended June 30, ----------------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------------------- (In Thousands, Average Per Share Average Per Share Except Share Data) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 109,176 $ 75,725 Less: preferred stock dividends 3,000 3,000 ----------- ----------- Basic EPS: Income available to common stockholders 106,176 51,898,459 $2.05 72,725 50,441,555 $1.44 ===== ===== Effect of dilutive unexercised stock options 1,398,389 2,399,127 ----------- ----------- Diluted EPS: Income available to common stockholders plus assumed conversions $ 106,176 53,296,848 $1.99 $ 72,725 52,840,682 $1.38 =========== =========== ===== =========== =========== =====
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 The Company follows Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires that all items that are components of "comprehensive income" be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company adopted the provisions of SFAS No. 130 during the first quarter of 1998 and, as such, was required to: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section in the statement of financial condition. 7 9 Comprehensive (loss) income for the three and six months ended June 30, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 --------- --------- --------- --------- Net income $ 55,722 $ 39,519 $ 109,176 $ 75,725 Net unrealized losses on securities, net of reclassification adjustment (a) (131,540) (2,765) (188,483) (4,588) --------- --------- --------- --------- Comprehensive (loss) income $ (75,818) $ 36,754 $ (79,307) $ 71,137 ========= ========= ========= ========= a) Disclosure of reclassification adjustment: Net unrealized (losses) gains arising during period $(131,063) $ 651 $(188,077) $ 1,731 Less: reclassification adjustment for net gains included in net income (477) (3,416) (406) (6,319) --------- --------- --------- --------- Net unrealized losses on securities $(131,540) $ (2,765) $(188,483) $ (4,588) ========= ========= ========= =========
5. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, unrealized gains and losses) depends on the intended use of the derivative and the resulting designation. SFAS No. 133 is effective for fiscal quarters of fiscal years beginning after June 15, 2000 and does not require restatement of prior periods. Management of the Company believes the implementation of SFAS No. 133 will not have a material impact on the Company's financial condition or results of operations. Effective January 1, 1999, the Company 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" ("SFAS No. 134"). SFAS No. 134 conforms the accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. The implementation of SFAS No. 134 did not have a material impact on the Company's financial condition or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. GENERAL The Company is headquartered in Lake Success, New York and its principal business currently consists of the operation of its wholly-owned subsidiary, the Association. The Association's primary business is attracting retail deposits from the general public and investing those deposits, together with borrowed funds, funds generated from operations and principal repayments, primarily in one-to-four family residential mortgage loans, mortgage-backed 8 10 securities and, to a lesser extent, commercial real estate loans, multi-family mortgage loans and consumer loans. In addition, the Association invests in securities issued by the U.S. Government and federal agencies and other securities. The Company's results of operations are dependent primarily on its net interest income, which is the difference between the interest earned on its assets, primarily its loan and securities portfolios, and its cost of funds, which consists of the interest paid on its deposits and borrowings. The Company's net income is also affected by its provision for loan losses as well as non-interest income, general and administrative expense, other non-interest expense, and income tax expense. General and administrative expense consists of compensation and benefits, 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. The earnings of the Company are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities. MERGERS AND ACQUISITIONS The Company continues to consider merger and acquisition activity as an integral part of its strategic objective for its long-term growth. Following the close of business on September 30, 1998, the Company completed the LIB Acquisition. The transaction was accounted for as a pooling-of-interests. Accordingly, the assets, liabilities and stockholders' equity as reported by LIB immediately prior to consummation, were recorded by the Company. 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 ("LIB Common Stock"), received 1.15 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for each share of LIB Common Stock, resulting in the issuance of 27,876,636 shares of Common Stock. Acquisition Costs and Restructuring Charges From the period between initiation of the LIB Acquisition and the consummation date, the Company developed formal plans to integrate the businesses of LIB and the Company. 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. The Company has 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 ("EITF"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit An Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The Company has 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 the Company's consolidated statement of income for the year ended December 31, 1998. Such costs relate to restructuring plans and/or exit plans formally adopted by the Company. 9 11 The following table sets forth the activity in the Company's balances of accrued acquisition costs and restructuring charges for the six months ended June 30, 1999:
ACCRUED BALANCE AT CASH PAYMENTS ACCRUED BALANCE (IN THOUSANDS) DECEMBER 31, 1998 THROUGH JUNE 30, 1999 AT JUNE 30, 1999 ----------------- --------------------- ---------------- Employee termination costs $10,326 $ 4,925 $ 5,401 (a) Facilities, equipment and systems cost 12,428 3,577 8,851 (b) Transaction fees & other costs 8,557 7,265 1,292 (c) ------- ------- ------- Total $31,311 $15,767 $15,544 ======= ======= =======
(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 to the Company 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 the Company's former mortgage headquarters. (c) The remaining accrued balance primarily represents accrued legal fees which the Company will incur to restructure the various employee benefit plans of LIB and the subsidiaries of LISB. 1999 Cost Savings Initiatives As part of the Company's strategy of improving operating efficiency and achieving cost savings targets following the LIB Acquisition, the Company has entered into or has the intent to enter into various transactions in 1999. Such transactions include, but are not limited to, the disposition of various loan production offices, banking offices and the former headquarters of LIB. In order to refocus its mortgage loan origination efforts toward portfolio growth rather than sale in the secondary market, the Company decided to close or otherwise dispose of certain retail loan production offices ("LPOs"). Certain of these transactions occurred during the first quarter of 1999 and included the sale of two LPOs, the closing of two LPOs and the sub-leasing of one LPO. As a result of the transactions involving these five LPOs, the Company incurred a $1.2 million charge during the first quarter of 1999. In the second quarter of 1999, the Association entered into a definitive agreement with CNB Financial Corporation, parent company of Central National Bank, headquartered in Canajoharie, New York, to sell the Association's five upstate New York banking offices in Otsego and Chenango counties with deposits totaling $158.6 million at June 30, 1999. The transaction is expected to close in the third quarter of 1999. Additionally, the Company has entered into a contract to sell the former headquarters of LIB which is expected to close in the third quarter of 1999. YEAR 2000 PROJECT The "Year 2000 Problem" centers on the inability of some computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, the Company and its operations may be significantly and adversely affected by the Year 2000 Problem due to the nature of financial information. In addition, software, hardware, and equipment outside the Company's direct control and with which the Company electronically or operationally interfaces (e.g. including, but not limited to, third party vendors providing data processing, information system management, maintenance of computer systems, and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest calculations, payment amounts or due dates and other operating functions, may generate results which 10 12 could be significantly misstated, and the Company 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 the Company's suppliers and creditors and the creditworthiness of its borrowers. If not adequately addressed, the Year 2000 Problem could result in a material adverse impact on the Company's products, services and competitive condition and therefore, its results of operations and could be deemed to imperil the safety and soundness of the Association. There has been limited litigation filed against corporations regarding the Year 2000 Problem and their compliance efforts. Nonetheless, the law in this area will likely continue to develop well into the new millennium. Should the Company experience a Year 2000 failure, exposure of the Company could be significant and material. 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: (i) to establish uniform legal standards that give businesses and users of technology products reasonable incentives to solve the Year 2000 problems before they develop, (ii) to encourage remediation and testing efforts, (iii) to promote alternative dispute resolution, and (iv) to discourage insubstantial lawsuits while preserving remedies of plaintiffs who suffer genuine injury. The impact of the legislation is currently under analysis by the Company. No assurance can be given at this time that the legislation will have the effect of limiting any potential liability of the Company. The Office of Thrift Supervision ("OTS"), the Company's primary federal bank regulatory agency, along with the other federal bank regulatory agencies has published substantive guidance on the Year 2000 Problem and has included Year 2000 compliance as a substantive area of examination for both regularly scheduled and special 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. The Company has developed and is implementing a Year 2000 Project Plan (the "Plan") to address the Year 2000 Problem and its effects on the Company. The Plan includes five components which address issues involving awareness, assessment, renovation, validation and implementation. The Company has completed, in all material respects, all five phases of the Plan. During the assessment and renovation phases of the Plan, the Company 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 embedded or automated devices. As noted below, this review included both internal systems and those of third party vendors which provide systems such as retail deposit processing, loan origination processing, loan servicing and general ledger and accounting systems and software. The Company 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. The Company completed testing of its mission critical and customer systems prior to September 30, 1998. The Company had substantially completed testing of core mission critical internal systems as of December 31, 1998 and also has substantially completed tests of the renovations made of both internally and externally supplied systems, as of June 30, 1999. Where practical, the Company has scheduled end-to-end Year 2000 tests as well as participated in proxy testing with its business partners, allowing the Company additional opportunities to test readiness of internal and external systems. As part of the Plan, the Company had formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Problem and has been following the progress of those vendors in becoming Year 2000 compliant. The Company presently believes that with modifications to existing software and conversions to new software and hardware where necessary, the Year 2000 Problem will be mitigated with little or no impact on the operations of the Company. The Company's mission critical hardware and software systems have been renovated, tested and implemented within the OTS's suggested time frame. Despite its best efforts to ensure Year 2000 compliance, it is possible that one or more of the Company's internal or external systems may fail to operate. Although the Company is Year 2000 ready, the potential that circumstances beyond the Company's control may result in an interruption of normal business operations cannot be determined with complete certainty. As a result, the Company has formulated contingency plans for its mission critical systems where deemed feasible by management. 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. The Company has developed manual processes to ameliorate situations that may result from 11 13 a loss of telecommunications, power, and/or isolated business systems. The Company expects 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 recovery plans in addition to developing Year 2000 contingency plans, to address the possible failure of one or more mission critical systems. The Company has reviewed its customer base to determine whether they pose significant Year 2000 risks. The Company's customer base consists primarily of individual depositors and residential mortgage loan borrowers who utilize the Company's 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 the Company. Significant risks could occur if customers' employers or other third parties suffer significant disruptions caused by the Year 2000 Problem. Monitoring and managing the Year 2000 Project has resulted in direct and indirect costs to the Company. 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. The Company does 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, excluding reallocation of internal resources, approximately $2,000,000. The Company has incurred $1,500,000 to date, which includes $750,000 expensed by LISB prior to the LIB Acquisition. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds is cash provided by investing activities, which includes principal and interest payments on loans, mortgage-backed securities and other securities. During the six months ended June 30, 1999 and 1998, principal payments on loans, mortgage-backed securities and proceeds from maturities of other securities totaled $3.16 billion and $2.66 billion, respectively. During the six months ended June 30, 1999, the Company received $175.3 million of funds from the sale of securities available-for-sale and real estate versus $695.6 million from sales during the six months ended June 30, 1998. The Company's other sources of funds are provided by operating and financing activities. Net cash provided from operating activities during the six months ended June 30, 1999 and 1998 totaled $162.4 million and $941,000, respectively. The net increase in borrowings during the six months ended June 30, 1999 totaled $2.70 billion reflecting the Company's funding of its asset growth discussed below. The net decrease in deposits totaled $41.8 million during the six months ended June 30, 1999. During the six months ended June 30, 1998, the net increase in borrowings totaled $1.55 billion and the net decrease in deposits totaled $191.9 million. The Company's primary uses of funds in its investing activities are for the purchase and origination of mortgage loans and the purchase of mortgage-backed and other securities. During the six months ended June 30, 1999, the Company's gross originations and purchases of mortgage loans totaled $2.36 billion, compared to $2.62 billion during the six months ended June 30, 1998. The Company's purchases of mortgage-backed and other securities during the six months ended June 30, 1999 and 1998 totaled $4.03 billion and $2.65 billion, respectively. Stockholders' equity totaled $1.34 billion at June 30, 1999 and $1.46 billion at December 31, 1998. Decreases to stockholders' equity included a $188.5 million increase in the unrealized loss on securities, net of taxes, primarily due to increases in interest rates during the first half of 1999, which adversely affected the market values of the Company's available-for-sale securities. Additional decreases in stockholders' equity were a result of repurchases of Common Stock of $44.3 million and dividends declared of $28.7 million. These decreases were partially offset by $109.2 million of net income, the effect of options exercised and related tax benefit of $22.1 million and the amortization for the allocated portion of shares held by the ESOP and the related tax benefit on the earned portion of the shares held by the RRPs of $7.8 million. The Association 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%. The Association's liquidity ratios were 9.95% and 11.29% at June 30, 1999 and December 31, 1998, respectively. 12 14 The levels of the Association's liquid assets are dependent on the Association's operating, investing and financing activities during any given period. On April 21, 1999, the Board of Directors of the Company approved the Company's sixth stock repurchase plan authorizing the purchase, at the discretion of management, of up to 10% of its Common Stock then outstanding or 5,528,000 shares, over a two year period, in open-market or privately negotiated transactions. Under this plan, 917,200 shares of Common Stock have been repurchased during the second quarter of 1999 at an aggregate cost of $44.3 million. On June 1, 1999, the Company paid a quarterly cash dividend equal to $0.24 per share on Common Stock outstanding as of the close of business on May 14, 1999, totaling $12.8 million. On July 21, 1999, the Company declared a quarterly cash dividend of $0.24 per share of Common Stock payable on September 1, 1999 to stockholders of record as of the close of business on August 13, 1999. Beginning October 15, 1997, the Company has paid quarterly cash dividends equal to $0.75 per share on shares of its Series B Preferred Stock, aggregating $1.5 million per quarter. At June 30, 1999, the Association's total capital exceeded all of its regulatory capital requirements with tangible, leverage, and risk-based capital ratios of 5.27%, 5.27%, and 14.01%, respectively. The respective minimum regulatory requirements were 1.50%, 4.00%, and 8.00%. INTEREST RATE SENSITIVITY ANALYSIS As a financial institution, the Company's primary component of market risk is interest rate volatility (which is the sensitivity of income to variations in interest rates). The Company's market rate sensitive instruments primarily include interest-earning assets and interest-bearing liabilities. Accordingly, the Company's net interest income, the primary component of its net income, is subject to substantial risk due to changes in interest rates or changes in market yield curves, particularly if there is a substantial variation in the timing between the repricing of its assets and the liabilities which fund them. The Company seeks to manage interest rate risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. 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. The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in mortgage prepayment and market interest rates. 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 largest determinants of prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. 13 15 Management monitors 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 June 30, 1999, the Company's net interest-earning assets maturing or repricing within one year exceeded interest-bearing liabilities maturing or repricing within the same time period by $251.6 million, representing a positive cumulative one-year gap of 1.09% 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. The Company's June 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 June 30, 1999 were classified within the one-year maturing or repricing category, net interest-earning assets maturing or repricing within one year would have exceeded interest-bearing liabilities maturing or repricing within the same time period by $7.59 billion, representing a positive cumulative one-year gap of 32.86% 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 management's discretion. The following table (the "Gap Table") sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at June 30, 1999, that are anticipated by the Company, using certain assumptions based on its historical experience and other data available to management to reprice or mature in each of the future time periods shown. The Gap Table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the actual repricing dates of various assets and liabilities are subject to customer discretion and competitive and other pressures. Callable features of certain assets and liabilities, in addition to the foregoing, may cause actual experience to vary from that indicated. Included in this table are $1.32 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, $1.04 billion are callable within one year and at various times thereafter. Also included in this table are $11.18 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, $3.63 billion are callable within one year and at various times thereafter. 14 16
At June 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 - ------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Mortgage loans (1) $ 2,392,999 $ 2,459,029 $ 2,208,272 $ 2,415,436 $ 9,475,736 Consumer and other loans (1) 156,342 40,424 -- -- 196,766 Federal funds sold and repurchase agreements 149,226 -- -- -- 149,226 Mortgage-backed and other securities available-for-sale (2) 2,890,977 2,159,270 1,879,974 3,298,796 10,229,017 Mortgage-backed and other securities held-to-maturity (2) 419,438 267,917 147,686 1,181,335 2,016,376 ----------- ----------- ----------- ----------- ----------- Total interest-earning assets 6,008,982 4,926,640 4,235,932 6,895,567 22,067,121 Add: Net unamortized purchase premiums and deferred fees (3) 11,776 12,442 11,374 12,575 48,167 ----------- ----------- ----------- ----------- ----------- Net interest-earning assets 6,020,758 4,939,082 4,247,306 6,908,142 22,115,288 ----------- ----------- ----------- ----------- ----------- Interest-bearing liabilities: Savings 271,896 543,792 543,792 1,359,490 2,718,970 NOW 14,148 28,296 28,296 70,724 141,464 Money market 902,540 29,736 29,736 89,164 1,051,176 Money manager 36,648 73,296 73,296 183,243 366,483 Certificates of deposit 3,487,888 1,255,138 224,542 4,846 4,972,414 Borrowed funds (2) 1,056,076 1,399,663 6,090,000 3,180,000 11,725,739 ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities 5,769,196 3,329,921 6,989,662 4,887,467 20,976,246 ----------- ----------- ----------- ----------- ----------- Interest sensitivity gap $ 251,562 $ 1,609,161 $(2,742,356) $ 2,020,675 $ 1,139,042 ----------- ----------- ----------- ----------- ----------- Cumulative interest sensitivity gap $ 251,562 $ 1,860,723 $ (881,633) $ 1,139,042 =========== =========== =========== =========== Cumulative interest sensitivity gap as a percentage of total assets 1.09% 8.06% (3.82)% 4.93% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 104.36% 120.45% 94.52% 105.43%
(1) Mortgage, consumer and other loans exclude non-performing loans, but are not reduced for the allowance for loan losses. (2) Includes $1.04 billion of other securities and $3.63 billion of borrowings, callable within one year and at various times thereafter, 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 the estimates of management as to periods to repricing at a particular point in time. Among the factors considered, are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time. 15 17 The Company's interest rate sensitivity is also monitored by management through analysis of the change in the net portfolio value ("NPV"). NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the market value of an institution's net worth. Increases in the market value of assets will increase the NPV whereas decreases in market value of assets will decrease the NPV. Conversely, increases in the market value of liabilities will decrease NPV whereas decreases in the market value of liabilities will increase the NPV. The changes in market value of assets and liabilities due to changes in interest rates reflect the interest sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e. fixed rate, adjustable rate, caps, floors) relative to the interest rate environment. For example, in a rising interest rate environment, the fair market value of a fixed rate asset will decline, whereas the fair market value of an adjustable rate asset, depending on its repricing characteristics, may not decline. The NPV ratio under any interest rate scenario is defined as the NPV in that scenario divided by the market value of assets in the same scenario. This analysis, referred to in the following NPV table (the "NPV Table"), initially measures percentage changes from the value of projected NPV in a given rate scenario, and then measures interest rate sensitivity by the change in the NPV ratio, over a range of interest rate change scenarios. The OTS also produces a similar analysis using its own model based upon data submitted on the Association's quarterly Thrift Financial Reports, the results of which may vary from the Company's internal model primarily because of differences in assumptions utilized between the Company's internal model and the OTS model, including estimated loan prepayment rates, reinvestment rates and deposit decay rates. For purposes of the NPV Table, prepayment speeds and deposit decay rates similar to those used in the Gap Table were used. In addition, the available-for-sale securities were classified according to repricing periods based on contractual maturities and estimated prepayments. The NPV Table is based on simulations which utilize institution specific assumptions with regard to future cash flows, including customer options such as loan prepayments, period and lifetime caps, puts and calls, and deposit withdrawal estimates. The NPV Table uses discount rates derived from various sources including, but not limited to, 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 the Company 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. Other non-interest earning assets and non-interest bearing liabilities such as deferred fees, unamortized premiums, goodwill and accrued expenses and other liabilities are excluded from the NPV calculation. The following represents the Company's NPV table as of June 30, 1999.
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) +200 $1,240,460 $(873,532) (41.32)% 5.80% (3.46)% +100 1,732,725 (381,267) (18.04) 7.83 (1.43) -0- 2,113,992 - - 9.26 - -100 2,355,522 241,530 11.43 10.06 0.80 -200 2,100,731 (13,261) (0.63) 8.87 (0.39)
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 the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is immediate and is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In addition, prepayment estimates and other assumptions within the NPV Table are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. 16 18 Accordingly, although the NPV measurements, in theory, may provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide for a precise forecast of the effect of changes in market interest rates on the Company's NPV and will differ from actual results. The Company, from time to time, in an attempt to further reduce volatility in its earnings caused by changes in interest rates will enter into financial derivative agreements with third parties. At June 30, 1999, the Company 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, the Company is not subject to foreign currency exchange or commodity price risk and does not own any trading assets. LOAN PORTFOLIO The following table sets forth the composition of the Company's loan portfolio at June 30, 1999 and December 31, 1998.
At June 30, 1999 At December 31, 1998 ------------------------------ ------------------------------ Percent Percent of of (Dollars in Thousands) Amount Total Amount Total - ------------------------------------------------------------------------------------------------------------ MORTGAGE LOANS GROSS (1): One-to-four family ............. $ 8,607,371 88.39% $ 7,857,964 87.37% Multi-family ................... 511,334 5.25 452,854 5.03 Commercial real estate ......... 420,864 4.32 453,973 5.05 ----------- ------------- ----------- ------------- Total mortgage loans ......... 9,539,569 97.96 8,764,791 97.45 ----------- ------------- ----------- ------------- CONSUMER AND OTHER LOANS: Home equity .................... 120,885 1.24 142,437 1.58 Passbook ....................... 6,742 0.07 6,653 0.07 Other .......................... 71,435 0.73 80,287 0.90 ----------- ------------- ----------- ------------- Total consumer and other loans ..... 199,062 2.04 229,377 2.55 ----------- ------------- ----------- ------------- TOTAL LOANS ........................ 9,738,631 100.00% 8,994,168 100.00% ----------- ============= ----------- ============= LESS: Unearned discounts, premiums and deferred loan fees, net .... 50,123 32,463 Allowance for loan losses ...... (75,382) (74,403) ----------- ----------- TOTAL LOANS, NET ................... $ 9,713,372 $ 8,952,228 =========== ===========
1. These amounts include $39.4 million and $212.9 million of mortgage loans held-for-sale at June 30, 1999 and December 31, 1998, respectively. 17 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 June 30, 1999 and December 31, 1998.
At June 30, 1999 ------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------ AVAILABLE-FOR-SALE: Mortgage-backed securities: GNMA pass-through certificates $ 142,028 $ 689 $ (647) $ 142,070 FHLMC pass-through certificates 264,147 410 (2,000) 262,557 FNMA pass-through certificates 501,842 3,911 (2,298) 503,455 REMICs and CMOs: Agency issuance 7,205,492 1,769 (267,343) 6,939,918 Non agency issuance 1,742,118 1,534 (55,028) 1,688,624 ----------- ----------- ----------- ----------- Total mortgage-backed securities 9,855,627 8,313 (327,316) 9,536,624 ----------- ----------- ----------- ----------- Other securities: Obligations of the U.S. Government and agencies 548,972 218 (35,845) 513,345 Corporate debt securities 51,622 3 (3,251) 48,374 FNMA and FHLMC preferred stock 127,515 737 -- 128,252 Equity and other securities 2,434 36 (48) 2,422 ----------- ----------- ----------- ----------- Total other securities 730,543 994 (39,144) 692,393 ----------- ----------- ----------- ----------- Total Available-for-Sale $10,586,170 $ 9,307 $ (366,460) $10,229,017 =========== =========== =========== =========== HELD-TO-MATURITY: Mortgage-backed securities: GNMA pass-through certificates $ 5,088 $ 291 $ -- $ 5,379 FHLMC pass-through certificates 51,920 1,700 (11) 53,609 FNMA pass-through certificates 14,230 36 (299) 13,967 REMICs and CMOs: Agency issuance 667,817 4,812 (2,101) 670,528 Non agency issuance 187,248 350 (2,292) 185,306 ----------- ----------- ----------- ----------- Total mortgage-backed securities 926,303 7,189 (4,703) 928,789 ----------- ----------- ----------- ----------- Other securities: Obligations of the U.S. Government and agencies 781,434 178 (26,097) 755,515 Obligations of states and political subdivisions 46,434 -- (24) 46,410 ----------- ----------- ----------- ----------- Total other securities 827,868 178 (26,121) 801,925 ----------- ----------- ----------- ----------- Total Held-to-Maturity $ 1,754,171 $ 7,367 $ (30,824) $ 1,730,714 =========== =========== =========== ===========
18 20 SECURITIES PORTFOLIO, CONTINUED
At December 31, 1998 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: Mortgage-backed securities: 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 ========== ========== ========== ==========
19 21 COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 AND OPERATING RESULTS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 FINANCIAL CONDITION Total assets increased $2.51 billion, to $23.10 billion at June 30, 1999, from $20.59 billion at December 31, 1998. This increase was primarily due to the Company's 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 $965.9 million, from $8.58 billion at December 31, 1998 to $9.55 billion at June 30, 1999. Gross mortgage loans originated and purchased during the six months ended June 30, 1999 totaled $2.36 billion, of which $2.18 billion were originations and $184.1 million were purchases. These originations and purchases consisted primarily of one-to-four family residential mortgage loans. This compares to $2.50 billion of originations and $122.3 million of purchases for a total of $2.62 billion during the six months ended June 30, 1998. The decrease in the mortgage loan originations was partially offset by a slowdown in loan prepayments, as well as a decrease in loans held-for-sale. Mortgage-backed securities increased $1.77 billion to $10.46 billion at June 30, 1999, from $8.69 billion at December 31, 1998. This increase was primarily the result of significant purchases during the six months ended June 30, 1999, primarily agency-issued REMICs and CMOs, of $3.87 billion, offset by principal payments of $1.66 billion. Other assets increased $146.9 million from $166.6 million at December 31, 1998 to $313.5 million at June 30, 1999, primarily due to the increase in the deferred tax asset due 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 the Company's strategy of complementing its growth through acquisitions by leveraging the Company's excess capital. Reverse repurchase agreements increased $2.74 billion, to $10.03 billion at June 30, 1999, from $7.29 billion at December 31, 1998. Federal Home Loan Bank of New York advances remained constant at $1.21 billion. Deposits decreased from $9.67 billion at December 31, 1998 to $9.63 billion at June 30, 1999, as competition with equity markets, coupled with a low interest rate environment, created minimal opportunities for deposit growth. Stockholders' equity totaled $1.34 billion at June 30, 1999 and $1.46 billion at December 31, 1998. Decreases to stockholders' equity included a $188.5 million increase in the unrealized loss on securities, net of taxes, primarily due to increases in interest rates during the first half of 1999, which adversely affected the market values of the Company's available-for-sale securities. Additional decreases in stockholders' equity were a result of repurchases of Common Stock of $44.3 million and dividends declared of $28.7 million. These decreases were partially offset by $109.2 million of net income, the effect of options exercised and related tax benefit of $22.1 million and the amortization for the allocated portion of shares held by the ESOP and the related tax benefit on the earned portion of the shares held by the RRPs of $7.8 million. Management of the Company believes it has been successful in achieving its strategy of growth through deployment of its excess capital. As such, the Company has de-emphasized further growth through purchases of mortgage-backed securities during the 1999 second quarter. In order to maintain its current capital ratio levels, currently at "well-capitalized" amounts, the Company expects 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, the Company has begun to sell, in the secondary market, its 15-year fixed-rate mortgage loan production, but will continue to retain, in its portfolio, its adjustable-rate mortgage loan production. By doing so, the Company intends to shift its asset mix towards adjustable rate mortgage loans, which will be favorable in the current rising interest rate environment. RESULTS OF OPERATIONS GENERAL Net income increased $16.2 million, or 41.0%, to $55.7 million, or diluted earnings per common share of $1.02 20 22 for the second quarter of 1999, from $39.5 million, or diluted earnings per common share of $0.72, for the comparable period in 1998. The return on average assets increased to 0.97% for the second quarter of 1999, from 0.89% for the second quarter of 1998. The return on average equity and the return on average tangible equity increased to 15.74% and 18.90%, respectively, for the second quarter of 1999, from 10.53% and 12.75%, respectively, for the second quarter of 1998. For the six months ended June 30, 1999, net income increased $33.5 million, or 44.2%, to $109.2 million, or diluted earnings per common share of $1.99, from $75.7 million, or diluted earnings per common share of $1.38 for the six months ended June 30, 1998. The return on average assets for the six months ended June 30, 1999 and 1998 was 0.97% and 0.87%, respectively. The return on average equity and the return on average tangible equity also increased to 15.27% and 18.35%, respectively, for the six months ended June 30, 1999, as compared to 10.19% and 12.36%, respectively, for the same period in 1998. INTEREST INCOME Interest income for the three months ended June 30, 1999 increased $78.1 million, or 26.1%, to $377.2 million, from $299.1 million for the three months ended June 30, 1998. This increase was the result of a $5.36 billion increase in average interest-earning assets to $22.28 billion for the three months ended June 30, 1999, from $16.92 billion for the comparable period in 1998. This increase was partially offset by a decrease in the average yield of interest-earning assets to 6.77% for the second quarter of 1999, from 7.07% for the second quarter of 1998. The increase in average interest-earning assets, for both the three and six month periods, was primarily due to increases in mortgage loans and mortgage-backed securities. Interest income on mortgage loans increased $14.1 million to $167.9 million for the second quarter of 1999, from $153.8 million for the second quarter of 1998, which was the result of an increase in the average balance of $1.10 billion, partially offset by a decrease in the average yield on mortgage loans to 7.15% for the second quarter of 1999, from 7.42% for the second quarter of 1998. The increase in the average balance of mortgage loans reflects the Company's continued emphasis on originations of primarily one-to-four family residential mortgage loans. The decrease in the average yield was due to the significant decline in market interest rates from the same period a year ago, coupled with the accelerated prepayments and refinancing activity during 1998, which have continued during the first quarter of 1999. Although rising interest rates during the first half of 1999 have caused a deceleration of this prepayment and refinancing activity, the overall levels of interest rates did not surpass prior year levels until June of 1999. As such, the impact of these rising rates will not be reflected in the overall average yield on the Company's mortgage loan portfolio until the second half of 1999. Interest income on consumer and other loans decreased $1.4 million resulting from a decrease in the average balance of $61.6 million, partially offset by an increase in the yield to 9.33% for the second quarter of 1999, from 9.25% for the second quarter of 1998. Interest income on mortgage-backed securities increased $69.6 million to $171.0 million for the second quarter of 1999, from $101.4 million for the second quarter of 1998, reflecting the Company's strategy of effectively deploying its capital through asset growth. This increase was the result of a $4.57 billion increase in the average balance of this portfolio, partially offset by a decrease in the average yield to 6.38% for the second quarter of 1999, from 6.58% for the second quarter of 1998. The decrease in the average yield of the Company's mortgage-backed securities portfolio is reflective of the changes in the interest rate environment discussed above. Interest income on other securities decreased $855,000 to $32.0 million for the quarter ended June 30, 1999, from $32.8 million for the quarter ended June 30, 1998. This was the result of a decrease in the average balance of this portfolio of $44.5 million, coupled with a decrease in the average yield to 7.01% for the second quarter of 1999, from 7.03% for the second quarter of 1998. Interest income on federal funds sold and repurchase agreements decreased $3.4 million as a result of a decrease in the average balance of $203.1 million and a decrease in the average yield to 4.81% for the second quarter of 1999, from 5.92% for the comparable 1998 period. For the six months ended June 30,1999, interest income increased $149.1 million, or 25.3%, to $738.1 million, from $589.0 million for the six months ended June 30,1998. This increase was the result of a $5.14 billion increase in average interest-earning assets to $21.69 billion for the six months ended June 30, 1999, from $16.55 billion for the comparable period in 1998. This increase was partially offset by a decrease in the average yield on interest-earning assets to 6.81% for the six months ended June 30,1999, from 7.12% for the six months ended June 30, 1998. 21 23 Interest income on mortgage loans increased $27.7 million to $329.8 million for the six months ended June 30, 1999, from $302.1 million for the six months ended June 30, 1998, which was the result of an increase in the average balance of $1.09 billion, partially offset by a decrease in the average yield on mortgage loans to 7.17% for the six months ended June 30, 1999, from 7.45% for the comparable period in 1998. Interest income on other loans decreased $2.3 million resulting from a decrease in the average balance of $51.7 million, partially offset by an increase in the average yield to 9.40% for the six months ended June 30, 1999, from 9.33% for the six months ended June 30, 1998. Interest income on mortgage-backed securities increased $128.6 million to $329.9 million for the six months ended June 30, 1999, from $201.3 million for the six months ended June 30, 1998. This increase was the result of a $4.23 billion increase in the average balance of the portfolio, partially offset by a decrease in the average yield to 6.42% for the six months ended June 30, 1999, from 6.65% for the six months ended June 30, 1998. Interest income on other securities decreased $868,000 to $65.0 million for the six months ended June 30, 1999, from $65.9 million for the six months ended June 30, 1998, resulting from a decrease in the average balance of $12.9 million and a decrease in the average yield to 7.00% for the first six months of 1999, from 7.05% for the comparable period in 1998. Interest income on federal funds sold and repurchase agreements decreased $3.9 million as a result of a decrease in the average balance of $114.3 million and a decrease in the average yield to 4.77% for the six months ended June 30, 1999, from 5.67% for the six months ended June 30, 1998. The changes in the average balances and average yields on interest-earning assets for the six months ended June 30, 1999 were consistent with the changes for the three months ended June 30, 1999. INTEREST EXPENSE Interest expense for the three months ended June 30, 1999 increased $51.9 million, to $240.4 million, from $188.5 million for the three months ended June 30, 1998. This increase was attributable to an increase in the average balance of interest-bearing liabilities of $5.36 billion, to $20.85 billion for the quarter ended June 30, 1999, from $15.49 billion for the quarter ended June 30, 1998, partially offset by a decrease in the average cost of such liabilities to 4.61% for the second quarter of 1999 from 4.87% for the second quarter of 1998. The increase in average interest-bearing liabilities was primarily attributable to an increase in the average balance of borrowings of $5.59 billion, discussed below. The decline in the overall average costs of the Company's interest-bearing liabilities reflects the lower interest rate environment that has prevailed in the first half of 1999 versus the comparable 1998 period. Interest expense on borrowed funds increased $64.1 million, to $150.4 million for the three months ended June 30, 1999, from $86.3 million for the three months ended June 30, 1998. This increase was attributable to an increase in the average balance of borrowings of $5.59 billion, partially offset by a decrease in the average cost of borrowings to 5.18% for the second quarter of 1999, from 5.74% for the second quarter of 1998. The significant growth experienced by the Company during the second half of 1998 and first quarter of 1999 was funded primarily through medium-term borrowings, which have been a cost effective source of funding, for incremental growth during the low interest rate environment as they provide low fixed costs and more predictable funding amounts. Interest expense on deposits decreased $12.1 million to $90.0 million for the three months ended June 30, 1999, from $102.1 million for the three months ended June 30, 1998, reflecting a decrease in the average cost of interest-bearing deposits to 3.90% for the second 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 $227.0 million. Interest expense on savings accounts decreased $5.4 million as a result of a decrease in the average cost to 2.01% for the second quarter of 1999, from 2.61% for the same period in 1998 and a decrease in the average balance of $195.4 million. The decrease in average cost is a result of the Company lowering the rates paid on savings accounts during the fourth quarter of 1998. Interest expense on certificates of deposit decreased $9.0 million from the combined effect of a decrease in the average balance of $374.1 million and a decrease in the average cost to 5.16% for the second quarter of 1999, from 5.48% for the second quarter of 1998, primarily due to the lower interest rate environment. The decrease in the average balance of deposits reflects the prevailing low interest rate environment and the increasing competition with equity markets. Interest expense on money market accounts increased $2.8 million to $10.7 million for the second quarter of 1999, from $7.9 million for the second quarter of 1998, as a result of an increase in the average balance of $308.1 22 24 million, offset by a decrease in the average cost to 4.23% for the second quarter of 1999, from 4.51% for the same period in 1998. Interest paid on money market accounts is on a tiered basis with 84.9% of the balance in the highest tier. The yield on the top tier is committed to be at least equal to the discount rate for the three-month U.S. Treasury bill. As previously mentioned, despite the recent increase in rates during the first half of 1999, the actual levels of interest rates did not surpass those of the prior year until June of 1999. More importantly, the three month U.S. Treasury bill rate has remained below its prior year levels during the period. Interest expense on NOW and money manager accounts decreased $440,000 which was attributable to the Company lowering the rates paid on these accounts during the third quarter of 1998. Interest expense for the six months ended June 30,1999 increased $97.4 million, to $465.5 million, from $368.1 million for the six months ended June 30,1998. This increase was the result of a $5.13 billion increase in average interest-bearing liabilities to $20.29 billion for the six months ended June 30,1999, from $15.16 billion for the comparable period in 1998, partially offset by a decrease in the average cost of these liabilities to 4.59% for the six months ended June 30,1999, from 4.86 % for the six months ended June 30, 1998. Interest expense on borrowed funds for the six months ended June 30, 1999 increased $123.4 million, to $285.9 million, from $162.5 million for the six months ended June 30, 1998, resulting from an increase in the average balance of borrowings of $5.43 billion, partially offset by a decrease in the average cost of borrowings to 5.17% for the six months ended June 30, 1999, from 5.77% for the comparable 1998 period. Interest expense on deposits decreased $26.0 million, to $179.6 million for the six months ended June 30,1999, from $205.6 million for the six months ended June 30,1998, reflecting a decrease in the average balance of total interest-bearing deposits of $295.9 million, coupled with a decrease in the average cost of interest bearing-deposits to 3.89% for the six months ended June 30, 1999, from 4.32% for the same period in 1998. Interest expense on savings accounts decreased $10.8 million which was attributable to a decrease in the average balance of $177.7 million and a decrease in the average cost to 1.99% for the six months ended June 30, 1999, from 2.61% for the six months ended June 30, 1998. Interest expense on certificates of deposit decreased $19.5 million resulting from a decrease in the average balance of $447.5 million and a decrease in the average cost to 5.18% for the six months ended June 30, 1999, from 5.47% for the six months ended June 30, 1998. Interest expense on money market accounts increased $5.2 million reflecting an increase in the average balance of $292.0 million, offset by a decrease in the average cost to 4.19% for the six months ended June 30, 1999, from 4.48% for the 1998 comparable period. Interest expense on NOW and money manager accounts decreased $916,000 as a result of the Company lowering the rates paid on these accounts during the third quarter of 1998, as mentioned above. 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. The Company's 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 first half of 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, the Company has continued to experience compression on its net interest spread and net interest margin for both the second quarter and first half of 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 $26.1 million, or 23.6%, to $136.8 million for the three months ended June 30, 1999, from $110.7 million for the three months ended June 30, 1998. The increase in total average interest-earning assets of $5.36 billion was equally offset by an increase in total average interest-bearing liabilities of $5.36 billion. 23 25 The Company's net interest rate spread decreased to 2.16% for the second quarter of 1999, from 2.20% for the second quarter of 1998. This decrease in net interest rate spread was the result of the average yield on total interest-earning assets decreasing to 6.77% for the second quarter of 1999, from 7.07% for the second quarter of 1998, partially offset by the average cost of interest-bearing liabilities decreasing to 4.61% for the second quarter of 1999, from 4.87% for the second quarter of 1998. The Company's net interest margin decreased to 2.46% for the second quarter of 1999 as compared to 2.62% for the second quarter of 1998. For the six months ended June 30, 1999, net interest income increased $51.7 million, or 23.4%, to $272.6 million, from $220.9 million for the six months ended June 30, 1998. This change was a result of an increase in total average interest-earning assets of $5.14 billion, offset by an increase in total average interest-bearing liabilities of $5.13 billion. This increase in average net interest-earning assets was partially offset by a decrease in the net interest rate spread to 2.22% for the six months ended June 30, 1999, from 2.26% for the six months ended June 30, 1998. The change in the net interest rate spread resulted from a decrease in the average yield on total interest-earning assets to 6.81% for the six months ended June 30, 1999, from 7.12% for the six months ended June 30, 1998, partially offset by a decrease in the average cost of interest-bearing liabilities to 4.59% for the first six months of 1999, from 4.86% for the first six months of 1998. The net interest margin for the six months ended June 30, 1999 and 1998 was 2.51% and 2.67%, respectively. ANALYSIS OF NET INTEREST INCOME The following table sets forth certain information relating to the Company for the three and six months ended June 30, 1999 and 1998. Yields and costs are derived by dividing income or expense by the average balance of the related assets or liabilities, respectively, 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 the Company has discontinued accruing interest. The yields and costs include fees, premiums and discounts which are considered adjustments to interest rates. 24 26
Quarter Ended June 30, ----------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: (Annualized) (Annualized) Interest-earning assets: Mortgage loans $ 9,397,072 $ 167,919 7.15% $ 8,296,205 $ 153,828 7.42% Consumer and other loans 205,607 4,794 9.33 267,238 6,180 9.25 Mortgage-backed securities (1) 10,728,117 170,988 6.38 6,161,547 101,388 6.58 Other securities (1) 1,824,159 31,985 7.01 1,868,686 32,840 7.03 Federal funds sold and repurchase agreements 127,055 1,527 4.81 330,138 4,885 5.92 ----------- ----------- ----------- ----------- Total interest-earning assets 22,282,010 377,213 6.77 16,923,814 299,121 7.07 ----------- ----------- Non-interest-earning assets 812,304 821,797 ----------- ----------- Total assets $23,094,314 $17,745,611 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Savings $ 2,729,232 $ 13,682 2.01% $ 2,924,586 $ 19,054 2.61% Certificates of deposit 4,989,725 64,427 5.16 5,363,809 73,470 5.48 NOW 127,054 315 0.99 136,428 516 1.51 Money market 1,006,389 10,651 4.23 698,334 7,877 4.51 Money manager 390,938 966 0.99 347,155 1,205 1.39 Borrowed funds 11,609,953 150,382 5.18 6,019,304 86,335 5.74 ----------- ----------- ----------- ----------- Total interest-bearing liabilities 20,853,291 240,423 4.61 15,489,616 188,457 4.87 ----------- ----------- Non-interest-bearing liabilities 825,226 755,013 ----------- ----------- Total liabilities 21,678,517 16,244,629 Stockholders' equity 1,415,797 1,500,982 ----------- ----------- Total liabilities and stockholders' equity $23,094,314 $17,745,611 =========== =========== Net interest income/net interest rate spread $ 136,790 2.16% $ 110,664 2.20% =========== ==== =========== ==== Net interest-earning assets/net interest margin $ 1,428,719 2.46% $ 1,434,198 2.62% =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.09x ==== ====
(1) Securities available-for-sale are reported at average amortized cost. 25 27
Six Months Ended June 30, ------------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: (Annualized) (Annualized) Interest-earning assets: Mortgage loans $ 9,197,773 $ 329,806 7.17% $ 8,106,062 $ 302,135 7.45% Consumer and other loans 214,272 10,071 9.40 265,975 12,404 9.33 Mortgage-backed securities (1) 10,282,758 329,865 6.42 6,052,026 201,331 6.65 Other securities (1) 1,857,263 65,017 7.00 1,870,121 65,885 7.05 Federal funds sold and repurchase agreements 140,340 3,349 4.77 254,650 7,213 5.67 ----------- --------- ----------- --------- Total interest-earning assets 21,692,406 738,108 6.81 16,548,834 588,968 7.12 --------- --------- Non-interest-earning assets 852,637 814,163 ----------- ----------- Total assets $22,545,043 $17,362,997 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Savings $ 2,746,304 $ 27,367 1.99% $ 2,923,978 $ 38,141 2.61% Certificates of deposit 5,005,693 129,619 5.18 5,453,175 149,107 5.47 NOW 133,583 657 0.98 126,553 936 1.48 Money market 958,097 20,092 4.19 666,122 14,911 4.48 Money manager 381,194 1,872 0.98 350,906 2,509 1.43 Borrowed funds 11,060,175 285,916 5.17 5,634,389 162,475 5.77 ----------- --------- ----------- --------- Total interest-bearing liabilities 20,285,046 465,523 4.59 15,155,123 368,079 4.86 --------- --------- Non-interest-bearing liabilities 829,869 721,834 ----------- ----------- Total liabilities 21,114,915 15,876,957 Stockholders' equity 1,430,128 1,486,040 ----------- ----------- Total liabilities and stockholders' equity $22,545,043 $17,362,997 =========== =========== Net interest income/net interest rate spread $ 272,585 2.22% $ 220,889 2.26% ========= ==== =========== ========= Net interest-earning assets/net interest margin $ 1,407,360 2.51% $ 1,393,711 2.67% =========== ==== =========== ========= Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.09x =========== ===========
(1) Securities available-for-sale are reported at average amortized cost. 26 28 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Quarter Ended June 30, 1999 Six Months Ended June 30, 1999 Compared to Compared to Quarter Ended June 30, 1998 Six Months Ended June 30, 1998 ------------------------------------------------------------------------ (In Thousands) Increase (Decrease) Increase (Decrease) - ---------------------------------------------------------------------------------------------------------------------- Volume Rate Net Volume Rate Net ------- -------- ------- -------- -------- -------- Interest-earning assets: Mortgage loans........................ $19,848 $ (5,757) $14,091 $ 39,378 $(11,707) $ 27,671 Consumer and other loans.............. (1,438) 52 (1,386) (2,425) 92 (2,333) Mortgage-backed securities............ 72,777 (3,177) 69,600 135,738 (7,204) 128,534 Other securities...................... (764) (91) (855) (427) (441) (868) Federal funds sold and repurchase agreements......................... (2,574) (784) (3,358) (2,855) (1,009) (3,864) ------- -------- ------- -------- -------- -------- Total.................................... 87,849 (9,757) 78,092 169,409 (20,269) 149,140 ------- -------- ------- -------- -------- -------- Interest-bearing liabilities: Savings............................... (1,210) (4,162) (5,372) (2,195) (8,579) (10,774) Certificates of deposit .............. (4,922) (4,121) (9,043) (11,839) (7,649) (19,488) NOW................................... (33) (168) (201) 50 (329) (279) Money market ......................... 3,289 (515) 2,774 6,198 (1,017) 5,181 Money manager......................... 139 (378) (239) 203 (840) (637) Borrowed funds........................ 73,211 (9,164) 64,047 141,922 (18,481) 123,441 ------- -------- ------- -------- -------- -------- Total.................................... 70,474 (18,508) 51,966 134,339 (36,895) 97,444 ------- -------- ------- -------- -------- -------- Net change in net interest income................................ $17,375 $ 8,751 $26,126 $ 35,070 $ 16,626 $ 51,696 ======= ======== ======= ======== ======== ========
PROVISION FOR LOAN LOSSES Provision for loan losses decreased to $1.0 million for the second quarter of 1999, from $1.8 million for the second quarter of 1998. For the six months ended June 30, 1999, provision for loan losses decreased to $2.1 million, from $3.6 million for the 1998 comparable period. The allowance for loan losses increased to $75.4 million at June 30, 1999, from $74.4 million at December 31, 1998. Net loan charge-offs totaled $885,000 and $1.1 million for the three and six months ended June 30, 1999, respectively. Non-performing loans decreased $45.0 million to $66.1 million at June 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 113.99% at June 30, 1999. The allowance for loan losses as a percentage of total loans decreased from 0.83% at December 31, 1998 to 0.77% at June 30, 1999 primarily due to the increase of $744.5 million in gross loans receivable from December 31, 1998 to June 30, 1999. The decline in the provision generally reflects the decline in non-performing loans while the increase in the allowance for loan losses reflects the overall increase in the Company's loan portfolio. For further discussion on non-performing loans and allowance for loan losses, see "Asset Quality." 27 29 NON-INTEREST INCOME Non-interest income for the quarter ended June 30, 1999 decreased to $15.7 million from $20.9 million for the quarter ended June 30, 1998. Excluding gains on sales of securities, non-interest income for the second quarter of 1999 and 1998 totaled $14.8 million and $14.9 million, respectively. For the six months ended June 30, 1999 and 1998, non-interest income totaled $32.4 million and $38.1 million, respectively. Excluding gains on sales of securities and the loss on disposition of loan production offices, non-interest income increased $5.9 million, or 21.9%, to $32.9 million for the six months ended June 30, 1999 versus $27.0 million for the comparable 1998 period. Customer service and other loan fees for the three and six months ended June 30, 1999 totaled $9.4 million and $18.9 million, respectively, compared to $8.7 million and $15.9 million, for the three and six months ended June 30, 1998, respectively. This increase is due in part to the Company's changes in customer service fees in 1998 and the overall growth in the loan portfolio. Loan servicing fees totaled $4.1 million and $9.3 million for the three and six months ended June 30, 1999, respectively, compared to $1.8 million and $3.7 million, respectively, for the comparable 1998 periods. Loan servicing fees include all contractual and ancillary servicing revenue received by the Company 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 $1.4 million and $2.5 million decrease in the amortization of mortgage servicing rights for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. In addition, as a result of a change in prepayment speeds in 1999, the Company recognized a recovery of portions of the valuation allowance for mortgage servicing rights of $1.0 million and $2.8 million for the three and six months ended June 30, 1999, respectively. Net gains on sales of loans totaled $773,000 and $3.0 million for the three and six months ended June 30, 1999, respectively, compared to $1.2 million and $2.2 million for the three and six months ended June 30, 1998, respectively. Other non-interest income totaled $550,000 and $1.7 million for the three and six months ended June 30, 1999, respectively, compared to $3.2 million and $5.2 million, respectively, for the comparable 1998 periods. The decreases are primarily due to a $1.6 million gain on the settlement of a real estate dispute in the second quarter of 1998 and $470,000 of rental income for the six months ended June 30, 1998, recognized from a sublease from the Company's former mortgage headquarters, which expired in January 1999. Net gain on sales of securities decreased $5.2 million to $839,000 for the second quarter of 1999, from $6.0 million for the second quarter of 1998. For the six months ended June 30, 1999, net gain on sales of securities totaled $714,000 compared to $11.1 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 first six months of 1999, however, with the exception of thirty-year fixed-rate loans, the Company's loan originations were added to the portfolio, rather than being securitized and sold. During the quarter ended March 31, 1999, the Company recognized a loss of $1.2 million on various transactions relating to five LPOs. See further discussion under "Mergers and Acquisitions - 1999 Cost Savings Initiatives." NON-INTEREST EXPENSE Non-interest expense decreased $5.2 million, or 8.6%, to $56.2 million for the second quarter of 1999 compared to $61.4 million for the second quarter of 1998. For the six months ended June 30, 1999, non-interest expense decreased $11.4 million, to $114.2 million, from $125.6 million for the six months ended June 30, 1998. This reduction was primarily the result of the consolidation of LIB's operations into the Company which resulted in significant cost savings. General and administrative expense decreased $6.8 million to $50.4 million for the second quarter of 1999, from $57.2 million for the second quarter of 1998. For the six months ended June 30, 1999, general and administrative expense decreased $13.7 million to $102.4 million, from $116.1 million for the comparable 1998 period. Compensation and benefits totaled $23.4 million and $48.0 million for the three and six months ended June 30,1999, respectively, compared to $26.0 million and $51.6 million for the three and six months ended June 30,1998, respectively. Employee stock plans amortization expense totaled $2.9 million and $5.8 million for the three and six months ended June 30, 1999, respectively, compared to $4.8 million and $10.6 million, respectively, for the same periods in 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 the Common Stock from $56.11 per share and $55.74 per share for the three and six months ended June 30, 1998, respectively, to $47.19 per share 28 30 and $47.26 per share for the three and six months ended June 30, 1999, respectively. In addition, the Company's vesting period for the majority of shares granted under the RRPs was completed in January 1999. The amortization period for these grants was completed in fiscal 1998, resulting in a decrease in amortization expense to $36,000 for the second quarter of 1999, compared to $1.2 million for the second quarter of 1998; the amortization expense for the six month period ended June 30, 1999 decreased to $72,000, compared to $2.9 million for the respective 1998 period. Occupancy, equipment and systems expense totaled $13.1 million and $27.1 million for the three and six months ended June 30, 1999, respectively, as compared to $13.5 million and $28.6 million for the three and six months ended June 30, 1998, respectively. Advertising expense increased $1.1 million and $1.0 million, respectively, for the three and six months ended June 30, 1999 from the comparable 1998 periods. Other expenses decreased $2.5 million and $4.6 million, respectively, for the three and six months ended June 30, 1999 as compared to the same periods in 1998. Goodwill litigation expense increased to $1.8 million for the second quarter of 1999 compared to $583,000 for the second quarter of 1998 and increased to $2.9 million for the six months ended June 30, 1999 compared to $699,000 for the six months ended June 30, 1998. For further discussion on the goodwill litigation proceedings, see "Part II - Other Information, Item 1 - Legal Proceedings." The Company's percentage of general and administrative expense to average assets improved to 0.87% and 0.91% for the three and six months ended June 30, 1999, respectively, from 1.29% and 1.34% for the three and six months ended June 30,1998, respectively. The efficiency ratios also improved to 33.23% and 33.56% for the three and six months ended June 30, 1999, respectively, from 45.55% and 46.83%, respectively, for the comparable 1998 periods. INCOME TAX EXPENSE Income tax expense increased $10.8 million to $39.6 million for the second quarter of 1999, representing an effective tax rate of 41.5%, from $28.8 million, representing an effective tax rate of 42.1%, for the second quarter of 1998, primarily due to an increase in income before taxes of $27.0 million. Income tax expense increased $25.4 million to $79.5 million for the six months ended June 30, 1999, representing an effective tax rate of 42.1%, from $54.1 million, representing an effective tax rate of 41.7% for the comparable 1998 period, primarily due to an increase in income before taxes of $58.9 million. CASH EARNINGS Tangible stockholders' equity (stockholders' equity less goodwill) totaled $1.11 billion at June 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. The Association is subject to various capital requirements which affect its classification for safety and soundness purposes, as well as for deposit insurance purposes. These requirements utilize tangible equity as a base component, not equity as defined by generally accepted accounting principles ("GAAP"). Although reported earnings and return on equity are traditional measures of a company's performance, management believes that the increase 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. Management believes that cash earnings and cash returns on average tangible equity reflect the Company's ability to generate tangible capital that can be leveraged for future growth. Cash earnings for the second quarter of 1999 totaled $64.4 million, an increase of $13.9 million over $50.5 million cash earnings for the second quarter of 1998. For the six months ended June 30, 1999, cash earnings increased $28.0 million to $126.7 million, from $98.7 million for the six months ended June 30, 1998. Cash returns on average tangible equity and average assets for the second quarter of 1999 were 21.85% and 1.12%, respectively, compared to 16.30% and 1.14%, respectively, for the comparable 1998 period. Cash returns on average tangible equity and average assets for the six months ended June 30, 1999 were 21.30% and 1.12%, respectively, compared to 16.12% and 1.14%, 29 31 respectively, 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 and cash efficiency ratio also improved to 0.82% and 31.33%, respectively, for the three months ended June 30, 1999 as compared to 1.18% and 41.76%, respectively, for the three months ended June 30, 1998. For the six months ended June 30, 1999, the cash general and administrative expense to average assets ratio and cash efficiency ratio were 0.86% and 31.64%, respectively, as compared to 1.22% and 42.56%, respectively, for the six months ended June 30, 1998. Presented below are the Company's Condensed Consolidated Schedules of Cash Earnings for the three and six months ended June 30, 1999 and 1998. ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED SCHEDULES OF CASH EARNINGS (In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net Income $ 55,722 $ 39,519 $109,176 $ 75,725 Add back: Employee stock plans amortization expense 2,869 4,756 5,841 10,576 Amortization of goodwill 4,843 4,962 9,749 9,847 Income tax benefit on amortization expense of earned portion of RRP stock 968 1,283 1,935 2,566 -------- -------- -------- -------- Cash Earnings 64,402 50,520 126,701 98,714 Preferred dividends declared 1,500 1,500 3,000 3,000 -------- -------- -------- -------- Cash earnings available to common shareholders $ 62,902 $ 49,020 $123,701 $ 95,714 ======== ======== ======== ======== Basic earnings per common share (1) $ 1.21 $ 0.97 $ 2.38 $ 1.90 ======== ======== ======== ======== Diluted earnings per common share (1) $ 1.18 $ 0.93 $ 2.32 $ 1.81 ======== ======== ======== ========
(1) Based on the weighted average shares used to calculate earnings per share on the Consolidated Statements of Income. ASSET QUALITY One of the Company's key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to borrower workout arrangements and aggressive marketing of foreclosed properties, the Company has been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of the Company's financial condition. Such strategies, as well as the Company's concentration on one-to-four family mortgage lending and maintaining sound credit standards for new loan originations, 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 June 30, 1999. Non-performing assets and the ratio of non-performing assets to total assets both decreased from $120.4 million and 0.58%, respectively, at December 31, 1998 to $75.4 million and 0.33%, respectively, at June 30, 1999. The decrease in non-performing assets was primarily due to a $39.4 million decrease in non-performing loans from $100.3 million at December 31, 1998 to $60.9 million at June 30, 1999. Following the LIB Acquisition, the Company conformed LIB's collection policies and procedures to those of the Company. These efforts, aided by a stable economy, resulted in this significant decrease in non-performing loans, particularly during the second quarter of 1999. The following table shows a comparison of delinquent loans as of June 30, 1999 and December 31, 1998. 30 32 DELINQUENT LOANS
AT JUNE 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 - ---------------------------- --------------------------------------------- ------------------------------------------ One-to-four family 47 $ 1,195 507 $ 59,460 77 $ 2,422 804 $ 94,078 Multi-family 2 98 8 955 1 203 14 2,224 Commercial real estate 2 363 11 3,419 2 221 23 8,776 Consumer and other loans 169 1,140 206 2,296 246 2,058 279 5,995 -------- -------- -------- -------- -------- -------- -------- -------- Total delinquent loans 220 $ 2,796 732 $ 66,130 326 $ 4,904 1,120 $111,073 ======== ======== ======== ======== ======== ======== ======== ======== Delinquent loans to total loans 0.03% 0.68% 0.05% 1.23%
The following table sets forth information regarding non-performing assets at June 30, 1999 and December 31, 1998. In addition to the non-performing loans, the Company has approximately $2.8 million and $4.9 million of potential problem loans at June 30, 1999 and December 31, 1998, respectively. Such loans are 60-89 days delinquent as shown above. NON-PERFORMING ASSETS
AT AT JUNE 30, DECEMBER 31, 1999 (1) 1998 (1) -------- ----------- (DOLLARS IN THOUSANDS) Non-accrual delinquent mortgage loans (2)................ $60,866 $100,302 Non-accrual delinquent consumer and other loans ......... 2,296 5,995 Mortgage loans delinquent 90 days or more (3)............ 2,968 4,776 ------- -------- Total non-performing loans.......................... 66,130 111,073 ------ ------- Real estate owned, net (4)............................... 5,298 6,071 Investments in real estate, net (5)...................... 3,940 3,266 ------ -------- Total real estate owned and investments in real estate, net................................... 9,238 9,337 ------- -------- Total non-performing assets (6)..................... $75,368 $120,410 ====== ======= Allowance for loan losses to non-performing loans........... 113.99% 66.99% Allowance for loan losses to total loans.................... 0.77% 0.83%
(1) If all non-accrual loans had been performing in accordance with their original terms, the Company would have recorded interest income of $2.6 million for the six months ended June 30, 1999 and $6.8 million for the year ended December 31, 1998. Actual payments recorded to interest income totaled $1.1 million for the six months ended June 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 acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell. (5) Investments in real estate are recorded at the lower of cost or fair value. (6) Excluded from non-performing assets are $10.0 million and $6.9 million at June 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. 31 33 The following table sets forth the Company's change in allowance for loan, investments in real estate and REO losses.
(Dollars in Thousands) Allowance for Loan Losses: Balance at December 31, 1998 ............................ $ 74,403 Provision charged to operations .................... 2,093 Charge-offs: One-to-four family .......................... (1,025) Multi-family ................................ (12) Commercial .................................. (527) Consumer and other .......................... (1,601) -------- Total charge-offs .................................. (3,165) -------- Recoveries: One-to-four family .......................... 803 Multi-family ................................ 225 Commercial .................................. 53 Consumer and other .......................... 970 -------- Total recoveries ................................... 2,051 -------- Total net charge-offs .............................. (1,114) -------- Balance at June 30, 1999 ................................ $ 75,382 ======== Allowance for Losses on Investments in Real Estate and REO: Balance at December 31, 1998 ....................... $ 689 Recovery recorded to operations ............. (8) Charge-offs ................................. (360) Recoveries .................................. 68 -------- Balance at June 30, 1999 ........................... $ 389 ========
The following table sets forth the Company's allocation of the allowance for loan losses by loan category and the percent of loans in each category to total loans receivable. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss reserve is a valuation reserve applied to the entire loan portfolio.
At June 30, 1999 --------------------------------- % of Loans in Category to Amount Total Loans ------- -------------- (In Thousands) One-to-four family $39,364 88.39% Multi-family 4,452 5.25 Commercial 13,799 4.32 Consumer and other loans 17,767 2.04 ------- ------ Total allowances $75,382 100.00% ======= ======
32 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a description of the Company's quantitative and qualitative disclosures about market risk, see the information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 24, 1994, 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 against 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, certain partners of that law firm and LISB. The lawsuit is entitled Ronnie Weil Also Known as Ronnie Moore, for Herself and on Behalf of All Other Persons Who Attained 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, and 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 has been held in abeyance pending certain discovery. On January 4, 1999, the Company was served with a second amended complaint alleging essentially the same claims and adding as additional defendants, the Company and the Association, as successor to LISB, and certain members of Mr. James J. Conway, Jr.'s family. The second amended complaint seeks damages of at least $11 million trebled. On or about February 22, 1999, the Company, the Association, for themselves and on behalf of LISB, and the individual directors of LISB filed a motion to dismiss the second amended complaint. Management believes that the likelihood is remote that this case will have a material adverse impact on the Company's consolidated financial condition and results of operations. On July 18, 1997, a purported class action (the "Federal Action") was commenced in the United States District Court for the Eastern District of New York entitled Leonard Minzer, et ano. v. Gerard C. Keegan, et al. against The Greater, The Greater's directors and certain of its executive officers, the Company and the Association. The suit alleges, among other things, that The Greater, The Greater's directors and certain of its executive officers solicited proxies in violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9, promulgated thereunder, by failing to disclose certain allegedly material facts in the proxy statement, as amended, that was circulated to The Greater stockholders in connection with The Greater Acquisition, and that The Greater's directors and certain of its executive officers breached their fiduciary duties by entering into The Greater Acquisition and related arrangements. The suit further alleged, without specification, that the Company and the Association participated in the preparation and distribution of The Greater's proxy materials and/or aided and abetted the alleged breaches of fiduciary duty by The Greater defendants. Plaintiffs sought, among other things, a preliminary and permanent injunction against consummation of The Greater Acquisition and the related transactions, an order directing that the directors and executive officers of The Greater carry-out their fiduciary duties, and unspecified damages and costs. On September 2, 1997, plaintiffs filed an amended complaint and an Application for a preliminary injunction (the "Application"). An evidentiary hearing on plaintiffs' Application was held on September 10, 1997. On September 22, 1997, the Court issued a written decision denying plaintiffs' Application in all respects. Upon stipulation of the parties, all claims against the non-director, executive officers of The Greater, except one, were dismissed. The remaining 33 35 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. The appeal is pending. The Company believes the allegations made in the second amended complaint in the Federal Action are without merit and intends to aggressively defend its 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 ("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 ("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 (the "LISB Goodwill Litigation"). Similarly, on July 21, 1995, the Association commenced an action, Astoria Federal Savings and Loan Association vs. United States, (the "Astoria Goodwill Litigation") in the United States Court of Federal Claims against the United States seeking in excess of $250 million in damages arising from the government's breach of an assistance agreement entered into by the Association's predecessor in interest, Fidelity New York, FSB, in connection with its acquisition in October 1984 of Suburbia Federal Savings and Loan Association, and the government's subsequent enactment and implementation of the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") in 1989. In addition to its breach of contract claim, the Association's complaint also asserts claims based on promissory estoppel, failure of consideration and frustration of purpose, and a taking of the Association's property without just compensation in violation of the Fifth Amendment to the United States Constitution. 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 (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 ("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, the Association 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 the Association's contract claims. 34 36 On August 7 and 8, 1997, the United States Court of Federal Claims heard oral arguments on 11 common issues raised by the government in the various partial summary judgment motions filed by the plaintiffs in the goodwill cases. The Court heard argument on these common issues in the context of 4 specific summary judgment motions, not including the 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 60 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. 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 the Association'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 the Association's motion. The Association has responded to the government's response indicating in substance that the issue raised by the government was specifically addressed and decided by the United States Supreme Court in the Winstar Cases, 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 the Association's motion for partial summary judgment should be granted. The Association's response further requests reimbursement of the Association's attorneys' fees from the government for seeking to relitigate the capital credit issue. By motion dated July 16, 1998, the government moved to stay further proceedings related to the Association's motion which has been granted through July 31, 1999. The Association'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 is underway. Both sides have exchanged documents and directed interrogatories to each other which have been answered. The Company's attorneys have been taking depositions of key former government regulators who had supervisory authority over LISB. The government has been taking depositions of a number of former LISB directors, officers and employees. Such depositions and other fact discovery was substantially concluded on July 31, 1999. It is expected that the Astoria Goodwill Litigation will be designated as one of the "Second Thirty Cases." As a result, it is expected that discovery in such case will commence 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, 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. Based upon its review of these decisions, the Company is unable to predict with any degree of certainty the outcome of its 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. 35 37 ITEM 2. NOT APPLICABLE ITEM 3. NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on May 19, 1999 (the "Annual Meeting"). At the Annual Meeting, the shareholders of the Company elected George L. Engelke, Jr., Robert J. Conway, Peter C. Haeffner, Jr., Ralph F. Palleschi and Leo J. Waters as directors of the Company each to serve for a three year term and, in any case, until the election and qualification of their respective successors. The number of votes cast as to each matter acted upon at the Annual Meeting was as follows: (a) Election of Directors:
For Withheld George L. Engelke, Jr. 45,916,984 1,511,492 Robert J. Conway 45,926,519 1,501,957 Peter C. Haeffner, Jr. 46,105,309 1,323,167 Ralph F. Palleschi 46,082,867 1,345,609 Leo J. Waters 46,110,755 1,317,721
There were no broker held non-voted shares represented at the meeting with respect to this proposal. (b) The approval of the 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation: For 37,923,061 Against 9,228,744 Abstained 281,556
There were no broker held non-voted shares represented at the meeting with respect to this proposal. (c) The approval of the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation: For 41,285,917 Against 5,722,357 Abstained 432,665
There were no broker held non-voted shares represented at the meeting with respect to this proposal. (d) The approval of the Astoria Financial Corporation Executive Officer Annual Incentive Plan: For 43,655,315 Against 3,346,474 Abstained 426,685
There were no broker held non-voted shares represented at the meeting with respect to this proposal. 36 38 (e) Ratification of the appointment of KPMG LLP as independent auditors of Astoria Financial Corporation for its 1999 fiscal year: For 46,698,149 Against 517,443 Abstained 212,883
There were no broker held non-voted shares represented at the meeting with respect to this proposal. ITEM 5. OTHER INFORMATION Effective June 16, 1999, Robert G. Bolton retired from the Board of Directors of the Company and the Association after reaching mandatory retirement age. Effective upon his retirement, the Board reduced its number from fifteen directors to fourteen directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11. Statement Regarding Computation of Per Share Earnings. 27. Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed with the Securities and Exchange Commission for the quarter ended June 30, 1999. 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: August 12, 1999 By: /s/ Monte N. Redman -------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 37 39 Exhibit Index Exhibit No Identification of Exhibit 11. Statement Regarding Computation of Per Share Earnings 27. Financial Data Schedule 38 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Six Months Ended June 30, 1999 --------------------- (In Thousands, Except Per Share Data) 1. Net Income $ 109,176 Less: Preferred stock dividends declared 3,000 --------- Net income available to common shareholders $ 106,176 ========= 2. Weighted average common shares outstanding 55,069 3. ESOP shares not committed to be released (3,171) --------- 4. Total weighted average common shares outstanding 51,898 ========= 5. Basic earnings per common share $ 2.05 ========= 6. Total weighted average common shares outstanding 51,898 7. Dilutive effect of stock options using the treasury stock method 1,399 --------- 8. Total average common and common equivalent shares 53,297 ========= 9. Diluted earnings per common share $ 1.99 =========
39 EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 96,035 0 149,226 0 10,229,017 1,754,171 1,730,714 9,788,754 75,382 23,097,346 9,626,097 450,000 405,516 11,275,739 0 2,000 555 1,337,439 23,097,346 339,877 398,231 0 738,108 179,607 465,523 272,585 2,093 714 15,082 188,695 109,176 0 0 109,176 2.05 1.99 2.51 63,162 2,968 0 2,796 74,403 3,165 2,051 75,382 75,382 0 0
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