Astoria Financial Corporation

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Astoria Financial Corporation

1 Astoria Federal Plaza
Lake Success, New York 11042-1085
U.S.A.
Telephone: (516) 327-3000
Toll Free: (800) 278-6742
Fax: (516) 327-7461
Web site: http://www.astoriafederal.com

Public Company
Incorporated: 1993
Employees: 2,025
Sales: $1.587 billion
Stock Exchanges: NASDAQ
Ticker Symbol: ASFC
NAIC: 522120 Savings Institutions; 551111 Officers of Bank Holding Companies

Astoria Financial Corporation is the holding company formed in 1993 to facilitate the conversion of Astoria Federal Savings and Loan Association from a mutual form of ownership to stock ownership. The Long Island-based institution has since grown via acquisitions to become the second largest thrift in New York State and the sixth largest in the country. Although very much dependent on its traditional family residential mortgage business, Astoria Financial has made recent efforts to diversify by strengthening its retail banking operations. Astoria Financial serves 700,000 customers, with deposits topping $10 billion and total assets of $22 billion. While focused on the sizable Long Island, Brooklyn, and Queens market, Astoria Financial also originates loans through its own offices or brokers in a number of states outside of New York, including Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, North Carolina, Pennsylvania, South Carolina, and Virginia.

Part of the 1800s Building Association Movement

The history of Astoria Financial dates back to 1888 at a time when mutually owned Building and Loan associations spread across the United States. In essence, people who could not afford to buy or build houses on their own pooled their money in order to receive affordable mortgages. This concept of mutual assistance was akin to the savings bank movement that began in Germany and Switzerland in the later part of the 18th century. Savings banks were formed for the working class in which depositors pooled their money in order to realize higher interest rates. The concept was similar to a contemporary retirement plan, since depositors could withdraw money only when they reached a prescribed age. British progressives seized upon the idea as a way to eliminate poverty, preferring to set up mutual savings plans rather than giving alms, which they believed would simply reward idleness. The first self-sustaining savings bank was established in Scotland in 1810, and the idea spread so quickly that by 1818 the British Isles boasted 465 organizations. The idea then spread to the United States. The first New York mutual savings bank began operating in 1819, and by the time of the Civil War there would be 25 mutual savings banks in Manhattan, Brooklyn, and Queens.

The first mutually owned building association in the United States was the Oxford Provident of Frankfort, established in 1831 in the Philadelphia area to provide housing for the working class. Similar organizations cropped up around the country over the ensuing decades. On December 4, 1888, 16 Queens businessmen pledged $4,000 to create the progenitor of Astoria Financial, the Central Permanent Building and Loan Association, with the stated purpose of promoting thrift and home ownership. Edwin Wooley served as president and G.H. Pierce as secretary. Within a year the association was paying interest on savings accounts.

Like mutual savings banks, building associations evolved into commercial enterprises. In the beginning they were open only several hours a week and often operated out of the offices of insurance or real estate businesses. Mutual savings banks quickly dropped their charitable ties, soon advertising themselves in the newspapers and raising interest rates to lure customers away from rival mutuals. Institutions that had been established to serve the working class eventually fought over the deposits of businessmen. In a similar vein, building associations evolved into contemporary Savings and Loan institutions.

Limited government regulation allowed S&Ls to proliferate, but the Depression of the 1930s would cause a shakeout, and many institutions failed.

With just $600,000 in assets, the Central Permanent Building and Loan Association survived the Depression. In 1936 it changed its name to Astoria Savings & Loan Association. In Washington during the 1930s a spate of New Deal legislation was passed to reform the banking industry, including the creation of federally chartered S&Ls. Astoria Savings received its federal charter in 1937 and duly changed its name to Astoria Federal Savings & Loan Association.

External Growth in 1973

As did the population of Queens, Astoria Federal grew steadily, especially during the building boom that followed World War II. In the 1950s it would become the largest savings association in Queens County and the first city thrift to branch out to adjacent Nassau County on Long Island. In 1973 Astoria Federal took its first steps in external expansion by acquiring Metropolitan Federal Savings, a relatively young thrift that was chartered originally by New York State in 1953 and converted to a federal charter in 1966. By 1977 Astoria Federal boasted assets of $1 billion. In 1983 it acquired another bank, Citizens Savings & Loan Association of New York. Citizens Savings was originally chartered by New York State in 1919 as the Elmhurst Building & Loan Association, then was renamed in 1948 as the Woodside Savings & Loan Association before becoming Citizens Savings in 1974.

Banking in general would see an accelerated move to consolidation in the 1980s, fueled in large part by changes in law that allowed banks from different states to acquire one another. In the highly fragmented thrift sector in the New York City area there was ample opportunity for institutions like Astoria Federal to grow. No single institution controlled as much as 10 percent of area depositors. Moreover, the S&L crisis of the late 1980s resulted in the closing of more than 1,000 thrifts nationwide and pushed hundreds more to the brink of bankruptcy, making the environment even more conducive to consolidation. Federal legislation passed to bail out the industry, however, would have an adverse effect on Astoria Federal. Previously, larger thrifts were encouraged to acquire weaker ones by allowing them to count “supervisory goodwill” (the difference between the purchase price and the actual value of assets) as capital, and thus the amount the government would cushion against loan losses. The 1989 Financial Institutions Reform and Recovery Act (FIRREA) eliminated supervisory goodwill, costing some S&Ls like Astoria Federal hundreds of millions of dollars. The matter would then be litigated and have a further impact on Astoria Federal later in the 1990s.

Astoria Federal’s external growth in the 1980s began with the 1983 acquisition of Hastings on Hudson Federal Savings & Loan Association. It was chartered originally by New York State in 1901 as Hastings-on-Hudson Building Co-Op Savings & Loan and converted to a federal charter in 1953. Astoria Federal then acquired Chenango Federal Savings in 1985. Chenango dated back to 1888 when it was chartered by New York State as Chenango Co-Operative Savings & Loan of Norwich, New York. It converted to a federal charter in 1980. Astoria Federal also acquired Oneonta Federal Savings & Loan Association in 1988. It also dated back to 1888 when it was chartered by the state. Oneonta converted to a federal charter in 1981.

In 1989 Astoria Federal changed leadership, which would spearhead the conversion from mutual ownership to stock ownership. Succeeding President and Chief Executive Officer Henry Drewitz, who remained as chairman, was George L. Engelke, Jr., a certified public accountant. After graduating from Lehigh University with a degree in business administration, Engelke was employed by Peat Marwick, Mitchell & Co., concentrating on audit and tax work for thrifts during nine out of his 11 years with the firm. He joined Astoria Federal in 1971 to serve as vice-president and treasurer. He was promoted to executive vice-president in 1974, was named to the bank’s board of directors in 1983, and was named chief operating officer in 1986.

Changes in banking laws in the late 1980s made it easier for depositor-owned federal thrifts to convert to shareholder-owned state-chartered savings banks. For acquisition-minded thrifts like Astoria Federal the move was beneficial on two levels. Not only would the bank have stock to use in making purchases, an initial public offering would create a war chest for acquisitions. A mutual converts to stock ownership by creating a holding company, then making a subscription offering to allow depositors, employees, officers, and directors to buy shares in the new corporation at a set price. Half the proceeds generally are used to acquire the bank, and the rest is available for use in growing the institution. Depositors of the mutual stand to gain because the stock of the new holding company is likely to rise substantially, generally spiking 15 percent to 20 percent on the first day of public trading. Through the holding company the bank also can expand into complementary businesses such as insurance, real estate, and financial planning.

Company Perspectives:

Our mission is to provide a strong return to our shareholders, while recognizing the importance of serving the needs of our customers and the communities in which they reside.

On June 4, 1993, Astoria Financial Corporation was incorporated in Delaware to serve as the holding company for Astoria Federal Savings & Loan Association. Then, in November 1993, the holding company sold 13.2 million shares of stock at $25 per share. Astoria was well positioned to take part in the consolidation of New York thrifts that was now heating up. Shortly after New York Bancorp bought Brooklyn’s Hamilton Bancorp and the area’s two largest thrifts, Dime Bancorp and Anchor Bancorp, agreed to merge, Astoria Financial announced that it had reached an agreement to acquire Long Island-based Fidelity New York for $29 a share in cash. When the transaction was completed in February 1995, the final price would total approximately $157.8 million. As a result of the deal, Astoria Federal increased its assets to nearly $6.5 billion and deposits to $4.4 billion, at the time making it the 14th largest publicly traded thrift in the country. It would have 38 offices in Queens, Nassau, and Suffolk counties, as well as five branches in upstate New York.

Although he was aggressive in growing Astoria Financial through acquisitions, Engelke remained cautious when it came to the bank’s business, electing to concentrate on its traditional residential lending program. In 1996 the U.S. Supreme Court ruled on the supervisory goodwill issue, deciding that the federal government had reneged on incentives to acquire ailing thrifts, setting the stage for Astoria Financial, as well as Dime Bancorp and Long Island Bancorp, to press the U.S. Court of Federal Claims for millions of dollars. Although Dime Bancorp estimated that it lost $700 million, Long Island Bancorp $500 million, and Astoria Financial $160 million, the banks were expected to file for much higher claims. With this potential windfall in new capital, all three institutions appeared poised for even greater growth, but the best acquisition targets had been acquired and others appeared to be overvalued. The situation in the New York metropolitan area was becoming increasingly unpredictable. Although Astoria was eager to buy other banks, it also was making itself an attractive candidate for acquisition.

Engelke, named Astoria’s chairman in 1997, began looking to the Brooklyn market, which was similar to Queens and its base of working-class homeowners, especially in the growing immigrant communities. In April 1997, Astoria Financial announced that it would acquire Brooklyn-based Greater New York Savings Bank at a price of $19 per share for a total of $293 million. The acquisition boosted Astoria Financial’s assets to $9.8 billion. Its stock price rose to the $40 range, a significant increase over the initial public offering, especially compared with a split-adjusted $12.50 price. Also bidding on Greater New York was North Fork Bancorp, another aggressive player in the area, which would soon contend with Astoria Financial over Long Island Bancorp.

Acquisition of Long Island Bancorp in 1988

Long Island Bancorp was the holding company for Long Island Savings Bank, which had been chartered originally in 1875. It became a prized catch in 1998, due in some measure to the thrift’s expected share of the federal supervisory goodwill settlement. Bidding between rival suitors, which included Dime Bancorp, GreenPoint Financial Corp., and North Fork Bancorp, became so heated that Long Island Bancorp’s board traveled to an Orlando, Florida, retreat in order to prevent leaks about the deliberations. North Fork increased its stake in the holding company’s stock from 4.5 percent to 9.9 percent and outbid its rivals, but in the end Astoria Financial’s $1.8 billion stock swap offer was accepted. Engelke sweetened his offer by agreeing to increase the number of Long Island directors on the combined board from four to five and keep on key executives.

Although the Long Island Bancorp acquisition was regarded as a major coup for Engelke and Astoria Financial, the aftermath of the deal proved to be somewhat rocky. Wall Street expressed concern that the bank had overpaid by bidding down Astoria’s stock. Investors were especially dubious about Engelke’s plan to make the deal work by cutting 50 percent of Long Island Bancorp’s cost structure. He had been able to achieve considerable savings with previous acquisitions, but not to that level. A lower stock price, as a result, hampered Astoria Financial’s ability to use its shares for further acquisitions. Moreover, Engelke faced pressure from North Fork, which had positioned itself to become Astoria’s largest institutional shareholder through the Long Island Bancorp stock it purchased during the acquisition fight. North Fork’s chairman and chief executive, John Adam Kanas, issued a public letter in September, questioning Engelke’s plan and threatening to call for a change in management if projected results were not realized. According to Crain’s New York Business, ” It’s the type of move that has made Mr. Kanas the most disliked man in local banking, shaking up the otherwise friendly world of savings and loans in the Long Island-New York market. . . . In the past, Mr. Kanas has sought win-win situations in which North Fork buys a stake in a thrift and then pressures it to sell: if the thrift is sold to a competitor, North Fork still collects a tidy profit on its investment.” In this case, however, Kanas might have forced Astoria Financial to be sold to an even larger rival, which would severely cripple his chance to emerge in what was rapidly turning into a last-man-standing scenario. Engelke simply wrote back to Kanas to express his confidence that Astoria Financial would indeed meet its projections.

Nevertheless, Astoria Financial was forced to make some adjustments, especially as interest rates rose in 1999. It put further expansion plans on hold and made significant cutbacks on its mortgage-backed securities portfolio. With freed-up capital, it then initiated a stock repurchase program to buy back some 10 percent of its shares. Astoria Financial also looked to diversify its product offerings, in particular establishing an insurance agency, AF Insurance Agency, to market life, health, property, and casualty insurance through its bank branches. It was hardly a ground-breaking move, but one that was long overdue, as was the upgrading of the bank’s Internet site. Astoria Financial’s stock began to rebound in the fall of 2000, reflecting investors’ approval of the changes.

Key Dates:

1888:: Bank originally chartered by New York State as the Central Permanent Building and Loan Association is established.
1936:: Name is changed to Astoria Savings & Loan Association.
1937:: The bank receives federal charter and becomes Astoria Federal Savings & Loan Association.
1989:: George L. Engelke, Jr., is named president and CEO.
1993:: Astoria Financial Corporation is created to convert bank from mutual ownership to stock ownership.
1995:: Fidelity New York Savings Bank is acquired.
1997:: Greater New York Savings Bank is acquired.
1998:: Long Island Savings Bank is acquired.

It was a flagging economy in 2001, however, that significantly boosted the prospects for Astoria Financial. A reliance on mortgages, viewed negatively only months earlier, now made thrifts like Astoria Financial a safe haven for investors wary of the stock market. Almost every one of Astoria’s residential mortgages were backed by actual property. Moreover, nonperforming assets comprised only 0.2 percent of the thrift’s portfolio, compared to rivals with an average of 1.56 percent, according to CIBC World Markets. Commercial banks, on the other hand, stood at 1.75 percent. As a result of these factors, the price of Astoria Financial stock soared. It was now in a position to use its stock for renewed growth. At the same time, however, Astoria Financial became an even more inviting acquisition target for any large outsider looking to make a splash in the New York market. Whichever course lay in store, the days of being a Queens neighborhood thrift were long past for Astoria Financial.