-----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, IBQTlAuqKHqp/+V/lNxXiuBhlRc8MIb0ILevshEZS32HTpTG1ipFrunoRNa4d/xj 61b5Xh8L4VNZxFfFJCwv1A== 0000950123-99-010108.txt : 19991115 0000950123-99-010108.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950123-99-010108 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749154 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 September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 0-22228 ASTORIA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter)
Delaware 11-3170868 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085 ------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
(516) 327-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, October 29, 1999 ----------------------- ---------------------------------------------- .01 Par Value 54,383,927 ------------- ----------
2 PART I -- FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Consolidated Statements of Financial Condition at September 30, 1999 2 and December 31, 1998. Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1999 and September 30, 1998. 3 Consolidated Statement of Stockholders' Equity for the Nine Months 4 Ended September 30, 1999. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and September 30, 1998. 5 Notes to Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and 8 Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. 34 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 5. Other Information 37 Item 6. Exhibits and Reports on Form 8-K 37 (a) Exhibits (4) Amendment No. 2 to Rights Agreement dated as of September 15, 1999, between Astoria Financial Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent. (11) Statement Regarding Computation of Per Share Earnings (27) Financial Data Schedule (b) Reports on Form 8-K Signatures 37
1 3 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT AT SEPTEMBER 30, DECEMBER 31, (In Thousands, Except Share Data) 1999 1998 - --------------------------------- ---- ---- Assets Cash and due from banks $ 114,328 $ 126,945 Federal funds sold and repurchase agreements 127,209 266,437 Mortgage-backed securities available-for-sale 8,887,451 7,553,834 Other securities available-for-sale 667,498 642,610 Mortgage-backed securities held-to-maturity (estimated fair value of $1,129,039 and $1,141,145, respectively) 1,131,636 1,136,799 Other securities held-to-maturity (estimated fair value of $781,393 and $982,295, respectively) 829,020 972,012 Federal Home Loan Bank of New York stock 262,000 210,250 Loans held-for-sale 38,478 212,909 Loans receivable held-for-investment: Mortgage loans, net 9,823,261 8,583,355 Consumer and other loans, net 184,299 230,367 ------------ ------------ 10,007,560 8,813,722 Less allowance for loan losses 74,332 74,403 ------------ ------------ Loans receivable held-for-investment, net 9,933,228 8,739,319 Mortgage servicing rights, net 49,957 50,237 Accrued interest receivable 115,563 102,288 Premises and equipment, net 177,557 161,629 Goodwill 228,778 245,862 Other assets 301,055 166,610 ------------ ------------ Total assets $ 22,863,758 $ 20,587,741 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits: Savings $ 2,645,132 $ 2,815,681 Money market 1,113,816 857,295 Money manager 578,380 626,832 NOW 245,448 325,726 Certificates of deposit 4,857,447 5,042,752 ------------ ------------ Total deposits 9,440,223 9,668,286 Reverse repurchase agreements 9,776,800 7,291,800 Federal Home Loan Bank of New York advances 1,410,087 1,210,170 Other borrowings 477,685 520,827 Mortgage escrow funds 143,001 116,106 Accrued expenses and other liabilities 257,219 318,168 ------------ ------------ Total liabilities 21,505,015 19,125,357 ------------ ------------ Stockholders' Equity: Preferred stock, $1.00 par value; 5,000,000 shares authorized: Series A (325,000 shares authorized and -0- issued and outstanding) -- -- Series B (2,000,000 shares authorized, issued and outstanding) 2,000 2,000 Common stock, $.01 par value; (200,000,000 shares authorized; 55,498,296 and 54,655,095 shares issued, respectively; and 54,340,443 and 54,655,095 shares outstanding, respectively) 555 547 Additional paid-in capital 797,541 767,846 Retained earnings - substantially restricted 864,741 742,679 Treasury stock (1,157,853 shares, at cost) (50,086) -- Accumulated other comprehensive income: Net unrealized loss on securities, net of taxes (222,258) (14,566) Unallocated common stock held by ESOPs (33,645) (35,908) Unearned common stock held by RRP (105) (214) ------------ ------------ Total stockholders' equity 1,358,743 1,462,384 ------------ ------------ Total liabilities and stockholders' equity $ 22,863,758 $ 20,587,741 ============ ============
See accompanying notes to consolidated financial statements. 2 4 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- (Dollars in Thousands, Except Per Share Data) 1999 1998 1999 1998 - --------------------------------------------- ---- ---- ---- ---- Interest income: Mortgage loans $ 172,208 $ 155,824 $ 502,014 $ 457,959 Consumer and other loans 4,726 6,192 14,797 18,596 Mortgage-backed securities 167,422 113,025 497,287 314,356 Other securities 31,854 34,080 96,871 99,965 Federal funds sold and repurchase agreements 2,237 3,921 5,586 11,134 ------------ ------------ ------------ ------------ Total interest income 378,447 313,042 1,116,555 902,010 ------------ ------------ ------------ ------------ Interest expense: Deposits 91,496 100,530 271,103 306,134 Borrowed funds 153,714 100,242 439,630 262,717 ------------ ------------ ------------ ------------ Total interest expense 245,210 200,772 710,733 568,851 ------------ ------------ ------------ ------------ Net interest income 133,237 112,270 405,822 333,159 Provision for loan losses 1,026 5,166 3,119 8,780 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 132,211 107,104 402,703 324,379 ------------ ------------ ------------ ------------ Non-interest income: Customer service and other loan fees 10,435 9,127 29,310 25,047 Loan servicing fees (costs), net 2,813 (5,810) 12,135 (2,127) Gain on sales of securities -- 4,132 714 15,253 Gain (loss) on sales of loans 209 (844) 3,255 1,364 Net gain on disposition of banking and loan production offices 20,447 -- 19,206 -- Operating income from real estate joint ventures 2,084 -- 2,768 1,735 Other 790 1,674 2,471 6,877 ------------ ------------ ------------ ------------ Total non-interest income 36,778 8,279 69,859 48,149 ------------ ------------ ------------ ------------ Non-interest expense: General and administrative: Compensation and benefits 22,542 26,601 70,586 78,194 Employee stock plans amortization 2,234 3,983 8,075 14,559 Occupancy, equipment and systems 13,215 14,460 40,356 43,055 Federal deposit insurance premiums 1,055 1,713 3,452 4,474 Advertising 2,085 1,261 5,938 4,116 Other 6,862 18,949 21,944 38,647 ------------ ------------ ------------ ------------ Total general and administrative 47,993 66,967 150,351 183,045 Real estate operations and provision for real estate losses, net 116 (646) (60) 36 Goodwill litigation 1,094 421 4,041 1,120 Amortization of goodwill 4,843 4,962 14,592 14,809 ------------ ------------ ------------ ------------ Total non-interest expense 54,046 71,704 168,924 199,010 ------------ ------------ ------------ ------------ Income before income tax expense 114,943 43,679 303,638 173,518 Income tax expense 47,995 18,815 127,514 72,929 ------------ ------------ ------------ ------------ Net income 66,948 24,864 176,124 100,589 Preferred dividends declared (1,500) (1,500) (4,500) (4,500) ------------ ------------ ------------ ------------ Net income available to common shareholders $ 65,448 $ 23,364 $ 171,624 $ 96,089 ============ ============ ============ ============ Basic earnings per common share $ 1.27 $ 0.46 $ 3.32 $ 1.90 ============ ============ ============ ============ Diluted earnings per common share $ 1.25 $ 0.44 $ 3.24 1.82 ============ ============ ============ ============ Dividends per common share $ 0.24 $ 0.20 $ 0.72 $ 0.60 ============ ============ ============ ============ Basic weighted average common shares 51,417,820 51,011,647 51,736,485 50,595,090 Diluted weighted average common and common equivalent shares 52,376,642 52,894,829 52,988,352 52,818,974
See accompanying notes to consolidated financial statements. 3 5 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 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 176,124 -- -- -- 176,124 Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment (207,692) -- -- -- -- Common stock repurchased (1,503,700 shares) (66,729) -- -- -- -- Dividends on common and preferred stock and amortization of purchase premium (42,791) -- -- (978) (41,813) Exercise of stock options and related tax benefit 26,469 -- 8 22,067 (12,249) Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit 10,978 -- -- 8,606 -- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1999 $ 1,358,743 $ 2,000 $ 555 $ 797,541 $ 864,741 =========== =========== =========== =========== ===========
Unallocated Unearned Accumulated Common Common Other Stock Stock Treasury Comprehensive Held Held (In Thousands, Except Share Data) Stock Income by ESOPs by RRP ----------- ----------- ----------- ----------- Balance at December 31, 1998 -- $ (14,566) $ (35,908) $ (214) Net income -- -- -- -- Other comprehensive income, net of tax: Net unrealized loss on securities, net of reclassification adjustment -- (207,692) -- -- Common stock repurchased (1,503,700 shares) (66,729) -- -- -- Dividends on common and preferred stock and amortization of purchase premium -- -- -- -- Exercise of stock options and related tax benefit 16,643 -- -- -- Amortization relating to allocation of ESOP stock and earned portion of RRP stock and related tax benefit -- -- 2,263 109 ----------- ----------- ----------- ----------- Balance at September 30, 1999 $ (50,086) $ (222,258) $ (33,645) $ (105) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 6 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ (IN THOUSANDS) 1999 1998 ----------- ----------- Cash flows from operating activities: Net income $ 176,124 $ 100,589 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Net accretion of discounts, premiums and deferred loan fees (41,718) (17,397) Provision for loan and real estate losses 3,164 9,985 Depreciation and amortization 10,471 13,642 Net gain on sales of securities and loans (3,969) (16,617) Net gain on sales of premises and equipment (487) -- Net gain on disposition of banking and loan production offices (19,206) -- Proceeds from sales of loans held-for-sale, net of originations 126,503 (128,979) Amortization of goodwill 14,592 14,809 Allocated and earned shares from ESOPs and RRP 8,075 14,559 Increase in accrued interest receivable (13,275) (14,083) Capitalized mortgage servicing rights, net of amortization and valuation allowance 280 563 Decrease in other assets 12,505 6,183 (Decrease) increase in accrued expenses and other liabilities (51,540) 60,935 ----------- ----------- Net cash provided by operating activities 221,519 44,189 ----------- ----------- Cash flows from investing activities: Origination of loans held-for-investment, net of principal payments (876,658) (931,162) Loan purchases through third parties (279,792) (147,641) Principal payments on mortgage-backed securities held-to-maturity 287,604 207,535 Principal payments on mortgage-backed securities available-for-sale 2,091,974 1,134,240 Purchases of mortgage-backed securities held-to-maturity (281,165) (72,651) Purchases of mortgage-backed securities available-for-sale (3,869,950) (3,485,945) Purchases of other securities held-to-maturity (42,078) (213,456) Purchases of other securities available-for-sale (158,421) (1,014,929) Proceeds from maturities of other securities available-for-sale 58,884 611,136 Proceeds from maturities of other securities held-to-maturity 212,660 457,613 Purchases of FHLB stock, net (51,750) (40,524) Proceeds from sales of securities available-for-sale 176,362 1,096,181 Proceeds from sales of real estate owned and investments in real estate, net 11,989 10,942 Proceeds from disposition of loan production offices 4,208 -- Purchases of premises and equipment, net of proceeds from sales (22,780) (19,641) ----------- ----------- Net cash used in investing activities (2,738,913) (2,408,302) ----------- ----------- Cash flows from financing activities: Net decrease in deposits (208,584) (286,128) Net increase in reverse repurchase agreements 2,485,000 2,886,035 Net increase (decrease) in FHLB of New York advances 200,000 (120,000) Net (decrease) increase in other borrowings (43,261) 93,963 Increase in mortgage escrow funds 26,895 40,433 Costs to repurchase common stock (66,729) (16,633) Cash dividends paid to stockholders (42,791) (32,224) Cash received for options exercised 15,019 12,227 ----------- ----------- Net cash provided by financing activities 2,365,549 2,577,673 ----------- ----------- Net (decrease) increase in cash and cash equivalents (151,845) 213,560 Adjustment to conform fiscal year of Long Island Bancorp, Inc. to the Company -- 77,323 Cash and cash equivalents at beginning of period 393,382 159,195 ----------- ----------- Cash and cash equivalents at end of period $ 241,537 $ 450,078 =========== =========== Supplemental disclosures: Cash paid during the period: Interest $ 698,569 $ 550,928 =========== =========== Income taxes $ 83,447 $ 25,078 =========== =========== Additions to real estate owned $ 9,372 $ 11,196 =========== =========== Securitization of loans $ -- $ 387,071 =========== ===========
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 and our wholly-owned subsidiary, Astoria Federal Savings and Loan Association, or Astoria Federal, and its subsidiaries. As used in this quarterly report, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries, including Astoria Federal, depending on the context. All significant inter-company accounts and transactions have been eliminated in consolidation. Following the close of business on September 30, 1998, we completed the acquisition of Long Island Bancorp, Inc., or LIB, the holding company of The Long Island Savings Bank, FSB, or LISB, a federally chartered savings bank. LIB was merged with us and LISB was merged with Astoria Federal. We refer to this transaction as the LIB Acquisition. All subsidiaries of LISB became subsidiaries of Astoria Federal. The acquisition was accounted for as a pooling-of-interests, and accordingly, all prior year consolidated financial results have been restated to combine LIB with us. In our opinion, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation of our financial condition as of September 30, 1999 and December 31, 1998, and our results of operations for the three and nine months ended September 30, 1999 and 1998, cash flows for the nine months ended September 30, 1999 and 1998 and stockholders' equity for the nine months ended September 30, 1999. In preparing the financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities for the consolidated statements of financial condition as of September 30, 1999 and December 31, 1998, and amounts of revenues and expenses for the consolidated statements of income for the three and nine month periods ended September 30, 1999 and 1998. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These consolidated financial statements should be read in conjunction with our December 31, 1998 audited consolidated financial statements, interim statements and related notes. 2. EARNINGS PER SHARE, OR EPS -------------------------- Basic EPS is computed by dividing net income less preferred dividends by the weighted-average common shares outstanding during the period. The weighted-average common shares outstanding includes the average number of shares of common stock outstanding adjusted for the weighted-average number of unallocated shares held by our Employee Stock Ownership Plans, or ESOPs, and the Recognition and Retention Plan, or RRP. Diluted EPS is computed by dividing net income less preferred dividends by the weighted-average common shares and common equivalent shares outstanding during the period. For the diluted EPS calculation, the weighted-average common shares and common equivalent shares outstanding include the average number of shares of common stock outstanding adjusted for the weighted-average number of unallocated shares held by the ESOPs and the RRP and the dilutive effect of unexercised stock options using the treasury stock method. When applying the treasury stock method, our average stock price is utilized, and we add to the proceeds the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options. 6 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 September 30, ---------------------------------------- 1999 1998 --------------------------------------- -------------------------------- (In Thousands, Average Per Share Average Per Share Except Share Data) Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Net income $66,948 $24,864 Less: preferred stock dividends 1,500 1,500 ----- ----- Basic EPS: Income available to common stockholders 65,448 51,417,820 $1.27 23,364 51,011,647 $0.46 ===== ===== Effect of dilutive unexercised stock options 958,822 1,883,182 ------- --------- Diluted EPS: Income available to common stockholders plus assumed conversions $65,448 52,376,642 $1.25 $23,364 52,894,829 $0.44 ======= ========== ===== ======= ========== =====
For the Nine Months Ended September 30, --------------------------------------- 1999 1998 ------------------------------------ ---------------------------------- (In Thousands, Average Per Share Average Per Share Except Share Data) Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Net income $176,124 $100,589 Less: preferred stock dividends 4,500 4,500 ----- ----- Basic EPS: Income available to common stockholders 171,624 51,736,485 $3.32 96,089 50,595,090 $1.90 ===== ===== Effect of dilutive unexercised stock options 1,251,867 2,223,884 --------- --------- Diluted EPS: Income available to common stockholders plus assumed conversions $171,624 52,988,352 $3.24 $ 96,089 52,818,974 $1.82 ======== ========== ===== ======== ========== =====
3. CASH EQUIVALENTS ---------------- For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and repurchase agreements with original maturities of three months or less. 4. COMPREHENSIVE INCOME -------------------- Comprehensive income (loss) for the three and nine months ended September 30, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $ 66,948 $ 24,864 $ 176,124 $100,589 Net unrealized losses on securities, net of reclassification adjustment (a) (19,209) (8,122) (207,692) (12,710) -------- -------- ---------- --------- Comprehensive income (loss) $ 47,739 $ 16,742 $ (31,568) $ 87,879 ======== ======== ========== ========= a) Disclosure of reclassification adjustment: Net unrealized losses arising during period $(19,209) $(10,477) $(208,098) $ (21,405) Less: reclassification adjustment for net gains included in net income - 2,355 406 8,695 -------- -------- ---------- --------- Net unrealized losses on securities $(19,209) $ (8,122) $(207,692) $ (12,710) ======== ========= ========= =========
7 9 5. IMPACT OF NEW ACCOUNTING STANDARDS ---------------------------------- In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, unrealized gains and losses) depends on the intended use of the derivative and the resulting designation. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," or SFAS No. 137. SFAS No.137 defers the effective date of SFAS No. 133 from fiscal quarters of fiscal years beginning after June 15, 1999 to June 15, 2000. SFAS No. 133 does not require restatement of prior periods. We believe the implementation of SFAS No. 133 will not have a material impact on our financial condition or results of operations. Effective January 1, 1999, we adopted Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," or SFAS No. 134. SFAS No. 134, which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," requires that, after the securitization of a mortgage loan held for sale, any retained mortgage-backed security should be classified in accordance with the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." However, SFAS No. 134 requires that a mortgage banking enterprise classify as trading any retained mortgage-backed security that it commits to sell before or during the securitization process. The implementation of SFAS No. 134 did not have a material impact on our financial condition or results of operations. 6. SUBSEQUENT EVENT ---------------- On October 25, 1999, we announced the completion of a private placement of $125.0 million of 9.75% capital securities due November 1, 2029, which are fully and unconditionally guaranteed by us. The securities were issued by our recently formed trust affiliate, Astoria Capital Trust I. The capital securities have been rated "BBB-" by Duff & Phelps Credit Rating Co., "BBB-" by Thomson Financial BankWatch and "ba2" by Moody's Investors Service. Proceeds of the offering were invested by Astoria Capital Trust I in 9.75% junior subordinated debentures issued by us. Net proceeds from the sale of the debentures will be used to increase Astoria Federal's capital level and for general corporate purposes, including the repurchase of our common stock. ITEM 2. ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services. GENERAL ------- We are headquartered in Lake Success, New York and our principal business currently consists of the operation of our wholly-owned subsidiary, Astoria Federal. We have acquired, and may continue to acquire, either directly or indirectly through Astoria Federal, other operating subsidiaries, including other financial institutions. Astoria Federal's primary business is attracting retail deposits from the general public and investing those deposits, together with borrowed funds, funds generated from operations and principal repayments, primarily in one-to-four family residential mortgage loans, mortgage-backed securities and, to a lesser extent, commercial real estate loans, multi- 8 10 family mortgage loans and consumer loans. In addition, Astoria Federal invests in securities issued by the U.S. Government and federal agencies and other securities. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and our cost of funds, which consists of the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses as well as non-interest income, general and administrative expense, other non-interest expense, and income tax expense. General and administrative expense consists of compensation and benefits, employee stock plans amortization, occupancy, equipment and systems expense, federal deposit insurance premiums, advertising and other operating expenses. Other non-interest expense generally consists of real estate operations and provision for real estate losses, net, goodwill litigation expenses and amortization of goodwill. Our earnings are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities. MERGERS AND ACQUISITIONS We continue to consider mergers and acquisitions an integral part of our strategic objective for our long-term growth. Following the close of business on September 30, 1998, we completed the LIB Acquisition. The transaction was accounted for as a pooling-of-interests. Accordingly, we recorded the assets, liabilities and stockholders' equity as reported by LIB immediately prior to consummation. No goodwill was created as a result of the LIB Acquisition. Under the terms of the merger agreement, holders of LIB common stock, par value $.01 per share, or LIB Common Stock, received 1.15 shares of our common stock, par value $.01 per share, for each share of LIB Common Stock, resulting in the issuance of 27,876,636 shares of our common stock. Acquisition Costs and Restructuring Charges From the period between initiation of the LIB Acquisition and the consummation date, we developed formal plans to integrate LIB's business into our business. Such plans included, among other things, the termination of employees, disposal of duplicate facilities, consolidation and relocation of equipment and facilities, integration of information systems and cancellation of lease contracts and other executory contracts. We have recognized as liabilities only those items that qualify for recognition under the consensus reached on Issue No. 94-3 by the Emerging Issues Task Force, or EITF, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit An Activity (including Certain Costs Incurred in a Restructuring)," or EITF 94-3. We have recorded all direct costs related to the LIB Acquisition as liabilities as of the consummation date, and the total pre-tax charge of $124.2 million has been classified as acquisition costs and restructuring charges in our consolidated statement of income for the year ended December 31, 1998. Such costs relate to restructuring plans and/or exit plans we formally adopted. The following table sets forth the activity in the balances of accrued acquisition costs and restructuring charges for the nine months ended September 30, 1999:
ACCRUED BALANCE AT CASH PAYMENTS THROUGH ACCRUED BALANCE (IN THOUSANDS) DECEMBER 31, 1998 SEPTEMBER 30, 1999 AT SEPTEMBER 30, 1999 ------------------ --------------------- ---------------------- Employee termination costs $10,326 $ 5,140 $ 5,186 (a) Facilities, equipment and systems cost 12,428 4,650 7,778 (b) Transaction fees & other costs 8,557 7,275 1,282 (c) ----- ----- ----- Total $31,311 $17,065 $14,246 ======= ======= =======
- -------------------- (a) The remaining accrued balance primarily represents voluntary early retirement charges for pension and postretirement benefits for certain former employees of LIB. Such benefits will remain as accrued pension and postretirement benefit costs until all such benefits are paid during these former LIB employees' lifetimes. (b) The remaining accrued balance primarily represents the present value of net operating costs for our former mortgage headquarters. (c) The remaining accrued balance primarily represents accrued legal fees which we will incur to restructure the various employee benefit plans of LIB and the subsidiaries of LISB. 9 11 1999 Cost Savings Initiatives As part of our strategy of improving operating efficiency and achieving cost savings targets following the LIB Acquisition, we have entered into various transactions in 1999. Such transactions include, but are not limited to, the disposition of loan production offices, banking offices and the former headquarters of LIB. In order to refocus our mortgage loan origination efforts toward portfolio growth rather than sale in the secondary market, we have also decided to close or otherwise dispose of all retail loan production offices, or LPOs. In the third quarter of 1999, Astoria Federal sold its five upstate New York banking offices in Otsego and Chenango counties with deposits totaling $156.4 million to CNB Financial Corporation, the parent company of Central National Bank, headquartered in Canajoharie, New York. As a result of the transaction, we recognized a $20.4 million gain during the third quarter of 1999. Additionally, we have entered into a contract to sell the former headquarters of LIB which is expected to close in the fourth quarter of 1999. YEAR 2000 PROJECT The "Year 2000 Problem" centers on the inability of some computer systems to properly recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, our operations may be significantly and adversely affected by the Year 2000 Problem due to the nature of financial information. In addition, software, hardware, and equipment outside our direct control and with which we electronically or operationally interface (e.g., including, but not limited to, third party vendor provided data processing, information system management, maintenance of computer system, and credit bureau information) may be affected. Furthermore, if computer systems are not adequately changed to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest calculations, payment amounts or due dates and other operating functions, may generate results which could be significantly misstated, and we could experience an inability for a temporary, but unknown duration, to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of our suppliers and creditors and the creditworthiness of our borrowers. If not adequately addressed, the Year 2000 Problem could result in a material adverse impact on our products, services and competitive condition and therefore, our results of operations and could be deemed to imperil the safety and soundness of Astoria Federal. There has been limited litigation filed against corporations regarding the Year 2000 Problem and their compliance efforts. Nonetheless, the law in this area will likely continue to develop well into the new millennium. Should we experience a Year 2000 failure, our exposure could be significant and material. On July 20, 1999, the federal government enacted the Year 2000 Readiness and Responsibility Act, P.L.106-37. Among the goals of the legislation are: (1) to establish uniform legal standards that give businesses and users of technology products reasonable incentives to solve the Year 2000 problems before they develop, (2) to encourage remediation and testing efforts, (3) to promote alternative dispute resolution, and (4) to discourage insubstantial lawsuits while preserving remedies of plaintiffs who suffer genuine injury. No assurance can be given at this time that the legislation will have the effect of limiting our potential liability. The Office of Thrift Supervision, or OTS, our primary federal bank regulatory agency, along with the other federal bank regulatory agencies, has published substantive guidance on the Year 2000 Problem and has included Year 2000 compliance as a substantive area of examination for both regularly scheduled and special examinations. These publications, in addition to providing guidance as to examination criteria, have outlined requirements for creation and implementation of a compliance plan and target dates for testing and implementation of corrective actions, as discussed below. As a result of the oversight by and authority vested in the federal bank regulatory agencies, a financial institution that does not become Year 2000 compliant could become subject to administrative remedies similar to those imposed on financial institutions otherwise found not to be operating in a safe and sound manner, including remedies available under prompt corrective action regulations. We have developed and implemented a Year 2000 project plan, or the Plan, to address the Year 2000 Problem and its effects on us. The Plan includes five components which address issues involving awareness, assessment, renovation, validation and implementation. We have completed, in all material respects, all five phases of the Plan. 10 12 During the assessment and renovation phases of the Plan, we inventoried all material information systems and reviewed them for Year 2000 readiness. Among the systems reviewed were computer hardware and systems software, applications software and communications hardware and software as well as physical infrastructure including identification of embedded chips or automated devices. As noted below, this review included both internal systems and those of third party vendors which provide systems such as retail deposit processing, loan origination processing, loan servicing and general ledger and accounting systems and software. We then renovated or replaced the systems that may have posed a Year 2000-related problem. Following renovation, the functionality of the new systems were validated and implemented. Our mission critical hardware and software systems have also been renovated, tested and implemented within the OTS' suggested time frame. We completed testing of our mission critical vendor provided systems prior to September 30, 1998. We substantially completed testing of core mission critical internal systems as of December 31,1998 and also substantially completed tests of the renovations made of both internally and externally supplied systems, as of June 30, 1999. As part of the Plan, we had formal communications with all of our significant suppliers to determine the extent to which we are vulnerable to those third parties' failure to remediate their own Year 2000 Problem and have been following the progress of those vendors in becoming Year 2000 compliant. Where practical, we have scheduled and conducted end-to-end Year 2000 tests as well as participated in proxy testing with our business partners, allowing us additional opportunities to test readiness of internal and external systems. Despite our best efforts to ensure Year 2000 compliance, it is possible that one or more of our internal or external systems may fail to operate. Although we are Year 2000 ready, the potential that circumstances beyond our control may result in an interruption of normal business operations cannot be determined with complete certainty. As a result, we have formulated contingency plans for our mission critical systems where deemed feasible. These systems include retail deposit processing, check clearing and wire transfer capabilities, loan origination processing, loan servicing, investment monitoring and accounting, accounting operations and payroll processing. We have developed manual processes to ameliorate situations that may result from a loss of telecommunications, power, and/or isolated business systems. We expect to maintain the ability to conduct essential business transactions whenever possible, regardless of the loss of automated systems. All business units have also been involved in the review and, where necessary, amendment of the existing disaster recovery plans in addition to developing Year 2000 contingency plans, in order to address the possible failure of one or more mission critical systems. We have reviewed our customer base to determine whether they pose significant Year 2000 risks. Our customers consist primarily of individual depositors and residential mortgage loan borrowers who utilize our services for personal, household or consumer uses. These types of customers, individually and in the aggregate, are not likely to pose significant direct Year 2000 risks to us. Significant risks could occur if customers' employers or other third parties suffer significant disruptions caused by the Year 2000 Problem. Additionally, public concerns over the Year 2000 Problem could adversely impact our deposit flows near the end of 1999. Although we have made every effort to inform our deposit customers of the efforts taken in order to ensure that our computer systems will not be adversely effected by the Year 2000 Problem, there still exists a likelihood that some customers will remove their deposit funds. While we believe that deposit outflows related solely to the Year 2000 Problem will likely be both minimal and short-term in nature, we have planned for potential additional funding sources in the event that such deposit outflows occur. Monitoring and managing the Year 2000 Project has resulted in direct and indirect costs to us. Direct costs include charges by third party software vendors for product enhancements, costs involved in testing for Year 2000 compliance, and costs for developing and implementing contingency plans for critical systems which may fail. Indirect costs principally consist of the time devoted by existing employees in monitoring software vendor progress, testing, developing and implementing any necessary contingency plans. The direct and indirect costs of addressing the Year 2000 Problem continue to be charged to earnings as incurred, but have not been material to date. We do not believe that such costs will have a material effect on the results of operations, although there can be no assurance that such costs may not become material in the future. It is currently estimated that total Year 2000 compliance efforts will cost us, excluding reallocation of internal resources, approximately $2.2 million. We have incurred $1.9 million to date, which includes $750,000 expensed by LISB prior to the LIB Acquisition. 11 13 IMPACT OF PROPOSED LEGISLATION The U.S. Congress recently passed legislation intended to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies and other financial service providers. The legislation is being forwarded to the President for his approval. Generally, the legislation would (1) repeal the historical restrictions and eliminate many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (2) provide a uniform framework for the activities of banks, savings institutions and their holding companies, (3) broaden the activities that may be conducted by national banks and banking subsidiaries of bank holdings companies, (4) provide an enhanced framework for protecting the privacy of consumer's information (5) adopt a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the Federal Home Loan Bank system, (6) modify the laws governing the implementation of the Community Reinvestment Act and (7) address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities activities. In particular, the pending legislation would restrict certain of the powers that unitary savings and loan association holding companies currently have. Unitary savings and loan holding companies that are "grandfathered," i.e., became a unitary savings and loan holding company pursuant to an application filed with the OTS before May 4, 1999, would retain their authority under current law. All other savings and loan holding companies would be limited to financially related activities permissible for bank holding companies, as defined under the new law. We have been a unitary savings and loan holding company since 1993. The proposed legislation would prohibit non-financial companies from acquiring savings and loan association holding companies. Bank holding companies would be permitted to engage in a wider variety of financial activities than is permitted under current law, particularly with respect to insurance and securities activities. In addition, in a change from current law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities. We do not believe that the proposed legislation, as publicly reported, would have a material adverse affect on our operations in the near term. However, to the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in an increased number of larger financial institutions that both offer a wider variety of financial services than we currently offer and can aggressively compete in the markets we currently serve. LIQUIDITY AND CAPITAL RESOURCES Our primary source of funds is cash provided by investing activities, which includes principal and interest payments on loans, mortgage-backed securities and other securities. Principal payments on loans, mortgage-backed securities and proceeds from maturities of other securities totaled $4.39 billion for the nine months ended September 30, 1999 and $4.08 billion for the nine months ended September 30, 1998. During the nine months ended September 30, 1999, we received $188.4 million of funds from the sale of securities available-for-sale and real estate versus $1.11 billion from sales during the nine months ended September 30, 1998. Our other sources of funds are provided by operating and financing activities. Net cash provided from operating activities totaled $221.5 million during the nine months ended September 30, 1999 and $44.2 million during the nine months ended September 30, 1998. The net increase in borrowings during the nine months ended September 30, 1999 totaled $2.64 billion reflecting the funding of our asset growth discussed below. The net decrease in deposits totaled $208.6 million during the nine months ended September 30, 1999. During the nine months ended September 30, 1998, the net increase in borrowings totaled $2.86 billion and the net decrease in deposits totaled $286.1 million. Our primary use of funds in our investing activities are for the purchase and origination of mortgage loans and the purchase of mortgage-backed and other securities. During the nine months ended September 30, 1999, our gross originations and purchases of mortgage loans totaled $3.11 billion, compared to $3.86 billion during the nine months ended September 30, 1998. Our purchases of mortgage-backed and other securities totaled $4.35 billion during the nine months ended September 30, 1999 and $4.79 billion during the comparable 1998 period. Stockholders' equity totaled $1.36 billion at September 30, 1999 and $1.46 billion at December 31, 1998. Decreases to stockholders' equity included a $207.7 million increase in the unrealized loss on securities, net of taxes, primarily due to increases in interest rates during the nine months ended September 30, 1999, which adversely 12 14 affected the market values of our available-for-sale securities. Additional decreases in stockholders' equity were the result of repurchases of our common stock of $66.7 million and dividends declared of $42.8 million. These decreases were partially offset by $176.1 million of net income, the effect of options exercised and related tax benefit of $26.5 million and the amortization for the allocated portion of shares held by the ESOPs and the related tax benefit on the earned portion of the shares held by the RRP of $11.0 million. Astoria Federal is required by the OTS to maintain a minimum liquidity ratio, calculated as an average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings, of 4.00%. Astoria Federal's liquidity ratios were 6.63% at September 30, 1999 and 11.29% at December 31, 1998. The levels of Astoria Federal's liquid assets are dependent on Astoria Federal's operating, investing and financing activities during any given period. On April 21, 1999, our Board of Directors approved our sixth stock repurchase plan authorizing the purchase, at our management's discretion, of up to 10% of our common stock then outstanding, or 5,528,000 shares, over a two year period in open-market or privately negotiated transactions. Under this plan, 1,503,700 shares of our common stock have been repurchased during the second and third quarters of 1999 at an aggregate cost of $66.7 million. On September 1, 1999, we paid a quarterly cash dividend equal to $0.24 per share on shares of our common stock outstanding as of the close of business on August 13, 1999, totaling $12.6 million. On October 20, 1999, we declared a quarterly cash dividend of $0.24 per share on shares of our common stock payable on December 1, 1999 to stockholders of record as of the close of business on November 15, 1999. Beginning October 15, 1997, we have paid quarterly cash dividends equal to $0.75 per share on shares of our Series B Preferred Stock, aggregating $1.5 million per quarter. At September 30, 1999, Astoria Federal's total capital exceeded all of its regulatory capital requirements with a tangible ratio of 5.55%, leverage ratio of 5.55%, and risk-based capital ratio of 14.50%. The minimum regulatory requirements were a tangible ratio of 1.50%, leverage ratio of 4.00%, and risk-based capital ratio of 8.00%. INTEREST RATE SENSITIVITY ANALYSIS As a financial institution, our primary component of market risk is interest rate volatility. Our net interest income, the primary component of our net income, is subject to substantial risk due to changes in interest rates or changes in market yield curves, particularly if there is a substantial variation in the timing between the repricing of our assets and the liabilities which fund them. We seek to manage interest rate risk by monitoring and controlling the variation in repricing intervals between our assets and liabilities. To a lesser extent, we also monitor our interest rate sensitivity by analyzing the estimated changes in market value of our assets and liabilities assuming various interest rate scenarios. As discussed more fully below, a variety of factors influence the repricing characteristics and the market value of any given asset or liability. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period, either by contractual terms or based upon certain assumptions made by management, including, but not limited to, estimated prepayments. The interest rate sensitivity gap is the difference between the amount of interest-earning assets anticipated to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive liabilities maturing or repricing within that same time frame. Conversely, a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive assets maturing or repricing within that same time frame. In a rising interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a greater increase in the yields of its assets relative to the costs of its liabilities and thus an increase in the institution's net interest income, whereas an institution with a negative gap would generally be expected to experience the opposite results. Conversely, during a period of falling interest rates, a positive gap would tend to result in a decrease in net interest income while a negative gap would tend to increase net interest income. 13 15 The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in mortgage prepayments. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. We monitor interest rate sensitivity so that adjustments in the asset and liability mix, when deemed appropriate, can be made on a timely basis. Purchases of fixed-rate mortgage-backed securities are concentrated on those securities with short- and medium-term average lives. Originations of thirty-year fixed rate mortgages and, more recently, fifteen-year fixed rate mortgages are originated and sold in the secondary market, while those with shorter durations, primarily adjustable-rate mortgages are held-for-investment. At September 30, 1999, our net interest-earning assets maturing or repricing within one year exceeded interest-bearing liabilities maturing or repricing within the same time period by $522.6 million, representing a positive cumulative one-year gap of 2.29% of total assets. This compares to net interest-earning assets maturing or repricing within one year exceeding interest-bearing liabilities maturing or repricing within the same time period by $1.07 billion, representing a positive cumulative one-year gap of 5.18% of total assets at December 31, 1998. Our September 30, 1999 and December 31, 1998 cumulative one-year gap positions reflect the classification of available-for-sale securities within repricing periods based on their contractual maturities adjusted for estimated prepayments, if any. If those securities at September 30, 1999 were classified within the one-year or less maturing or repricing category, net interest-earning assets maturing or repricing within one year would have exceeded interest-bearing liabilities maturing or repricing within the same time period by $7.40 billion, representing a positive cumulative one-year gap of 32.35% of total assets. Using this method at December 31, 1998, net interest-earning assets maturing or repricing within one year would have exceeded interest-bearing liabilities maturing or repricing within the same time period by $6.46 billion, representing a positive cumulative one-year gap of 31.39% of total assets. The available-for-sale securities may or may not be sold, subject to our discretion. The following table, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at September 30, 1999, that we anticipate, using certain assumptions based on our historical experience and other data available to us to reprice or mature in each of the future time periods shown. The Gap Table does not necessarily indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities are subject to customer discretion and competitive and other pressures. Callable features of certain assets and liabilities, in addition to the foregoing, may cause actual experience to vary from that indicated. Included in this table are $1.31 billion of callable other securities at their amortized cost, classified according to their maturity dates, which are primarily within the more than five years maturity category. Of such securities, $1.01 billion are callable within one year and at various other times thereafter. These securities are not included in the one year or less category in the Gap Table. Also included in this table are $10.68 billion of callable borrowings, classified according to their maturity dates, which are primarily within the more than three years to five years category and the more than five years category. Of such borrowings, $3.13 billion are callable within one year and at various other times thereafter. These borrowings are not included in the one year or less category in the Gap Table. The use of these callable borrowings during our periods of rapid growth and the low absolute level of interest rates, has allowed us to maintain a low cost of funding. As of September 30, 1999, the weighted average rate on these borrowings was 5.21%. While the majority of those borrowings which have already reached their first call date have not been called, there can be no assurances that these borrowings will not be called in the future, particularly in a rising interest rate environment. If those securities and borrowings had been categorized according to their call dates, our cumulative one-year gap would have been negative at September 30, 1999. 14 16
At September 30, 1999 ----------------------------------------------------------------------------------- More than More than One Year Three Years One Year to to More than (Dollars in Thousands) or Less Three Years Five Years Five Years Total - ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans (1) $2,455,738 $2,520,869 $ 2,247,226 $2,527,938 $9,751,771 Consumer and other loans (1) 148,120 33,375 - - 181,495 Federal funds sold and repurchase agreements 127,209 - - - 127,209 Mortgage-backed and other securities available-for-sale (2) 2,681,472 2,043,059 1,787,633 3,042,785 9,554,949 Mortgage-backed and other securities held-to-maturity (2) 553,538 377,307 151,899 1,143,636 2,226,380 ------- ------- ------- --------- --------- Total interest-earning assets 5,966,077 4,974,610 4,186,758 6,714,359 21,841,804 Add: Net unamortized purchase premiums and deferred fees (3) 13,063 13,728 12,497 14,213 53,501 ---------- ---------- ----------- ---------- ----------- Net interest-earning assets $5,979,140 $4,988,338 $ 4,199,255 $6,728,572 $21,895,305 ---------- ---------- ----------- ---------- ----------- Interest-bearing liabilities: Savings $ 158,708 $ 317,416 $ 317,416 $1,851,592 $ 2,645,132 NOW 6,471 12,943 12,943 97,069 129,426 Money market 977,107 14,390 14,390 107,929 1,113,816 Money manager 18,162 36,324 36,324 272,432 363,242 Certificates of deposit 3,301,250 1,305,859 250,338 - 4,857,447 Borrowed funds (2) 994,848 1,699,724 5,790,000 3,180,000 11,664,572 ---------- ---------- ----------- ---------- ----------- Total interest-bearing liabilities $ 5,456,546 $3,386,656 $ 6,421,411 $5,509,022 $20,773,635 ---------- ---------- ----------- ---------- ----------- Interest sensitivity gap $ 522,594 $1,601,682 $(2,222,156) $1,219,550 $ 1,121,670 ---------- ---------- ----------- ---------- ----------- Cumulative interest sensitivity gap $ 522,594 $2,124,276 $ (97,880) $1,121,670 ----------- ---------- ------------ ---------- Cumulative interest sensitivity gap as a percentage of total assets 2.29% 9.29% (0.43)% 4.91% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 109.58% 124.02% 99.36% 105.40%
(1) Mortgage, consumer and other loans exclude non-performing loans, but are not reduced for the allowance for loan losses. (2) Includes $1.01 billion of other securities and $3.13 billion of borrowings, callable within one year and at various other times thereafter and not included in the one year or less category, which are each classified according to their contractual maturity dates (primarily in the more than five years category for other securities and the more than three years to five years and the more than five years categories for borrowings). (3) Net unamortized purchase premiums and deferred fees are prorated. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. Additionally, certain assets, such as ARM loans, have contractual features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further,in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of borrowers to service their ARM loans or other loan obligations may decrease in the event of an interest rate increase. The Gap Table reflects our estimates as to periods to repricing at a particular point in time. Among the factors considered, are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time. 15 17 We also monitor Astoria Federal's interest rate sensitivity through analysis of the change in the net portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. Increases in the value of assets will increase the NPV whereas decreases in value of assets will decrease the NPV. Conversely, increases in the value of liabilities will decrease NPV whereas decreases in the value of liabilities will increase the NPV. The changes in value of assets and liabilities due to changes in interest rates reflect the interest sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e. fixed rate, adjustable rate, caps, floors) relative to the interest rate environment. For example, in a rising interest rate environment, the fair value of a fixed rate asset will decline, whereas the fair value of an adjustable rate asset, depending on its repricing characteristics, may not decline. The NPV ratio under any interest rate scenario is defined as the NPV in that scenario divided by the value of assets in the same scenario. This analysis, presented in the following table, or the NPV Table, initially measures percentage changes from the value of projected NPV in a given rate scenario, and then measures interest rate sensitivity by the change in the NPV ratio, over a range of interest rate change scenarios. The OTS also produces a similar analysis using its own model based upon data submitted on Astoria Federal's quarterly Thrift Financial Reports, the results of which may vary from our internal model primarily because of differences in assumptions utilized between our internal model and the OTS model, including estimated loan prepayment rates, reinvestment rates and deposit decay rates. For purposes of the NPV Table, prepayment speeds and deposit decay rates similar to the Gap Table were used. However, we have utilized different assumptions with respect to the borrowings with imbedded call features for the NPV Table. Specifically, for the scenarios involving no change or an increase in interest rates, we have assumed that those borrowings with imbedded call options will be called at their next available call date. Since the NPV Table reflects a hypothetical value of net assets based on present value of cash flows, utilizing the shorter life by call date instead of maturity date would result in the most conservative value of Astoria Federal's borrowings and, therefore, the most conservative view of its NPV ratio. Despite the recent increase in interest rates during the first nine months of 1999, many of these borrowings which are currently in their call periods have not had those options exercised, thereby allowing us to maintain our low borrowing cost. However, no assurance can be given that this will continue in the future. The NPV Table is based on simulations which utilize institution specific assumptions with regard to future cash flows, including customer options such as loan prepayments, period and lifetime caps, puts and calls, and deposit withdrawal estimates. The NPV Table uses discount rates derived from various sources including, but not limited to, U.S. Treasury yield curves, thrift retail certificate of deposit curves, national and local secondary mortgage markets, brokerage security pricing services and various alternative funding sources. Specifically, for mortgage loans receivable, the discount rates used were based on market rates for new loans of similar type and purpose, adjusted, when necessary, for factors such as servicing cost, credit risk and term. The discount rates used for certificates of deposit and borrowings were based on rates which approximate those we would incur to replace such funding of similar remaining maturities. The NPV Table calculates the NPV at a flat rate scenario by computing the present value of cash flows of interest earning assets less the present value of interest bearing liabilities. Certain assets, including fixed assets and real estate held for development, are assumed to remain at book value (net of valuation allowance) regardless of interest rate scenario. The following represents Astoria Federal's NPV Table as of September 30, 1999.
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 $1,333,102 $(866,393) (39.39)% 6.30% (3.46)% +100 1,814,472 (385,023) (17.51) 8.30 (1.46) -0- 2,199,495 - - 9.76 - -100 2,600,015 400,520 18.21 11.22 1.46 -200 2,379,136 179,641 8.17 10.15 0.39
As with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling of changes in NPV requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of 16 18 a period remains constant over the period being measured and also assumes that a particular change in interest rates is immediate and is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In addition, prepayment estimates and other assumptions within the NPV Table are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Accordingly, although the NPV measurements, in theory, may provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide for a precise forecast of the effect of changes in market interest rates on Astoria Federal's NPV and will differ from actual results. From time to time, in an attempt to further reduce volatility in our earnings caused by changes in interest rates, we will enter into financial derivative agreements with third parties. At September 30, 1999, we had $60.0 million of interest rate floor agreements and $450.0 million of interest rate swap agreements outstanding based on their notional amount. Additionally, we are not subject to foreign currency exchange or commodity price risk and do not own any trading assets. LOAN PORTFOLIO - -------------- The following table sets forth the composition of our loan portfolio at September 30, 1999 and December 31, 1998.
At September 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 $ 8,841,211 88.49% $ 7,857,964 87.37% Multi-family 550,003 5.51 452,854 5.03 Commercial 416,287 4.17 453,973 5.05 ------- ---- ------- ---- Total mortgage loans 9,807,501 98.17 8,764,791 97.45 --------- ----- --------- ----- CONSUMER AND OTHER LOANS: Home equity 118,812 1.19 142,437 1.58 Passbook 7,186 0.07 6,653 0.07 Other 57,292 0.57 80,287 0.90 ------ ---- ------ ---- Total consumer and other loans 183,290 1.83 229,377 2.55 ------- ---- ------- ---- TOTAL LOANS 9,990,791 100.00% 8,994,168 100.00% ========= ====== ========= ====== LESS: Unearned discounts, premiums and deferred loan fees, net 55,247 32,463 Allowance for loan losses (74,332) (74,403) ------------ ---------- TOTAL LOANS, NET $ 9,971,706 $8,952,228 =========== ==========
1. These amounts include $38.5 million and $212.9 million of mortgage loans held-for-sale at September 30, 1999 and December 31, 1998, respectively. 17 19 Securities Portfolio - -------------------- The following tables set forth the amortized cost and estimated fair value of mortgage-backed securities and other securities available-for-sale and held-to-maturity at September 30, 1999 and December 31, 1998.
At September 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 $ 135,829 $ 874 $ (1,345) $ 135,358 FHLMC pass-through certificates 242,647 1,426 (1,810) 242,263 FNMA pass-through certificates 466,093 5,826 (1,639) 470,280 REMICs and CMOs: Agency issuance 6,713,217 952 (291,889) 6,422,280 Non agency issuance 1,659,816 702 (43,248) 1,617,270 --------- ----- -------- --------- Total mortgage-backed securities 9,217,602 9,780 (339,931) 8,887,451 --------- ----- -------- --------- Other securities: Obligations of the U.S. Government and agencies 546,902 162 (53,709) 493,355 Corporate debt securities 51,603 - (4,377) 47,226 FNMA and FHLMC preferred stock 127,515 1,111 (4,000) 124,626 Equity and other securities 2,268 24 (1) 2,291 --------- ----- -------- --------- Total other securities 728,288 1,297 (62,087) 667,498 --------- ----- -------- --------- Total Available-for-Sale $ 9,945,890 $ 11,077 $ (402,018) $ 9,554,949 ============= ========= ============ =========== HELD-TO-MATURITY: Mortgage-backed securities: GNMA pass-through certificates $ 4,630 $ 281 $ - $ 4,911 FHLMC pass-through certificates 48,187 1,184 (25) 49,346 FNMA pass-through certificates 13,510 35 (460) 13,085 REMICs and CMOs: Agency issuance 699,165 2,723 (3,220) 698,668 Non agency issuance 366,144 260 (3,375) 363,029 --------- ----- -------- --------- Total mortgage-backed securities 1,131,636 4,483 (7,080) 1,129,039 --------- ----- -------- --------- Other securities: Obligations of the U.S. Government and agencies 763,076 32 (47,328) 715,780 Obligations of states and political subdivisions 46,173 - (28) 46,145 Corporate debt 19,771 61 (364) 19,468 --------- ----- -------- --------- Total other securities 829,020 93 (47,720) 781,393 --------- ----- -------- --------- Total Held-to-Maturity $ 1,960,656 $ 4,576 $ (54,800) $ 1,910,432 ============= ======== =========== ===========
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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 AND OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 FINANCIAL CONDITION Total assets increased $2.27 billion, to $22.86 billion at September 30, 1999, from $20.59 billion at December 31, 1998. This increase was primarily due to our objective of effectively deploying capital through asset growth, which resulted in increases in the mortgage loan and mortgage-backed securities portfolios, primarily during the first quarter of 1999. Mortgage loans held-for-investment, net, increased $1.24 billion, from $8.58 billion at December 31, 1998 to $9.82 billion at September 30, 1999. Gross mortgage loans originated and purchased during the nine months ended September 30, 1999 totaled $3.11 billion, of which $2.83 billion were originations and $280.6 million were purchases. These originations and purchases consisted primarily of one-to-four family residential mortgage loans. This compares to $3.69 billion of originations and $171.1 million of purchases for a total of $3.86 billion during the nine months ended September 30, 1998. The decrease in the mortgage loan originations was primarily a result of the increase in interest rates, which decreased the levels of mortgage refinance activity. Additionally, we are focusing on originating loans for portfolio rather than for sale in the secondary market. The closing and disposal of all the LPOs acquired from LIB also contributed to the significant reduction in our volume of loan originations. This was offset by a slowdown in loan prepayments, also a result of the increase in interest rates, as well as a decrease in loans held-for- sale. Mortgage-backed securities increased $1.33 billion to $10.02 billion at September 30, 1999, from $8.69 billion at December 31, 1998. This increase was primarily the result of significant purchases during the nine months ended September 30, 1999, primarily agency-issued REMICs and CMOs purchased in the first quarter of 1999, of $4.15 billion, offset by principal payments received of $2.38 billion. Other assets increased $134.5 million from $166.6 million at December 31, 1998 to $301.1 million at September 30, 1999, primarily due to the increase in the deferred tax asset directly related to the increase in the unrealized loss on securities available-for-sale. The growth in the loan and mortgage-backed securities portfolios was funded primarily through additional medium-term borrowings, which is consistent with our strategy of complementing our growth through acquisitions by leveraging our excess capital. Reverse repurchase agreements increased $2.49 billion, to $9.78 billion at September 30, 1999, from $7.29 billion at December 31, 1998. Federal Home Loan Bank of New York advances increased $199.9 million to $1.41 billion at September 30, 1999 from $1.21 billion at December 31, 1998. Deposits decreased $228.1 million from $9.67 billion at December 31, 1998 to $9.44 billion at September 30, 1999 primarily due to the sale of our five upstate New York banking offices with deposits totaling $156.4 million in the third quarter of 1999. Competition with equity markets, coupled with a low interest rate environment, created minimal opportunities for deposit growth. Stockholders' equity totaled $1.36 billion at September 30, 1999 and $1.46 billion at December 31, 1998. Decreases to stockholders' equity included a $207.7 million increase in the unrealized loss on securities, net of taxes, primarily due to increases in interest rates during the nine months ended September 30, 1999, which adversely affected the market values of our available-for-sale securities. Additional decreases in stockholders' equity were the result of repurchases of our common stock of $66.7 million and dividends declared of $42.8 million. These decreases were partially offset by $176.1 million of net income, the effect of options exercised and related tax benefit of $26.5 million and the amortization for the allocated portion of shares held by the ESOPs and the related tax benefit on the earned portion of the shares held by the RRP of $11.0 million. We believe that we have been successful in achieving our strategy of growth through deployment of our excess capital and are now focused on maintaining our current capital ratio levels, which are currently at "well capitalized" amounts. As such, we have de-emphasized further growth during the 1999 second and third quarters. We expect to continue to emphasize the origination of one-to-four family mortgage loans in an effort to utilize funds from anticipated mortgage loan and mortgage-backed security repayments. In addition, we have begun to sell, in the secondary market, our 15-year fixed-rate mortgage loan production, but will continue to retain, in our portfolio, our adjustable-rate mortgage loan production. By doing so, we intend to shift our asset mix towards adjustable rate mortgage loans in response to the current rising interest rate environment. 20 22 RESULTS OF OPERATIONS GENERAL Net income increased $42.0 million, or 169.3%, to $66.9 million, or diluted earnings per common share of $1.25 for the third quarter of 1999, from $24.9 million, or diluted earnings per common share of $0.44, for the comparable period in 1998. The return on average assets increased to 1.16% for the third quarter of 1999, from 0.53% for the third quarter of 1998. The return on average equity increased to 20.27% for the 1999 third quarter, from 6.49% for the 1998 third quarter. The return on average tangible equity increased to 24.59% for the quarter ended September 30, 1999, from 7.79% for the comparable 1998 period. For the nine months ended September 30, 1999, net income increased $75.5 million, or 75.1%, to $176.1 million, or diluted earnings per common share of $3.24, from $100.6 million, or diluted earnings per common share of $1.82 for the nine months ended September 30, 1998. The return on average assets increased to 1.03% for the nine months ended September 30, 1999, from 0.75% for the nine months ended September 30, 1998. The return on average equity increased to 16.83% for the nine months ended September 30, 1999, from 8.93% for the comparable 1998 period. The return on average tangible equity increased to 20.28% for the nine months ended September 30, 1999, from 10.80% for the nine months ended September 30, 1998. Net income for the quarter ended September 30, 1999, excluding the net gain on disposition of banking and loan production offices, net of taxes, of $11.9 million, or $0.23 diluted earnings per common share, was $55.0 million, or $1.02 diluted earnings per common share. Excluding such gain, for the third quarter of 1999, the return on average assets was 0.96%, the return on average equity was 16.66% and the return on average tangible equity was 20.22%. For the nine months ended September 30, 1999, net income, excluding the net gain on disposition of banking and loan production offices, net of taxes, of $11.1 million, or $0.21 diluted earnings per common share, was $165.0 million, or diluted earnings per common share of $3.03. Excluding such gain, for the nine months ended September 30, 1999, the return on average assets was 0.97%, the return on average equity was 15.76% and the return on average tangible equity was 19.00%. NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves. Over the past two years, interest rates have declined significantly, and various financial instrument markets have become increasingly volatile. In addition, the decline in interest rates on long-term instruments has generally been greater than the decline in interest rates on short-term instruments, accentuating the flatness of the U.S. Treasury yield curve. During the nine months ended September 1999, however, interest rates in general have increased from the fourth quarter of 1998, and the increase in interest rates on long-term instruments has been greater than the increase in interest rates on short-term instruments, resulting in a steepening of the U.S. Treasury yield curve. Despite this change in the U.S. Treasury yield curve, we have continued to experience compression on our net interest spread and net interest margin for both the third quarter and the nine months ended September 30, 1999 versus the comparable 1998 periods. This compression was a result of the growth of interest-earning assets and interest-bearing liabilities during the 1998 lower interest rate environment. Net interest income increased $20.9 million, or 18.7%, to $133.2 million for the three months ended September 30, 1999, from $112.3 million for the three months ended September 30, 1998. The increase in total average interest-earning assets of $4.48 billion was offset by an increase in total average interest-bearing liabilities of $4.46 billion. Our net interest rate spread decreased to 2.08% for the third quarter of 1999, from 2.13% for the third quarter of 1998. This decrease in net interest rate spread was the result of the average yield on total interest-earning assets decreasing to 6.78% for the third of 1999, from 7.02% for the third quarter of 1998, partially offset by the average cost of interest-bearing liabilities decreasing to 4.70% for the third quarter of 1999, from 4.89% for the third quarter of 1998. Our net interest margin decreased to 2.39% for the third quarter of 1999 as compared to 2.52% for the third quarter of 1998. For the nine months ended September 30, 1999, net interest income increased $72.6 million, or 21.8%, to 21 23 $405.8 million, from $333.2 million for the nine months ended September 30, 1998. This change was a result of an increase in total average interest-earning assets of $4.92 billion, offset by an increase in total average interest-bearing liabilities of $4.90 billion. This increase in average net interest-earning assets was partially offset by a decrease in the net interest rate spread to 2.17% for the nine months ended September 30, 1999, from 2.21% for the nine months ended September 30, 1998. The change in the net interest rate spread resulted from a decrease in the average yield on total interest-earning assets to 6.80% for the nine months ended September 30, 1999, from 7.08% for the nine months ended September 30, 1998, partially offset by a decrease in the average cost of interest-bearing liabilities to 4.63% for the nine months ended September 30, 1999, from 4.87% for the comparable 1998 period. The net interest margin was 2.47% for the nine months ended September 30, 1999 and 2.62% for the same period in 1998. ANALYSIS OF NET INTEREST INCOME The following table sets forth certain information for the three and nine months ended September 30, 1999 and 1998. Yields are derived by dividing income by the average balance of the related assets and costs are derived by dividing expense by the average balance of the related liabilities, for the periods shown, except where otherwise noted. Average balances are derived from average daily balances. The average balance of loans receivable includes loans on which we have discontinued accruing interest. The yields and costs include fees, premiums and discounts which are considered adjustments to interest rates. 22 24
Quarter Ended September 30, --------------------------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost - ---------------------- ------- -------- ---- ------- -------- ---- ASSETS: (Annualized) (Annualized) Interest-earning assets: Mortgage loans $ 9,723,462 $ 172,208 7.08% $ 8,457,351 $ 155,824 7.37% Consumer and other loans 192,741 4,726 9.81 264,112 6,192 9.38 Mortgage-backed securities (1) 10,434,731 167,422 6.42 6,903,916 113,025 6.55 Other securities (1) 1,809,690 31,854 7.04 1,939,627 34,080 7.03 Federal funds sold and repurchase agreements 171,470 2,237 5.22 280,137 3,921 5.60 ----------- ----------- ----------- ----------- ---- Total interest-earning assets 22,332,094 378,447 6.78 17,845,143 313,042 7.02 ----------- ----------- Non-interest-earning assets 656,870 834,563 ----------- ----------- Total assets $22,988,964 $18,679,706 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Savings $ 2,688,840 $ 13,718 2.04% $ 2,888,979 $ 18,762 2.60% Certificates of deposit 4,883,535 64,517 5.28 5,204,569 71,503 5.50 NOW 117,747 294 1.00 124,974 455 1.46 Money market 1,096,111 11,979 4.37 758,915 8,590 4.53 Money manager 395,928 988 1.00 356,720 1,220 1.37 ----------- ----------- ----------- ----------- Total deposits 9,182,161 91,496 3.99 9,334,157 100,530 4.31 Borrowed funds 11,684,305 153,714 5.26 7,072,755 100,242 5.67 ----------- ----------- ----------- ----------- Total interest-bearing liabilities 20,866,466 245,210 4.70 16,406,912 200,772 4.89 ----------- ----------- Non-interest-bearing liabilities 801,327 739,693 ----------- ----------- Total liabilities 21,667,793 17,146,605 Stockholders' equity 1,321,171 1,533,101 ----------- ---------- Total liabilities and stockholders' equity $22,988,964 $18,679,706 =========== =========== Net interest income/net interest rate spread $ 133,237 2.08% $ 112,270 2.13% =========== ==== ========== ==== Net interest-earning assets/net interest margin $ 1,465,628 2.39% $ 1,438,231 2.52% =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.09x ==== ====
- ----------------------- (1) Securities available-for-sale are reported at average amortized cost. 23 25 Nine Months Ended September 30, ------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost - ---------------------------------------------------------------------------------------------------------------------------------- (Annualized) (Annualized) ASSETS: Interest-earning assets: Mortgage loans $ 9,374,928 $ 502,014 7.14% $ 8,224,446 $ 457,959 7.42% Consumer and other loans 207,328 14,797 9.52 265,346 18,596 9.34 Mortgage-backed securities (1) 10,333,972 497,287 6.42 6,339,109 314,356 6.61 Other securities (1) 1,841,231 96,871 7.01 1,893,548 99,965 7.04 Federal funds sold and repurchase agreements 150,831 5,586 4.94 263,336 11,134 5.64 ----------- ----------- ------------ ----------- Total interest-earning assets 21,908,290 1,116,555 6.80 16,985,785 902,010 7.08 ----------- ----------- Non-interest-earning assets 790,341 885,117 ----------- ------------ Total assets $22,698,631 $ 17,870,902 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Savings $ 2,726,939 $ 41,085 2.01% $ 2,912,184 $ 56,903 2.61% Certificates of deposit 4,964,526 194,136 5.21 5,369,395 220,610 5.48 NOW 128,246 951 0.99 126,045 1,391 1.47 Money market 1,004,608 32,071 4.26 697,393 23,501 4.49 Money manager 386,159 2,860 0.99 352,841 3,729 1.41 ----------- ----------- ------------ ----------- Total deposits 9,210,478 271,103 3.92 9,457,858 306,134 4.32 Borrowed funds 11,270,505 439,630 5.20 6,119,113 262,717 5.72 ----------- ----------- ------------ ----------- Total interest-bearing liabilities 20,480,983 710,733 4.63 15,576,971 568,851 4.87 ----------- ----------- Non-interest-bearing liabilities 822,089 792,432 ----------- ------------- Total liabilities 21,303,072 16,369,403 Stockholders' equity 1,395,559 1,501,499 ----------- ------------- Total liabilities and stockholders' equity $22,698,631 $17,870,902 =========== =========== Net interest income/net interest rate spread $ 405,822 2.17% $ 333,159 2.21% =========== ==== =========== ==== Net interest-earning assets/net interest margin $ 1,427,307 2.47% $ 1,408,814 2.62% =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.09x ==== ====
(1) Securities available-for-sale are reported at average amortized cost. 24 26 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (1) changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Quarter Ended September 30, 1999 Nine Months Ended September 30, 1999 Compared to Compared to Quarter Ended September 30, 1998 Nine Months Ended September 30, 1998 -------------------------------- ------------------------------------ (In Thousands) Increase (Decrease) Increase (Decrease) - ----------------------------------------------------------------------------------------------------------------- Volume Rate Net Volume Rate Net --------- --------- --------- --------- --------- --------- Interest-earning assets: Mortgage loans .................. $ 22,685 $ (6,301) $ 16,384 $ 61,899 $ (17,844) $ 44,055 Consumer and other loans ........ (1,739) 273 (1,466) (4,149) 350 (3,799) Mortgage-backed securities ...... 56,685 (2,288) 54,397 192,229 (9,298) 182,931 Other securities ................ (2,274) 48 (2,226) (2,681) (413) (3,094) Federal funds sold and repurchase agreements ................... (1,433) (251) (1,684) (4,299) (1,249) (5,548) --------- --------- --------- --------- --------- --------- Total .............................. 73,924 (8,519) 65,405 242,999 (28,454) 214,545 --------- --------- --------- --------- --------- --------- Interest-bearing liabilities: Savings ......................... (1,228) (3,816) (5,044) (3,428) (12,390) (15,818) Certificates of deposit ......... (4,237) (2,749) (6,986) (16,012) (10,462) (26,474) NOW ............................. (25) (136) (161) 23 (463) (440) Money market .................... 3,702 (313) 3,389 9,833 (1,263) 8,570 Money manager ................... 124 (356) (232) 326 (1,195) (869) Borrowed funds .................. 61,186 (7,714) 53,472 202,748 (25,835) 176,913 --------- --------- --------- --------- --------- --------- Total .............................. 59,522 (15,084) 44,438 193,490 (51,608) 141,882 --------- --------- --------- --------- --------- --------- Net change in net interest income .......................... $ 14,402 $ 6,565 $ 20,967 $ 49,509 $ 23,154 $ 72,663 ========= ========= ========= ========= ========= =========
INTEREST INCOME Interest income for the three months ended September 30, 1999 increased $65.4 million, or 20.9%, to $378.4 million, from $313.0 million for the three months ended September 30, 1998. This increase was the result of a $4.48 billion increase in average interest-earning assets to $22.33 billion for the three months ended September 30, 1999, from $17.85 billion for the comparable period in 1998. This increase was partially offset by a decrease in the average yield of interest-earning assets to 6.78% for the third quarter of 1999, from 7.02% for the third quarter of 1998. The increase in average interest-earning assets, for both the three and nine month periods, was primarily due to increases in mortgage loans and mortgage-backed securities resulting from our strategy of deploying excess capital through growth. Interest income on mortgage loans increased $16.4 million to $172.2 million for the third quarter of 1999, from $155.8 million for the third quarter of 1998, which was the result of an increase in the average balance of $1.27 billion, partially offset by a decrease in the average yield on mortgage loans to 7.08% for the third quarter of 1999, from 7.37% for the third quarter of 1998. The increase in the average balance of mortgage loans reflects our continued emphasis on originations of primarily one-to-four family residential mortgage loans. The decrease in the average yield was due to the continued decline in market interest rates during the later half of 1998, coupled with the accelerated prepayments and refinancing activity during 1998, which continued through the first quarter of 1999. Although rising interest rates during the first nine months of 1999 have caused a deceleration of this prepayment 25 27 and refinancing activity, the overall levels of interest rates did not surpass prior year levels until late in the second quarter of 1999. Additionally, the rising interest rate environment has created a shift in consumer demand from fixed rate products to adjustable rate products. As such, the impact of these rising rates has not yet been reflected in the overall average yield on our mortgage loan portfolio. Interest income on consumer and other loans decreased $1.5 million resulting from a decrease in the average balance of $71.4 million, partially offset by an increase in the yield to 9.81% for the third quarter of 1999, from 9.38% for the third quarter of 1998. Interest income on mortgage-backed securities increased $54.4 million to $167.4 million for the third quarter of 1999, from $113.0 million for the third quarter of 1998. This increase was the result of a $3.53 billion increase in the average balance of this portfolio, partially offset by a decrease in the average yield to 6.42% for the third quarter of 1999, from 6.55% for the third quarter of 1998. The decrease in the average yield of our mortgage-backed securities portfolio is reflective of the changes in the interest rate environment discussed above. Interest income on other securities decreased $2.2 million to $31.9 million for the quarter ended September 30, 1999, from $34.1 million for the quarter ended September 30, 1998. This was the result of a decrease in the average balance of this portfolio of $129.9 million, slightly offset by an increase in the average yield to 7.04% for the third quarter of 1999, from 7.03% for the third quarter of 1998. Interest income on federal funds sold and repurchase agreements decreased $1.7 million as a result of a decrease in the average balance of $108.7 million and a decrease in the average yield to 5.22% for the third quarter of 1999, from 5.60% for the comparable 1998 period. For the nine months ended September 30, 1999, interest income increased $214.5 million, or 23.8%, to $1.12 billion, from $902.0 million for the nine months ended September 30,1998. This increase was the result of a $4.92 billion increase in average interest-earning assets to $21.91 billion for the nine months ended September 30, 1999, from $16.99 billion for the comparable period in 1998. This increase was partially offset by a decrease in the average yield on interest-earning assets to 6.80% for the nine months ended September 30, 1999, from 7.08% for the nine months ended September 30, 1998. Interest income on mortgage loans increased $44.0 million to $502.0 million for the nine months ended September 30, 1999, from $458.0 million for the nine months ended September 30, 1998, which was the result of an increase in the average balance of $1.15 billion, partially offset by a decrease in the average yield on mortgage loans to 7.14% for the nine months ended September 30, 1999, from 7.42% for the comparable period in 1998. Interest income on other loans decreased $3.8 million resulting from a decrease in the average balance of $58.0 million, partially offset by an increase in the average yield to 9.52% for the nine months ended September 30, 1999, from 9.34% for the nine months ended September 30, 1998. Interest income on mortgage-backed securities increased $182.9 million to $497.3 million for the nine months ended September 30, 1999, from $314.4 million for the nine months ended September 30, 1998. This increase was the result of a $3.99 billion increase in the average balance of the portfolio, partially offset by a decrease in the average yield to 6.42% for the nine months ended September 30, 1999, from 6.61% for the nine months ended September 30, 1998. Interest income on other securities decreased $3.1 million to $96.9 million for the nine months ended September 30, 1999, from $100.0 million for the nine months ended September 30, 1998, resulting from a decrease in the average balance of $52.3 million and a decrease in the average yield to 7.01% for the nine months ended September 30, 1999, from 7.04% for the comparable period in 1998. Interest income on federal funds sold and repurchase agreements decreased $5.5 million as a result of a decrease in the average balance of $112.5 million and a decrease in the average yield to 4.94% for the nine months ended September 30, 1999, from 5.64% for the nine months ended September 30, 1998. The changes in the average balances and average yields on interest-earning assets for the nine months ended September 30, 1999 were consistent with the changes for the three months ended September 30, 1999. INTEREST EXPENSE Interest expense for the three months ended September 30, 1999 increased $44.4 million, to $245.2 million, from $200.8 million for the three months ended September 30, 1998. This increase was attributable to an increase in the average balance of interest-bearing liabilities of $4.46 billion, to $20.87 billion for the quarter ended September 30, 1999, from $16.41 billion for the quarter ended September 30, 1998, partially offset by a decrease in the average cost of such liabilities to 4.70% for the third quarter of 1999 from 4.89% for the third quarter of 1998. The increase in average interest-bearing liabilities was primarily attributable to an increase in the average 26 28 balance of borrowings of $4.61 billion, discussed below. The decline in the overall average costs of our interest-bearing liabilities reflects the lower interest rate environment that has prevailed in the first half of 1999 versus the comparable 1998 period. Although interest rate levels continued to increase during the third quarter of 1999, we were able to maintain the lower average costs by maintaining stable volume levels of borrowings during the rising interest rate environment. Interest expense on borrowed funds increased $53.5 million, to $153.7 million for the three months ended September 30, 1999, from $100.2 million for the three months ended September 30, 1998. This increase was attributable to an increase in the average balance of borrowings of $4.61 billion, partially offset by a decrease in the average cost of borrowings to 5.26% for the third quarter of 1999, from 5.67% for the third quarter of 1998. The significant growth we experienced during the second half of 1998 and first quarter of 1999 was funded primarily through cost effective medium-term borrowings. Interest expense on deposits decreased $9.0 million to $91.5 million for the three months ended September 30, 1999, from $100.5 million for the three months ended September 30, 1998, reflecting a decrease in the average cost of interest-bearing deposits to 3.99% for the third quarter of 1999 from 4.31% for the same period in 1998 coupled with a decrease in the average balance of total interest-bearing deposits of $152.0 million. Interest expense on savings accounts decreased $5.0 million as a result of a decrease in the average cost to 2.04% for the third quarter of 1999, from 2.60% for the same period in 1998 and a decrease in the average balance of $200.1 million. The decrease in average cost of savings accounts was a result of us lowering the rates paid on these accounts during the fourth quarter of 1998. Interest expense on certificates of deposit decreased $7.0 million from the combined effect of a decrease in the average balance of $321.0 million and a decrease in the average cost to 5.28% for the third quarter of 1999, from 5.50% for the third quarter of 1998, primarily due to the lower interest rate environment. Interest expense on money market accounts increased $3.4 million to $12.0 million for the third quarter of 1999, from $8.6 million for the third quarter of 1998, as a result of an increase in the average balance of $337.2 million, offset by a decrease in the average cost to 4.37% for the third quarter of 1999, from 4.53% for the same period in 1998. Interest paid on money market accounts is on a tiered basis with 86.01% of the balance in the highest tier (accounts with balances of $50,000 and higher). The yield on the top tier is by policy at least equal to the discount rate for the three-month U.S. Treasury bill. As previously mentioned, despite the increase in rates during the nine months ended September 30, 1999, the actual levels of interest rates did not surpass those of the prior year until late in the second quarter of 1999. Interest expense on NOW and money manager accounts decreased $393,000, because we lowered the rates paid on these accounts during the third quarter of 1998. Interest expense for the nine months ended September 30,1999 increased $141.8 million, to $710.7 million, from $568.9 million for the nine months ended September 30,1998. This increase was the result of a $4.90 billion increase in average interest-bearing liabilities to $20.48 billion for the nine months ended September 30, 1999, from $15.58 billion for the comparable period in 1998, partially offset by a decrease in the average cost of these liabilities to 4.63% for the nine months ended September 30, 1999, from 4.87% for the nine months ended September 30, 1998. Interest expense on borrowed funds for the nine months ended September 30, 1999 increased $176.9 million, to $439.6 million, from $262.7 million for the nine months ended September 30, 1998, resulting from an increase in the average balance of borrowings of $5.15 billion, partially offset by a decrease in the average cost of borrowings to 5.20% for the nine months ended September 30, 1999, from 5.72% for the comparable 1998 period. Interest expense on deposits decreased $35.0 million, to $271.1 million for the nine months ended September 30, 1999, from $306.1 million for the nine months ended September 30, 1998, reflecting a decrease in the average balance of total interest-bearing deposits of $247.4 million, coupled with a decrease in the average cost of interest bearing-deposits to 3.92% for the nine months ended September 30, 1999, from 4.32% for the same period in 1998. Interest expense on savings accounts decreased $15.8 million which was attributable to a decrease in the average balance of $185.2 million and a decrease in the average cost to 2.01% for the nine months ended September 30, 1999, from 2.61% for the nine months ended September 30, 1998. Interest expense on certificates of deposit decreased $26.5 million resulting from a decrease in the average balance of $404.9 million and a decrease in the average cost to 5.21% for the nine months ended September 30, 1999, from 5.48% for the nine months ended September 30, 1998. Interest expense on money market accounts increased $8.6 million reflecting an increase in the average balance of $307.2 million, offset by a decrease in the average cost to 4.26% for the nine months ended September 30, 1999, from 4.49% for the 1998 comparable period. Interest expense on NOW and money manager 27 29 accounts decreased $1.3 million, because we lowered the rates paid on these accounts during the third quarter of 1998, as mentioned above. PROVISION FOR LOAN LOSSES Provision for loan losses decreased to $1.0 million for the third quarter of 1999, from $5.2 million for the third quarter of 1998. The third quarter 1998 provision for loan losses reflects a $4.0 million charge due to increased delinquencies experienced in the consumer loan portfolio. For the nine months ended September 30, 1999, provision for loan losses decreased to $3.1 million, from $8.8 million for the 1998 comparable period. The allowance for loan losses decreased slightly to $74.3 million at September 30, 1999, from $74.4 million at December 31, 1998. Net loan charge-offs totaled $2.1 million for the quarter ended September 30, 1999 and $3.2 million for the nine months ended September 30, 1999. Non-performing loans decreased $53.6 million to $57.5 million at September 30, 1999, from $111.1 million at December 31, 1998. This reduction in non-performing loans improved the percentage of allowance for loan losses to non-performing loans from 66.99% at December 31, 1998 to 129.21% at September 30, 1999. The allowance for loan losses as a percentage of total loans decreased from 0.83% at December 31, 1998 to 0.74% at September 30, 1999 primarily due to the increase of $996.6 million in gross loans receivable from December 31, 1998 to September 30, 1999. The decline in the provision and in the allowance for loan losses generally reflects the decline in non-performing loans. For further discussion of non-performing loans and allowance for loan losses, see "Asset Quality." NON-INTEREST INCOME Non-interest income for the quarter ended September 30, 1999 increased to $36.8 million from $8.3 million for the quarter ended September 30, 1998. Excluding gains on sales of securities and the net gain on disposition of banking and loan production offices, non-interest income for the third quarter of 1999 increased $12.2 million to $16.3 million from $4.1 million for the third quarter of 1998. Non-interest income totaled $69.9 million for the nine months ended September 30, 1999 and $48.1 million for the nine months ended September 30, 1998. Excluding gains on sales of securities and the net gain on disposition of banking and loan production offices, non-interest income increased $17.0 million, or 51.8%, to $49.9 million for the nine months ended September 30, 1999 from $32.9 million for the comparable 1998 period. Customer service and other loan fees totaled $10.4 million for the three months ended September 30, 1999 and $29.3 million for the nine months ended September 30, 1999, compared to $9.1 million for the three months ended September 30, 1998 and $25.0 million for the nine months ended September 30, 1998. This increase is due in part to our changes in customer service fees in 1998 and the overall growth in the loan portfolio. Loan servicing fees totaled $2.8 million for the three months ended September 30, 1999 and $12.1 million for the nine months ended September 30, 1999 compared to loan servicing costs of $5.8 million for the quarter ended September 30, 1998 and $2.1 million for the nine months ended September 30, 1998. Loan servicing fees include all contractual and ancillary servicing revenue we receive net of amortization of mortgage servicing rights and valuation allowance adjustments for the impairment of mortgage servicing rights. The increase in loan servicing fees was the result of a decrease in amortization of servicing rights coupled with changes in the market valuation of servicing rights. We recorded a $1.9 million decrease in the amortization of mortgage servicing rights for the three months ended September 30, 1999 and a $4.4 million decrease for the nine months ended September 30, 1999, compared to the same periods in 1998. In addition, as a result of a change in prepayment speeds in 1999, we recognized a recovery of portions of the valuation allowance for mortgage servicing rights of $2.5 million for the nine months ended September 30, 1999. In contrast, for the quarter ended September 30, 1998, we recorded a $7.4 million provision for impairment on our mortgage servicing rights due to increased mortgage refinance activity and accelerating prepayment speeds. Net gains on sales of loans totaled $209,000 for the three months ended September 30, 1999 and $3.3 million for the nine months ended September 30, 1999, compared to an $844,000 net loss on sales of loans for the 1998 third quarter and a $1.4 million net gain for the nine months ended September 30, 1998. Other non-interest income totaled $790,000 for the three months ended September 30, 1999 and $2.5 million for the nine months ended September 30, 1999, compared to $1.7 million for the quarter ended September 30, 1998 and $6.9 million for the nine months ended September 30, 1998. The decreases are primarily due to a $1.6 million gain on the settlement of a real estate dispute recorded in the second quarter of 1998 and $470,000 of rental income for the nine months 28 30 ended September 30, 1998 recognized from a sublease from our former mortgage headquarters which expired in January 1999. Net gain on sales of securities totaled $4.1 million for the third quarter of 1998. There were no security sales during the third quarter of 1999. For the nine months ended September 30, 1999, net gain on sales of securities totaled $714,000 compared to $15.3 million for the comparable 1998 period. The sales activity in 1998 was concentrated on the sale of mortgage-backed securities created from the securitizations of mortgage loans. During the nine months ended September 30, 1999, however, with the exception of thirty-year fixed-rate loans, and, more recently, fifteen year fixed-rate loans, our loan originations were added to our portfolio, rather than being securitized and sold. During the nine months ended September 30, 1999, we recognized a loss of $1.2 million on various transactions relating to the LPOs previously acquired from LIB. During the quarter ended September 30, 1999, we recognized a $20.4 million gain on the sale of our five upstate New York banking offices. See further discussion under "Mergers and Acquisitions - 1999 Cost Savings Initiatives." NON-INTEREST EXPENSE Non-interest expense decreased $17.7 million, or 24.6%, to $54.0 million for the third quarter of 1999 compared to $71.7 million for the third quarter of 1998. For the nine months ended September 30, 1999, non-interest expense decreased $30.1 million, to $168.9 million, from $199.0 million for the nine months ended September 30, 1998. During the third quarter of 1998, included in other general and administrative expense, were $9.1 million of various accruals for expenses incurred and for differences between the general ledger and various subsidiary ledgers relating to the LIB Acquisition. The remaining reduction was primarily the result of the consolidation of LIB's operations into ours which resulted in significant cost savings. General and administrative expense decreased $19.0 million to $48.0 million for the third quarter of 1999, from $67.0 million for the third quarter of 1998. For the nine months ended September 30, 1999, general and administrative expense decreased $32.6 million to $150.4 million, from $183.0 million for the comparable 1998 period. Compensation and benefits totaled $22.5 million for the three months ended September 30, 1999, and $70.6 million for the nine months ended September 30, 1999, compared to $26.6 million for the three months ended September 30, 1998 and $78.2 million for the nine months ended September 30, 1998. Employee stock plans amortization expense totaled $2.2 million for the three months ended September 30, 1999 and $8.1 million for the nine months ended September 30, 1999, compared to $4.0 million for the three months ended September 30, 1998 and $14.6 million for the nine months ended September 30,1998. The decrease in employee stock plans amortization expense includes a decrease relating to the allocation of ESOP stock due to a lower average market value of our common stock from $46.51 per share for the three months ended September 30, 1998 and $52.60 per share for the nine months ended September 30, 1998, to $35.85 per share for the three months ended September 30, 1999 and $43.38 per share for the nine months ended September 30, 1999. In addition, our vesting period for the majority of shares granted under the RRP was completed in January 1999. The amortization period for these grants was primarily completed in fiscal 1998, resulting in a decrease in amortization expense to $36,000 for the third quarter of 1999, compared to $914,000 for the third quarter of 1998. The amortization expense for the nine month period ended September 30, 1999 decreased to $109,000, compared to $3.8 million for the respective 1998 period. Occupancy, equipment and systems expense totaled $13.2 million for the quarter ended September 30, 1999 and $40.4 million for the nine months ended September 30, 1999, as compared to $14.5 million for the quarter ended September 30, 1998 and $43.1 million for the nine months ended September 30, 1998. Advertising expense increased $824,000 for the quarter ended September 30, 1999 and $1.8 million for the nine months ended September 30, 1999 from the comparable 1998 periods. Other expenses decreased $12.1 million for the quarter ended September 30, 1999 and $16.7 million for the nine months ended September 30, 1999 as compared to the same periods in 1998. This decrease is primarily a result of $9.1 million of various accruals for expenses incurred and for differences between the general ledger and various subsidiary ledgers relating to the LIB Acquisition, as previously mentioned. Goodwill litigation expense increased to $1.1 million for the third quarter of 1999 compared to $421,000 for the third quarter of 1998 and increased to $4.0 million for the nine months ended September 30, 1999 compared to $1.1 million for the nine months ended September 30, 1998. For further discussion on the goodwill litigation proceedings, see "Part II - Other Information, Item 1 - Legal Proceedings." Our percentage of general and administrative expense to average assets improved to 0.84% for the three months ended September 30, 1999 and 0.88% for the nine months ended September 30, 1999, from 1.43% for the three months ended September 29 31 30, 1998 and 1.37% for the nine months ended September 30, 1998. The efficiency ratios also improved to 32.09% for the three months ended September 30, 1999 and 33.02% for the nine months ended September 30, 1999, from 57.53% for the three months ended September 30, 1998 and 50.01% for the nine months ended September 30, 1998. INCOME TAX EXPENSE Income tax expense increased $29.2 million to $48.0 million for the third quarter of 1999, representing an effective tax rate of 41.8%, from $18.8 million for the third quarter of 1998, representing an effective tax rate of 43.1%, primarily due to an increase in income before taxes of $71.3 million. Income tax expense increased $54.6 million to $127.5 million for the nine months ended September 30, 1999, from $72.9 million, for the comparable 1998 period, primarily due to an increase in income before taxes of $130.1 million. The effective tax rate for the nine months ended September 30, 1999 and 1998 remained constant at 42.0%. CASH EARNINGS Tangible stockholders' equity (stockholders' equity less goodwill) totaled $1.13 billion at September 30, 1999 and $1.22 billion at December 31, 1998. Tangible equity is a critical measure of a company's ability to repurchase shares, pay dividends and continue to grow. Astoria Federal is subject to various capital requirements which affect its classification for safety and soundness purposes, as well as for deposit insurance purposes. These requirements utilize tangible equity as a base component, not equity as defined by GAAP. Although reported earnings and return on equity are traditional measures of a company's performance, we believe that the change in tangible equity, or "cash earnings," is also a significant measure of a company's performance. Cash earnings exclude the effects of various non-cash expenses, such as the amortization for the allocation of ESOP and RRP stock and related tax benefit, as well as the amortization of goodwill. In the case of tangible equity, these items have either been previously charged to equity, as in the case of ESOP and RRP charges, through contra-equity accounts, or do not affect tangible equity, such as the market appreciation of allocated ESOP shares, for which the operating charge is offset by a credit to additional paid-in capital, and goodwill amortization for which the related intangible asset has already been deducted in the calculation of tangible equity. We believe that cash earnings and cash returns on average tangible equity reflect our ability to generate tangible capital that can be leveraged for future growth. The following comparisons exclude the net gain on disposition of banking and loan production offices recognized during the quarter and nine months ended September 30, 1999. Operating cash earnings for the third quarter of 1999 totaled $63.1 million, an increase of $24.6 million over $38.5 million operating cash earnings for the third quarter of 1998. For the nine months ended September 30, 1999, operating cash earnings increased $53.4 million to $190.6 million, from $137.2 million for the nine months ended September 30, 1998. Operating cash return on average tangible equity was 23.17% for the third quarter of 1999 and 12.06% for the third quarter of 1998. Operating cash return on average assets was 1.10% for the quarter ended September 30, 1999 and 0.82% for the quarter ended September 30, 1998. Operating cash return on average tangible equity was 21.94% for the nine months ended September 30, 1999 and 14.73% for the nine months ended September 30, 1998. Operating cash return on average assets was 1.12% for the period ended September 30, 1999 and 1.02% for the same period in 1998. Additionally, the cash general and administrative expense (general and administrative expense, excluding non-cash amortization expense relating to certain employee stock plans) to average assets ratio also improved to 0.80% for the three months ended September 30, 1999 as compared to 1.35% for the three months ended September 30, 1998. The operating cash efficiency ratio improved to 30.59% for the third quarter of 1999 from 54.11% for the third quarter of 1998. For the nine months ended September 30, 1999, the cash general and administrative expense to average assets ratio was 0.84% as compared to 1.26% for the comparable 1998 period. The operating cash efficiency ratio was 31.25% for the nine months ended September 30, 1999 versus 46.03% for the nine months ended September 30, 1998. 30 32 Presented below are our Condensed Consolidated Schedules of Operating Cash Earnings for the three and nine months ended September 30, 1999 and 1998. ASTORIA FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED SCHEDULES OF OPERATING CASH EARNINGS (In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net income $ 66,948 $ 24,864 $176,124 $100,589 Less: Net gain on disposition of banking and loan production offices, net of tax 11,909 -- 11,140 -- -------- -------- -------- -------- Operating income 55,039 24,864 164,984 100,589 Add back: Employee stock plans amortization expense 2,234 3,983 8,075 14,559 Amortization of goodwill 4,843 4,962 14,592 14,809 Income tax benefit on amortization expense of earned portion of RRP stock 968 4,698 2,903 7,264 -------- -------- -------- -------- Operating cash earnings 63,084 38,507 190,554 137,221 Preferred dividends declared 1,500 1,500 4,500 4,500 -------- -------- -------- -------- Operating cash earnings available to common shareholders $ 61,584 $ 37,007 $186,054 $132,721 ======== ======== ======== ======== Basic operating cash earnings per common share(1) $ 1.20 $ 0.73 $ 3.60 $ 2.62 ======== ======== ======== ======== Diluted operating cash earnings per common share (1) $ 1.18 $ 0.70 $ 3.51 $ 2.51 ======== ======== ======== ========
(1) Based on the weighted average shares used to calculate earnings per share on the Consolidated Statements of Income. ASSET QUALITY One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Through a variety of strategies, including, but not limited to borrower workout arrangements and aggressive marketing of foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to build the strength of our financial condition. Such strategies, as well as our concentration on one-to-four family mortgage lending and maintaining sound credit standards for new loan originations, and in particular a generally strong and stable economy and real estate market, have resulted in a steady reduction in non-performing assets to total assets from December 31, 1994 through September 30, 1999. Non-performing assets decreased from $120.4 million at December 31, 1998 to $64.0 million at September 30, 1999. The ratio of non-performing assets to total assets decreased from 0.58% at December 31, 1998 to 0.28% at September 30, 1999. The decrease in non-performing assets was primarily due to a $53.6 million decrease in non-performing loans from $111.1 million at December 31, 1998 to $57.5 million at September 30, 1999. Following the LIB Acquisition, we conformed LIB's collection policies and procedures to those of ours. These efforts, aided by a stable economy, resulted in this significant decrease in non-performing loans, particularly during the second and third quarters of 1999. The decrease in investments in real estate is a result of the sale of the property which comprised this balance at December 31, 1998. The following table shows a comparison of delinquent loans as of September 30, 1999 and December 31, 1998. 31 33
DELINQUENT LOANS ----------------------------------------------------------------------------------------------- AT SEPTEMBER 30, 1999 AT DECEMBER 31, 1998 ---------------------------------------------- --------------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE -------------------- ---------------------- --------------------- --------------------- NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE OF BALANCE OF BALANCE (Dollars in Thousands) LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS -------- -------- -------- -------- -------- -------- -------- -------- One-to-four family ....... 46 $ 2,419 424 $ 53,095 77 $ 2,422 804 $ 94,078 Multi-family ............. 2 374 5 630 1 203 14 2,224 Commercial real estate ... 1 326 6 2,008 2 221 23 8,776 Consumer and other loans . 168 3,278 176 1,795 246 2,058 279 5,995 -------- -------- -------- -------- -------- -------- -------- -------- Total delinquent loans ... 217 $ 6,397 611 $ 57,528 326 $ 4,904 1,120 $111,073 ======== ======== ======== ======== ======== ======== ======== ======== Delinquent loans to total loans ............. 0.06 % 0.58% 0.05% 1.23%
The following table sets forth information regarding non-performing assets at September 30, 1999 and December 31, 1998. In addition to the non-performing loans, we had approximately $6.4 million of potential problem loans at September 30, 1999 and $4.9 million at December 31, 1998. Such loans are 60-89 days delinquent as shown above. NON-PERFORMING ASSETS
AT AT SEPTEMBER 30, DECEMBER 31, 1999 (1) 1998 (1) -------- -------- (DOLLARS IN THOUSANDS) Non-accrual delinquent mortgage loans (2) ..... $ 52,856 $100,302 Non-accrual delinquent consumer and other loans 1,795 5,995 Mortgage loans delinquent 90 days or more (3) . 2,877 4,776 -------- -------- Total non-performing loans ............... 57,528 111,073 -------- -------- Real estate owned, net (4) .................... 6,495 6,071 Investments in real estate, net (5) ........... -- 3,266 -------- -------- Total real estate owned and investments in real estate, net ........................ 6,495 9,337 -------- -------- Total non-performing assets (6) .......... $ 64,023 $120,410 ======== ======== Allowance for loan losses to non-performing loans 129.21% 66.99% Allowance for loan losses to total loans ......... 0.74% 0.83%
(1) If all non-accrual loans had been performing in accordance with their original terms, we would have recorded interest income of $3.2 million for the nine months ended September 30, 1999 and $6.8 million for the year ended December 31, 1998. Actual payments recorded to interest income totaled $1.4 million for the nine months ended September 30, 1999 and $1.6 million for the year ended December 31, 1998. (2) Consists primarily of loans secured by one-to-four family properties. (3) Loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest payments, and are primarily secured by multi-family and commercial properties. (4) Real estate we acquired as a result of foreclosure or by deed-in-lieu of foreclosure is recorded at the lower of cost or fair value less estimated costs to sell. (5) Investments in real estate are recorded at the lower of cost or fair value. (6) Excluded from non-performing assets are $9.9 million and $6.9 million at September 30, 1999 and December 31, 1998, respectively, of restructured loans that have complied with the terms of their restructure agreement for a satisfactory period and have, therefore, been returned to performing status. 32 34 The following table sets forth the 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 ............................................ 3,119 Charge-offs: One-to-four family .................................................. (1,255) Multi-family ........................................................ (12) Commercial .......................................................... (845) Consumer and other .................................................. (3,695) -------- Total charge-offs .......................................................... (5,807) -------- Recoveries: One-to-four family .................................................. 1,102 Multi-family ........................................................ 270 Commercial .......................................................... 53 Consumer and other .................................................. 1,192 -------- Total recoveries ........................................................... 2,617 -------- Total net charge-offs ...................................................... (3,190) -------- Balance at September 30, 1999 ................................................... $ 74,332 ======== Allowance for Losses on Investments in Real Estate and REO: Balance at December 31, 1998 ............................................... $ 689 Provision charged to operations ..................................... 45 Charge-offs ......................................................... (482) Recoveries .......................................................... 68 -------- Balance at September 30, 1999 .............................................. $ 320 ========
The following table sets forth an allocation of the allowance for loan losses by loan category and the percent of loans in each category to total loans receivable. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss reserve is a valuation reserve applied to the entire loan portfolio.
At September 30, 1999 ------------------------------ % of Loans in Category to Amount Total Loans ------- ------ (In Thousands) One-to-four family $42,666 88.49% Multi-family 4,515 5.51 Commercial 10,495 4.17 Consumer and other loans 16,656 1.83 ------- ------ Total allowances $74,332 100.00% ======= ======
33 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a description of our quantitative and qualitative disclosures about market risk, see the information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 24, 1994, our predecessor, LISB, received notice that it had been named as a defendant in a class action lawsuit filed in the United States District Court for the Eastern District of New York. Other defendants included James J. Conway, Jr., former Chairman and Chief Executive Officer of LISB who resigned from LISB in June 1992, his former law firm, certain predecessor firms of that law firm, and certain partners of that law firm. The lawsuit is entitled Ronnie Weil Also Known as Ronnie Moore, for Herself and on Behalf of All Other Persons Who Obtained Mortgage Loans from The Long Island Savings Bank, FSB during the period January 1, 1983 through December 31, 1992 vs. The Long Island Savings Bank, FSB, et al. The complaint alleges that the defendants caused mortgage loan commitments to be issued to mortgage loan borrowers, submitted legal invoices to the borrowers at the closing of mortgage loans which falsely represented the true legal fees charged for representing LISB in connection with the mortgage loans and failed to advise that a part of the listed legal fee would be paid to Mr. Conway, thereby defrauding the borrowers. The complaint does not specify the amount of damages sought. On or about June 9, 1994, the Bank was served with an Amended Summons and Amended Complaint adding LISB's directors as individual defendants. On or about July 29, 1994, LISB and the individual director defendants served on plaintiffs a motion to dismiss the Amended Complaint. On or about August 29, 1994, the plaintiffs served papers in response to the motion. The remaining schedule on the motion was held in abeyance pending certain discovery. On January 4, 1999, we were served with a second amended complaint alleging essentially the same claims and adding as additional defendants, us, as successor to LISB, and certain members of James J. Conway, Jr.'s family. The second amended complaint seeks damages of at least $11.0 million trebled. On or about February 22, 1999, we, on behalf of ourselves and LISB, and the individual directors of LISB filed motions to dismiss the second amended complaint. The Court has not yet rendered a decision on the motion. We believe that the likelihood is remote that this case will have a material adverse impact on our consolidated financial condition and results of operations. On July 18, 1997, a purported class action, or the Federal Action, was commenced in the United States District Court for the Eastern District of New York entitled Leonard Minzer, et ano. v. Gerard C. Keegan, et al. against The Greater, The Greater's directors and certain of its executive officers, and us. The suit alleges, among other things, that The Greater, The Greater's directors and certain of its executive officers solicited proxies in violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9, promulgated thereunder, by failing to disclose certain allegedly material facts in the proxy statement, as amended, that was circulated to The Greater stockholders in connection with The Greater Acquisition, and that The Greater's directors and certain of its executive officers breached their fiduciary duties by entering into The Greater Acquisition and related arrangements. The suit further alleged, without specification, that we participated in the preparation and distribution of The Greater's proxy materials and/or aided and abetted the alleged breaches of fiduciary duty by The Greater defendants. Plaintiffs sought, among other things, a preliminary and permanent injunction against consummation of The Greater Acquisition and the related transactions, an order directing that the directors and executive officers of The Greater carry-out their fiduciary duties, and unspecified damages and costs. On September 2, 1997, plaintiffs filed an amended complaint and an Application for a preliminary injunction, or the Application. An evidentiary hearing on plaintiffs' Application was held on September 10, 1997. On September 22, 1997, the Court issued a written decision denying plaintiffs' Application in all respects. Upon stipulation of the 34 36 parties, all claims against the non-director, executive officers of The Greater, except one, were dismissed. The remaining defendants moved to dismiss the amended complaint. On June 1, 1998 the Court granted defendant's motion to dismiss the amended complaint without prejudice. In July 1998, the plaintiffs filed a second amended complaint, which the defendants moved to dismiss on July 21, 1998. The motion was argued before the Court on October 21, 1998 and after supplemental submissions by the parties, the Court on January 25, 1999 dismissed the second amended complaint in all respects. On or about February 18, 1999, plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit. Briefs were submitted on the appeal and oral argument was held on October 12, 1999. The Court has not yet rendered a decision on the appeal. We believe the allegations made in the second amended complaint in the Federal Action are without merit and intend to aggressively defend the Greater's and our interests with respect to such matters. On August 15, 1989, LISB, and its former wholly owned subsidiary, The Long Island Savings Bank of Centereach, FSB, or Centereach, filed suit against the United States seeking damages and/or other appropriate relief on the grounds, among others, that the government had breached the terms of the 1983 assistance agreement between LISB and the Federal Savings and Loan Insurance Corporation pursuant to which LISB acquired Centereach, or the Assistance Agreement. The Assistance Agreement, among other things, provided for the inclusion of supervisory goodwill as an asset on Centereach's balance sheet to be included in capital and amortized over 40 years for regulatory purposes. The suit is pending before Chief Judge Loren Smith in the United States Court of Federal Claims and is entitled The Long Island Savings Bank, FSB et al. vs. The United States, or the LISB Goodwill Litigation. Similarly, on July 21, 1995, we commenced an action, Astoria Federal Savings and Loan Association vs. United States, or the Astoria Goodwill Litigation, in the United States Court of Federal Claims against the United States seeking in excess of $250.0 million in damages arising from the government's breach of an assistance agreement entered into by our predecessor in interest, Fidelity New York, FSB, in connection with its acquisition in October 1984 of Suburbia Federal Savings and Loan Association, and the government's subsequent enactment and implementation of the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, in 1989. In addition to its breach of contract claim, Astoria Federal's complaint also asserts claims based on promissory estoppel, failure of consideration and frustration of purpose, and a taking of Astoria Federal's property without just compensation in violation of the Fifth Amendment to the United States Constitution. Initially, both the LISB Goodwill Litigation and the Astoria Goodwill Litigation had been stayed pending disposition by the United States Supreme Court of three related supervisory goodwill cases, or the Winstar Cases. On July 1, 1996, the Supreme Court ruled in the Winstar Cases that the government had breached its contracts in the Winstar Cases and was liable in damages for those breaches. On September 18, 1996, Judge Smith issued an Omnibus Case Management Order, or Case Management Order, applicable to all Winstar-related cases. The Case Management Order addresses certain timing and procedural matters with respect to the administration of the Winstar-related cases, including organization of the parties, initial discovery, initial determinations regarding liability, and the resolution of certain common issues. The Case Management Order provides that the parties will attempt to agree upon a Master Litigation Plan, which may be in phases, to govern all further proceedings, including the resolution of common issues (other than common issues covered by the Case Management Order), dispositive motions, trials, discovery schedules, protocols for depositions, document production, expert witnesses, and other matters. On November 1, 1996, LISB filed a motion for partial summary judgment against the government on the issues of whether LISB had a contract with the government and whether the enactment of FIRREA was contrary to the terms of such contract. The government contested such motion and cross-moved for summary judgment seeking to dismiss LISB's contract claims. On November 6, 1996, we also moved for partial summary judgment against the government on the issues of whether Fidelity had a contract with the government and whether the enactment of FIRREA was contrary to the terms of such contract. The government contested such motion and cross-moved for summary judgment seeking to dismiss 35 37 our contract claims. On August 7 and 8, 1997, the United States Court of Federal Claims heard oral arguments on eleven common issues raised by the government in the various partial summary judgment motions filed by the plaintiffs in the goodwill cases. The Court heard argument on these common issues in the context of four specific summary judgment motions, not including the LISB Goodwill Litigation or the Astoria Goodwill Litigation. In an opinion filed December 22, 1997, all such common issues were found in favor of the Plaintiffs and the government was ordered to show cause within sixty days why partial summary judgment should not be entered in all cases which have partial summary judgment motions pending, including the LISB Goodwill Litigation and the Astoria Goodwill Litigation. The government responded in the LISB Goodwill Litigation that if the Court will not consider case specific facts, then it has no defense to LISB's motion for partial summary judgment. The government further indicated that if the Court will consider case specific facts, then it asserts among other things that there are factual issues in dispute concerning the assistance agreement regarding Centereach which render the granting of partial summary judgment inappropriate. LISB's motion for partial summary judgment remains pending before the Court. The Court has not yet ruled on the motion in the LISB Goodwill Litigation. On September 14, 1999, the government moved to dismiss Counts II through V of the complaint in the LISB Goodwill Litigation. These counts are based on breach of implied contract, promissory estoppel, failure of consideration and frustration of purpose, and takings under the Fifth Amendment of the United States Constitution. The defendants also sought to supplement their cross motion for summary judgment. The Court has directed the parties in the "First Thirty Cases," including the LISB Goodwill Litigation, to meet and attempt to agree on open issues under the pending partial summary judgment motions and for plaintiffs in such cases to submit a proposed order listing all pending damage, as opposed to liability, claims. The government will then be given twenty-one days to respond. Those claims identified by the Court as solely damage claims will not be resolved in the current limited summary judgment procedure. The Court stayed all claims based on takings under the Fifth Amendment of the United States Constitution and pending completion of this identification procedure, all responses to damage issues. The government has responded in the Astoria Goodwill Litigation that if the Court will not consider case specific facts, then it has no defense to Astoria Federal's motion for partial summary judgment. The government further indicated that if the Court will consider case specific facts, then it asserts that the relevant portion of the Assistance Agreement with Fidelity did not authorize the use of its capital credit as a permanent addition to regulatory capital. In this response, the government did not raise any issues related to the supervisory goodwill portion of Astoria Federal's motion. Astoria Federal has responded to the government's response indicating in substance that the issue raised by the government was specifically addressed and decided by the United States Supreme Court in the Winstar Cases, that the contractual language in the Fidelity's Assistance Agreement and other operative documents is factually indistinguishable from that ruled upon in the Winstar Cases, and thus, that Astoria Federal's motion for partial summary judgment should be granted. Astoria Federal's response further requests reimbursement of Astoria Federal's attorneys' fees from the government for seeking to relitigate the capital credit issue. By motion dated July 16, 1998, the government moved to stay further proceedings related to Astoria Federal's motion which has been granted through July 31, 1999. Astoria Federal's motion for partial summary judgment remains pending before the Court. Pursuant to the Case Management Order, the LISB Goodwill Litigation has been designated as one of the "First Thirty Cases". As a result of this designation, discovery has been underway for approximately one year and a half. Both sides have exchanged documents and directed interrogatories to each other which have been answered. Our attorneys have taken depositions of key former government regulators who had supervisory authority over LISB. The government has taken depositions of a number of former LISB directors, officers and employees. The Astoria Goodwill Litigation has been designated as one of the "Second Thirty Cases." As a result, discovery in such case commenced on August 23, 1999. On April 9, 1999 and on April 16, 1999, damage decisions were rendered by the United States Court of Federal Claims in the cases of Glendale Federal Bank, FSB v. The United States, Case No. 90-772C and California Federal Bank v. United States of America, Case No. 92-138C, respectively. The former was rendered by Chief Judge Loren A. Smith while the latter decision was rendered by Judge Robert H. Hodges, Jr. Both of these decisions have been appealed. Similarly, on September 30, 1999, Judge Eric G. Bruggink rendered a damage decision in the case of LaSalle 36 38 Talman Bank, F.S.B. v. The United States, Case No. 92-652C. Based upon our review of these decisions, we are unable to predict with any degree of certainty the outcome of our claims against the United States and the amount of damages that may be awarded in connection with either the LISB Goodwill Litigation or the Astoria Goodwill Litigation, if any. No assurance can be given as to the results of these claims or the timing of any proceedings in relation thereto. ITEM 2. NOT APPLICABLE ITEM 3. NOT APPLICABLE ITEM 4. NOT APPLICABLE ITEM 5. NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4. Amendment No. 2 to Rights Agreement dated as of September 15, 1999, between Astoria Financial Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 11. Statement Regarding Computation of Per Share Earnings. 27. Financial Data Schedule. (b) Reports on Form 8-K 1. Form 8-K dated October 20, 1999 which includes our announcement of earnings for the quarter ended September 30, 1999. 2. Form 8-K dated October 25, 1999 which includes our announcement of our sale of $125.0 million of Trust Preferred Securities. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Astoria Financial Corporation Dated: November 12, 1999 By: /s/ Monte N. Redman ----------------- ----------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 37 39 Exhibit Index Exhibit No Identification of Exhibit - ---------- ------------------------- 4. Amendment No. 2 to Rights Agreement dated as of September 15, 1999, between Astoria Financial Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 11. Statement Regarding Computation of Per Share Earnings 27. Financial Data Schedule 38 EX-4 2 AMENDMENT NO. 2 TO RIGHTS AGREEMENT 1 EXHIBIT 4. AMENDMENT NO. 2 TO RIGHTS AGREEMENT BETWEEN ASTORIA FINANCIAL CORPORATION AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS RIGHTS AGENT This Amendment No. 2 to Rights Agreement, dated as of September 15, 1999 (the "Amendment"), is entered into by and between Astoria Financial Corporation, a Delaware corporation, having an office at One Astoria Federal Plaza, Lake Success, New York 11042-1085 (the "Corporation"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company, with an office at 85 Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey 07660 (the "Rights Agent"). WITNESSETH: WHEREAS, the Corporation and the Rights Agent desire to amend certain sections of the Rights Agreement, as and to the extent set forth in this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, the parties hereby agree as follows: Section 1. Definitions. Except to the extent otherwise specified herein, capitalized terms used in this Agreement shall have the meanings ascribed to them in the Rights Agreement. Section 2. Amendments. (a) Section 1(h) of the Rights Agreement is hereby amended by deleting the section in its entirety and renumbering Sections 1(i) through (bb) to be Sections 1(h) through (aa),respectively. (b) Section 3(b) of the Rights Agreement is hereby amended by deleting the words "by at least a majority of the Continuing Directors,". (c) Section 11(b) of the Rights Agreement is hereby amended by deleting the words "by at least a majority of the Continuing Directors". (d) Section 11(c) of the Rights Agreement is hereby amended by deleting the words "by at least a majority of the Continuing Directors". (e) Section 27 of the Rights Agreement is hereby amended and restated in its entirety as follows: Section 27. Supplements and Amendments. The Corporation may, at any time prior to the time a Person becomes an Acquiring Person, by resolution of its Board of Directors, from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in any respect, any such supplement or amendment to be evidenced by a writing signed by the Corporation and the Rights Agent; provided, however, that from and after such time as any Person becomes an Acquiring Person, this Agreement may be amended by the Board of Directors of the Corporation in any manner which would not adversely affect the interests of any holders of Right Certificates (other than an Acquiring Person or an Affiliate of Associate thereof.). Upon the delivery of a certificate from an executive officer of the Corporation which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment, provided that the Rights Agent shall not be required to consent to any amendment or supplement that is adverse to its interests. Without limiting the foregoing, the Corporation may, at any time prior to such time as any Person becomes an Acquiring Person, amend this Agreement to lower the thresholds set forth in Sections 1(a) and 3(b) hereof to not less than the largest percentage of the outstanding Common Shares then known by the Corporation to be beneficially owned by any Person." 39 2 (f) Section 29(a) of the Rights Agreement is hereby amended by deleting the parenthetical "(including, where specifically provided for herein, the Continuing Directors)" in both places in the first sentence of subsection (a). (g) Section 29(a)(ii) of the Rights Agreement is hereby amended by deleting the words "or the Continuing Director". (h) Section 29(a)(ii)(y) of the Rights Agreement is hereby amended by deleting the parenthetical "(or the Continuing Directors)". (i) Section 29(b) of the Rights Agreement is hereby amended by deleting the words "and the Continuing Directors". Section 3. Condition Precedent to Amendment. The amendment contemplated by Section 2 hereof is subject to the satisfaction of the following condition precedent: (a) Amendment. This Amendment shall have been duly executed and delivered by each of the parties hereto. Section 4. Reference to and Effect Upon the Rights Agreement. (a) Except as specifically amended in Section 2 above, the Rights Agreement and each exhibit thereto shall remain in full force and effect and each is hereby ratified and confirmed. (b) The execution, delivery and effect of this Amendment shall be limited precisely as written and shall not be deemed to (i) be a consent to any waiver of any term or condition, or to any amendment or modification of any term or condition (except as specifically amended in Section 2 above) of the Rights Agreement or (ii) prejudice any right, power or remedy which the Rights Agent now has or may have in the future under or in connection with the Rights Agreement. Each reference in the Rights Agreement to "this Agreement", "hereunder", "hereof', "herein" or any other word or words of similar import shall mean and be a reference to the Rights Agreement as amended hereby. Section 5. Counterparts. This Amendment may be executed in any number of counterparts, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 6. Governing Law. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 7. Descriptive Headings. Descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. [Signature Pages Follow] 40 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. ASTORIA FINANCIAL CORPORATION By: /s/ George L. Engelke, Jr. --------------------------------- Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer Attest: By: /s/ William K. Sheerin ---------------------------- Name: William K. Sheerin Title: Executive Vice President and Secretary CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent By: /s/ Robert Kavanagh ------------------------- Name: Robert Kavanagh Title: Vice President Attest: By: /s/ Jared Fassler --------------------------------- Name: Jared Fassler Title: Assistant Vice President 41 EX-11 3 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30, 1999 --------------------- (In Thousands, Except Per Share Data) 1. Net Income $ 176,124 Less: Preferred stock dividends declared 4,500 --------- Net income available to common shareholders $ 171,624 ========= 2. Weighted average common shares outstanding 54,876 3. ESOP shares not committed to be released (3,140) --------- 4. Total weighted average common shares outstanding 51,736 ========= 5. Basic earnings per common share $ 3.32 ========= 6. Total weighted average common shares outstanding 51,736 7. Dilutive effect of stock options using the treasury stock method 1,252 --------- 8. Total average common and common equivalent shares 52,988 ========= 9. Diluted earnings per common share $ 3.24 =========
42 EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 114,328 0 127,209 0 9,554,949 1,960,656 1,910,432 10,046,038 74,332 22,863,758 9,440,223 400,000 400,220 11,264,572 0 2,000 555 1,356,188 22,863,758 516,811 599,744 0 1,116,555 271,103 710,733 405,822 3,119 714 21,944 303,638 176,124 0 0 176,124 3.32 3.24 2.47 54,651 2,877 0 6,397 74,403 5,807 2,617 74,332 74,332 0 0
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