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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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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, April 30, 2003
- ----------------------- --------------------------------------------
.01 Par Value 82,348,219
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at March 31, 2003 2
and December 31, 2002
Consolidated Statements of Income for the Three Months Ended 3
March 31, 2003 and March 31, 2002
Consolidated Statement of Changes in Stockholders' Equity for the 4
Three Months Ended March 31, 2003
Consolidated Statements of Cash Flows for the Three Months Ended 5
March 31, 2003 and March 31, 2002
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 30
Item 4. Controls and Procedures 34
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 35
Certifications 36
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
At At
March 31, December 31,
(In Thousands, Except Share Data) 2003 2002
----------- ------------
ASSETS:
Cash and due from banks $ 128,425 $ 167,605
Federal funds sold and repurchase agreements 205,657 510,252
Available-for-sale securities:
Encumbered 1,573,208 2,096,619
Unencumbered 974,713 695,962
----------- -----------
2,547,921 2,792,581
Held-to-maturity securities, fair value of $6,653,745 and
$5,100,565, respectively:
Encumbered 4,550,759 4,059,947
Unencumbered 2,011,691 981,310
----------- -----------
6,562,450 5,041,257
Federal Home Loan Bank of New York stock, at cost 296,600 247,550
Loans held-for-sale, net 49,439 62,669
Loans receivable:
Mortgage loans, net 11,478,063 11,680,160
Consumer and other loans, net 394,720 379,201
----------- -----------
11,872,783 12,059,361
Allowance for loan losses (83,454) (83,546)
----------- -----------
Loans receivable, net 11,789,329 11,975,815
Mortgage servicing rights, net 17,624 20,411
Accrued interest receivable 92,946 88,908
Premises and equipment, net 159,899 157,297
Goodwill 185,151 185,151
Bank owned life insurance 364,097 358,898
Other assets 91,250 89,435
----------- -----------
Total assets $22,490,788 $21,697,829
=========== ===========
LIABILITIES:
Deposits:
Savings $ 2,873,168 $ 2,832,291
Money market 1,496,743 1,698,552
NOW and demand deposit 1,472,183 1,383,315
Certificates of deposit 5,416,023 5,153,038
----------- -----------
Total deposits 11,258,117 11,067,196
Reverse repurchase agreements 6,435,000 6,285,000
Federal Home Loan Bank of New York advances 2,474,000 2,064,000
Other borrowings, net 475,739 472,180
Mortgage escrow funds 144,880 104,353
Accrued expenses and other liabilities 158,456 151,102
----------- -----------
Total liabilities 20,946,192 20,143,831
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,225,000 shares authorized and -0- shares 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;
110,996,592 shares issued; and 82,855,757 and 84,805,817 shares
outstanding, respectively) 1,110 1,110
Additional paid-in capital 842,837 840,186
Retained earnings 1,404,570 1,368,062
Treasury stock (28,140,835 and 26,190,775 shares, at cost, respectively) (689,310) (639,579)
Accumulated other comprehensive income 10,463 9,800
Unallocated common stock held by ESOP (4,926,258 and 5,018,500
shares, respectively) (27,074) (27,581)
----------- -----------
Total stockholders' equity 1,544,596 1,553,998
----------- -----------
Total liabilities and stockholders' equity $22,490,788 $21,697,829
=========== ===========
See accompanying notes to consolidated financial statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31,
------------------------------------
(In Thousands, Except Share Data) 2003 2002
----------- -----------
Interest income:
Mortgage loans $ 173,145 $ 202,798
Consumer and other loans 4,772 3,802
Mortgage-backed securities 94,048 100,496
Other securities 9,849 19,656
Federal funds sold and repurchase agreements 752 4,138
----------- -----------
Total interest income 282,566 330,890
----------- -----------
Interest expense:
Deposits 58,241 78,227
Borrowed funds 115,317 137,736
----------- -----------
Total interest expense 173,558 215,963
----------- -----------
Net interest income 109,008 114,927
Provision for loan losses -- 1,004
----------- -----------
Net interest income after provision for loan losses 109,008 113,923
----------- -----------
Non-interest income:
Customer service fees 14,833 13,931
Other loan fees 1,826 2,122
Net gain of sales of securities 2,136 --
Mortgage banking income, net 436 3,428
Income from bank owned life insurance 5,199 4,262
Other 1,465 3,217
----------- -----------
Total non-interest income 25,895 26,960
----------- -----------
Non-interest expense:
General and administrative:
Compensation and benefits 28,764 26,068
Occupancy, equipment and systems 14,615 13,175
Federal deposit insurance premiums 492 505
Advertising 1,498 1,027
Other 6,597 7,354
----------- -----------
Total non-interest expense 51,966 48,129
----------- -----------
Income before income tax expense 82,937 92,754
Income tax expense 26,540 31,536
----------- -----------
Net income 56,397 61,218
Preferred dividends declared (1,500) (1,500)
----------- -----------
Net income available to common shareholders $ 54,897 $ 59,718
=========== ===========
Basic earnings per common share $ 0.69 $ 0.70
----------- -----------
Diluted earnings per common share $ 0.69 $ 0.69
----------- -----------
Dividends per common share $ 0.20 $ 0.17
----------- -----------
Basic weighted average common shares 79,041,158 85,478,138
Diluted weighted average common and common equivalent shares 79,781,388 87,041,932
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2003
Additional
Preferred Common Paid-in
(In Thousands, Except Share Data) Total Stock Stock Capital
---------- --------- ------ ----------
Balance at December 31, 2002 $1,553,998 $2,000 $1,110 $840,186
Comprehensive income:
Net income 56,397 -- -- --
Other comprehensive (loss) income,
net of tax:
Net unrealized loss on securities (160) -- -- --
Amortization of net unrealized loss
on cash flow hedging instruments 48 -- -- --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 775 -- -- --
----------
Comprehensive income 57,060
----------
Common stock repurchased
(2,114,300 shares) (53,744) -- -- --
Dividends on common and preferred
stock and amortization of purchase
premium (17,325) -- -- (326)
Exercise of stock options and
related tax benefit
(164,240 shares issued) 2,253 -- -- 1,130
Amortization relating to allocation
of ESOP stock 2,354 -- -- 1,847
---------- ------ ------ --------
Balance at March 31, 2003 $1,544,596 $2,000 $1,110 $842,837
========== ====== ====== ========
Unallocated
Accumulated Common
Other Stock
Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Earnings Stock Income by ESOP
---------- --------- ------------- -----------
Balance at December 31, 2002 $1,368,062 $(639,579) $ 9,800 $(27,581)
Comprehensive income:
Net income 56,397 -- -- --
Other comprehensive (loss) income,
net of tax:
Net unrealized loss on securities -- -- (160) --
Amortization of net unrealized loss
on cash flow hedging instruments -- -- 48 --
Amortization of unrealized loss
on securities transferred to
held-to-maturity -- -- 775 --
Comprehensive income
Common stock repurchased
(2,114,300 shares) -- (53,744) -- --
Dividends on common and preferred
stock and amortization of purchase
premium (16,999) -- -- --
Exercise of stock options and
related tax benefit
(164,240 shares issued) (2,890) 4,013 -- --
Amortization relating to allocation
of ESOP stock -- -- -- 507
---------- --------- ------- --------
Balance at March 31, 2003 $1,404,570 $(689,310) $10,463 $(27,074)
========== ========= ======= ========
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended
March 31,
--------------------------
(In Thousands) 2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 56,397 $ 61,218
Adjustments to reconcile net income to net cash provided
by operating activities:
Net amortization (accretion) of premiums, discounts and deferred costs 23,666 (2,522)
Net provision for loan and real estate losses 5 1,004
Depreciation and amortization 2,949 2,768
Net gain on sales of loans and securities (4,989) (1,549)
Proceeds from sales of loans held-for-sale, net of originations 16,083 16,525
Amortization relating to allocation of ESOP stock 2,354 2,397
Increase in accrued interest receivable (4,038) (706)
Mortgage servicing rights amortization and valuation
allowance, net of capitalized amounts 2,787 (413)
Income from bank owned life insurance (5,199) (4,262)
Increase in other assets (1,273) (15,279)
Increase (decrease) in accrued expenses and other liabilities 11,986 (57,023)
----------- -----------
Net cash provided by operating activities 100,728 2,158
----------- -----------
Cash flows from investing activities:
Origination of loans held-for-investment (1,065,770) (1,052,660)
Loan purchases through third parties (348,147) (454,598)
Principal payments on loans held-for-investment 1,587,193 1,254,041
Principal payments on mortgage-backed securities held-to-maturity 1,167,004 759,606
Principal payments on mortgage-backed securities available-for-sale 541,220 618,245
Proceeds from sales of mortgage-backed securities available-for-sale 201,836 --
Purchases of mortgage-backed securities held-to-maturity (2,762,749) (1,109,091)
Purchases of mortgage-backed securities available-for-sale (601,787) --
Proceeds from calls and maturities of other securities available-for-sale 102,712 66
Proceeds from calls and maturities of other securities held-to-maturity 66,705 25,316
Purchases of other securities available-for-sale (100) --
Net (purchases) redemptions of FHLB stock (49,050) 7,477
Proceeds from sales of real estate owned, net 479 1,262
Purchases of premises and equipment, net of proceeds from sales (5,551) (4,298)
Purchase of bank owned life insurance -- (100,000)
----------- -----------
Net cash used in investing activities (1,166,005) (54,634)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 190,921 193,112
Net increase (decrease) in reverse repurchase agreements 150,000 (500,000)
Net increase (decrease) in FHLB of New York advances 410,000 (249,550)
Increase in mortgage escrow funds 40,527 44,033
Repurchase of common stock (53,744) (36,548)
Cash dividends paid to stockholders (17,325) (16,988)
Cash received for options exercised 1,123 4,145
----------- -----------
Net cash provided by (used in) financing activities 721,502 (561,796)
----------- -----------
Net decrease in cash and cash equivalents (343,775) (614,272)
Cash and cash equivalents at beginning of period 677,857 1,453,858
----------- -----------
Cash and cash equivalents at end of period $ 334,082 $ 839,586
=========== ===========
Supplemental disclosures:
Cash paid during the period:
Interest $ 172,866 $ 222,725
----------- -----------
Income taxes $ 1,821 $ 7,481
----------- -----------
Additions to real estate owned $ 325 $ 946
----------- -----------
See accompanying notes to consolidated financial statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal; Astoria Capital Trust I; and AF Insurance Agency, Inc. As used in this
quarterly report, "we," "us" and "our" refer to Astoria Financial Corporation
and its consolidated subsidiaries, including Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc. All significant inter-company accounts and
transactions have been eliminated in consolidation.
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of March 31, 2003 and December
31, 2002, our results of operations for the three months ended March 31, 2003
and 2002, changes in our stockholders' equity for the three months ended March
31, 2003 and our cash flows for the three months ended March 31, 2003 and 2002.
In preparing the consolidated 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 March
31, 2003 and December 31, 2002, and amounts of revenues and expenses in the
consolidated statements of income for the three months ended March 31, 2003 and
2002. The results of operations for the three months ended March 31, 2003 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 accounting
principles generally accepted in the United States of America, or GAAP, have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, or SEC. Certain reclassifications have been
made to prior period amounts to conform to the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2002 audited consolidated financial statements and related notes
included in our 2002 Annual Report on Form 10-K.
6
2. Earnings Per Share, or EPS
The following table is a reconciliation of basic and diluted EPS.
For the Three Months Ended March 31,
----------------------------------------
2003 2002
------------------ ------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2)
------- ------- ------- -------
Net income $56,397 $56,397 $61,218 $61,218
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
------- ------- ------- -------
Net income available to common shareholders $54,897 $54,897 $59,718 $59,718
------- ------- ------- -------
Total weighted average basic
common shares outstanding 79,041 79,041 85,478 85,478
Effect of dilutive securities:
Options -- 740 -- 1,564
------- ------- ------- -------
Total weighted average diluted
common shares outstanding 79,041 79,781 85,478 87,042
------- ------- ------- -------
Net earnings per common share $ 0.69 $ 0.69 $ 0.70 $ 0.69
------- ------- ------- -------
(1) Options to purchase 1,926,484 shares of common stock at prices between
$26.24 per share and $29.88 per share were outstanding as of March 31,
2003, but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the three months ended March 31, 2003.
(2) Options to purchase 467,000 shares of common stock at prices between $29.06
per share and $29.88 per share were outstanding as of March 31, 2002, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares for the three months ended March 31, 2002.
3. Mortgage Servicing Rights, or MSR
MSR are carried at amortized cost, and impairment, if any, is recognized through
a valuation allowance. MSR, at amortized cost, totaled $33.2 million at March
31, 2003 and $35.1 million at December 31, 2002. The valuation allowance totaled
$15.6 million at March 31, 2003 and $14.7 million at December 31, 2002. The cost
of MSR are amortized over the estimated remaining lives of the loans serviced.
MSR amortization totaled $3.8 million for the three months ended March 31, 2003
and $2.1 million for the three months ended March 31, 2002. As of March 31,
2003, estimated future MSR amortization through 2008 is as follows: $9.0 million
for the remainder of 2003, $8.9 million for 2004, $5.7 million for 2005, $3.5
million for 2006, $2.2 million for 2007 and $1.4 million for 2008. Actual
results may vary depending upon the level of repayments on the loans currently
serviced.
4. Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
7
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the Three Months Ended March 31,
------------------------------------
(In Thousands, Except Per Share Data) 2003 2002
------- -------
Net income:
As reported $56,397 $61,218
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect 1,378 1,188
------- -------
Pro forma $55,019 $60,030
------- -------
Basic earnings per common share:
As reported $ 0.69 $ 0.70
------- -------
Pro forma $ 0.68 $ 0.68
------- -------
Diluted earnings per common share:
As reported $ 0.69 $ 0.69
------- -------
Pro forma $ 0.67 $ 0.67
------- -------
5. Adoption of New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN No.
45, which addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. FIN No. 45 also requires a guarantor to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN No. 45 were effective
for financial statements of interim or annual periods ending after December 15,
2002. The recognition and measurement provisions are applicable prospectively to
guarantees issued or modified after December 31, 2002. The adoption of the
recognition and measurement provisions of FIN No. 45 did not have a material
impact on our financial condition or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. These statements may be identified by
the use of the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "outlook," "plan," "potential," "predict," "project," "should,"
"will," "would" and similar terms and phrases, including references to
assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate under the circumstances. These statements
are not guarantees of future performance and are subject to risks, uncertainties
and other factors (many of which are beyond our control) that could cause
8
actual results to differ materially from future results expressed or implied by
such forward-looking statements. These factors include, without limitation, the
following:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause our
financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
General
We are a Delaware corporation organized as the unitary savings and loan
association holding company of Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. Astoria Federal's principal business
is attracting retail deposits from the general public and investing those
deposits, together with funds generated from operations, principal repayments on
loans and securities, and borrowed funds, primarily in one-to-four family
mortgage loans, mortgage-backed securities, multi-family mortgage loans and
commercial real estate loans. To a much smaller degree, we also invest in
construction loans and consumer and other loans. In addition, Astoria Federal
invests in U.S. Government and federal agency securities and other investments
permitted by federal laws and regulations.
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, non-interest income, non-interest expense and
income tax expense. Non-interest income includes customer service fees; other
loan fees; net gain on sales of securities; mortgage banking income, net; income
from bank owned life insurance, or BOLI; and other non-interest income.
Non-interest expense consists of general and administrative expense which
includes compensation and benefits expense; occupancy, equipment and systems
expense; federal deposit insurance premiums; advertising; and other operating
expenses. Our earnings are also significantly
9
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.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and property and casualty insurance agency. Through contractual
agreements with various third party marketing organizations, AF Insurance
Agency, Inc. provides insurance products primarily to the customers of Astoria
Federal. Astoria Capital Trust I was formed in 1999 for the purpose of issuing
$125.0 million aggregate liquidation amount of 9.75% Capital Securities due
November 1, 2029, or Capital Securities, which are prepayable at our option on
or after November 1, 2009.
Available Information
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the SEC.
Such reports are also available on the SEC's website at www.sec.gov.
Critical Accounting Policies
Note 1 to our Audited Consolidated Financial Statements for the year ended
December 31, 2002 included in our Annual Report on Form 10-K for the year ended
December 31, 2002, as supplemented by this report, contains a summary of our
significant accounting policies. Various elements of our accounting policies, by
their nature, are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments. Certain assets are carried in our
consolidated statements of financial condition at fair value or the lower of
cost or fair value. Our policies with respect to the methodologies used to
determine the allowance for loan losses, the valuation of MSR and judgments
regarding goodwill and securities impairment are our most critical accounting
policies because they are important to the presentation of our financial
condition and results of operations, involve a higher degree of complexity and
require management to make difficult and subjective judgments which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
Following is a description of our critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical accounting policies and their application are reviewed quarterly with
the Audit Committee of our Board of Directors.
Allowance for Loan Losses
Our allowance for loan losses is established and maintained through a provision
for loan losses based on our evaluation of the risks inherent in our loan
portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The
allowance is comprised of both specific valuation allowances and general
valuation allowances.
10
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process including the procedures for
impairment testing under SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance. Pursuant to our
policy, loan losses are charged-off in the period the loans, or portions
thereof, are deemed uncollectible. The determination of the loans on which full
collectibility is not reasonably assured, the estimates of the fair value of the
underlying collateral, and the assessments of economic and regulatory conditions
are subject to assumptions and judgments by management. Specific valuation
allowances could differ materially as a result of changes in these assumptions
and judgments.
General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with our lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. The determination of the adequacy of the valuation
allowance takes into consideration a variety of factors. We segment our loan
portfolio into like categories by composition and size and perform analyses
against each category. These include historical loss experience and delinquency
levels and trends. We also consider the growth in the portfolio as well as our
credit administration and asset management philosophies and procedures. In
addition, we evaluate and consider the impact that existing and projected
economic and market conditions may have on the portfolio as well as known and
inherent risks in the portfolio. Finally, we evaluate and consider the allowance
ratios and coverage percentages of both peer group and regulatory agency data.
After evaluating these variables, we determine appropriate allowance coverage
percentages for each of our portfolio segments and the appropriate level of our
allowance for loan losses.
These evaluations are inherently subjective because, even though they are based
on objective data, it is management's interpretation of that data that
determines the amount of the appropriate allowance. Therefore, from time to
time, we review the actual performance and charge-off history of our portfolio
and compare that to our previously determined allowance coverage percentages. In
doing so, we evaluate the impact the previously mentioned variables may have had
on the portfolio to determine which changes, if any, should be made to our
assumptions and analyses.
As indicated above, actual results could differ from our estimate as a result of
changes in economic or market conditions. Changes in estimates could result in a
material change in the allowance. While we believe that the allowance for loan
losses has been established and maintained at levels adequate to reflect the
risks inherent in our loan portfolio, future increases may be necessary if
economic or market conditions decline substantially from the conditions that
existed at the time of the initial determinations.
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses" and "Asset Quality" in this document and under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," in our Annual Report on Form 10-K for the year ended December 31,
2002.
11
Valuation of MSR
MSR are carried at cost and amortized over the estimated remaining lives of the
loans serviced. Impairment, if any, is recognized through a valuation allowance.
The initial recognition of originated MSR is based upon an allocation of the
total cost of the related loans between the loans and the servicing rights based
on their relative estimated fair values. The estimated fair value of MSR is
based upon quoted market prices of similar loans which we sell servicing
released. Purchased MSR are recorded at cost, although we generally do not
purchase MSR. Impairment exists if the carrying value of MSR exceeds the
estimated fair value. We stratify our MSR by underlying loan type, primarily
fixed and adjustable, and further stratify the fixed rate loans by interest
rate. Individual impairment allowances for each stratum are established when
necessary and then adjusted in subsequent periods to reflect changes in
impairment. The estimated fair values of each MSR stratum are obtained through
independent third party valuations based upon an analysis of future cash flows,
incorporating numerous assumptions including servicing income, servicing costs,
market discount rates, prepayment speeds, default rates and other market driven
data. All assumptions are reviewed for reasonableness on a quarterly basis to
ensure they reflect current and anticipated market conditions.
The fair value of MSR is highly sensitive to changes in assumptions. Changes in
prepayment speed assumptions have the most significant impact on the fair value
of our MSR. Generally, as interest rates decline, mortgage loan prepayments
accelerate due to increased refinance activity, which results in a decrease in
the fair value of MSR. As interest rates rise, mortgage loan prepayments slow
down, which results in an increase in the fair value of MSR. Thus, any
measurement of the fair value of our MSR is limited by the conditions existing
and the assumptions utilized as of a particular point in time, and those
assumptions may not be appropriate if they are applied at a different point in
time.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is not amortized, but
rather tested, at least annually, for impairment at the reporting unit level.
Impairment exists when the carrying amount of goodwill exceeds its implied fair
value. When performing the impairment test, if the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit is not
considered impaired. For purposes of our goodwill impairment testing, we
identified a single reporting unit. On September 30, 2002 we performed our
annual goodwill impairment test. We determined the fair value of our one
reporting unit to be in excess of its carrying value, using the quoted market
price of our common stock on our impairment testing date as the basis for
determining the fair value. Accordingly, as of our annual impairment test date,
there was no indication of goodwill impairment. Goodwill would be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. As of March 31, 2003, there have been no such events or changes
in circumstances since our annual impairment test date. According to SFAS No.
142, "Goodwill and Other Intangible Assets," quoted market prices in active
markets are the best evidence of fair value and are to be used as the basis for
the measurement, when available. Other acceptable valuation methods include
present value measurement or measurements based on multiples of earnings or
revenue or similar performance measures. Differences in the identification of
reporting units and the use of valuation techniques can result in materially
different evaluations of impairment.
12
Securities Impairment
Our available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains and losses, net of taxes reported as accumulated other
comprehensive income in stockholders' equity. The securities which we have the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. We conduct a periodic review
and evaluation of the securities portfolio to determine if the decline in the
fair value of any security below its carrying value is other than temporary. If
we deem such decline to be other than temporary, the security is written down to
a new cost basis and the resulting loss is charged to earnings. The market
values of our securities, particularly our fixed rate mortgage-backed securities
which comprise 93.0% of our total securities portfolio at March 31, 2003, are
affected by changes in interest rates. In general, as interest rates rise, the
market value of fixed rate securities will decrease; as interest rates fall, the
market value of fixed rate securities will increase. Estimated fair values for
securities are based on published or securities dealers' market values. There
were no securities write downs during the three months ended March 31, 2003.
Liquidity and Capital Resources
Our primary source of funds is cash provided by principal and interest payments
on loans and mortgage-backed and other securities. Principal payments on loans
and mortgage-backed securities and proceeds from calls and maturities of other
securities totaled $3.46 billion for the three months ended March 31, 2003 and
$2.66 billion for the three months ended March 31, 2002. The increase in loan
and security repayments was primarily the result of the continued high level of
mortgage loan refinance activity caused by the continued low interest rate
environment. Medium- and long-term U.S. Treasury rates (maturities of two to ten
years) declined on average approximately 140 basis points during the year ended
December 31, 2002. Additionally, the Federal Open Market Committee, or FOMC,
reduced the federal funds rate by a total of 50 basis points during 2002. These
rate reductions resulted in a lower interest rate environment during the three
months ended March 31, 2003 as compared to the three months ended March 31,
2002.
In addition to cash provided by principal and interest payments on loans and
securities, our other sources of funds include cash provided by operating
activities, deposits and borrowings. Net cash provided by operating activities
totaled $100.7 million during the three months ended March 31, 2003 and $2.2
million during the three months ended March 31, 2002. During the three months
ended March 31, 2003, net borrowings increased $563.6 million and net deposits
increased $190.9 million. During the three months ended March 31, 2002, net
borrowings decreased $749.8 million, while net deposits increased $193.1
million. While we have reduced our borrowings to deposit ratio as well as our
overall level of borrowings over the past several years, during the three months
ended March 31, 2003 we borrowed an additional $500.0 million with a weighted
average rate of 2.58% and a weighted average maturity of 3.2 years in the
current low interest rate environment to help protect against the impact on
interest expense of future interest rate increases. The decrease in net
borrowings during the three months ended March 31, 2002 was consistent with our
strategy of repositioning the balance sheet through, in part, a shift in our
liability mix toward lower costing and less interest rate sensitive core
deposits, consisting of savings, money market, NOW and demand deposits accounts.
The net increases in deposits for the three months ended March 31, 2003 and 2002
reflect our continued emphasis on attracting customer deposits through
competitive rates, extensive product offerings and quality service. Despite
increased local competition for
13
checking accounts, we have been successful in growing our NOW and demand
deposits, including our business checking deposits, due in large part to our
concerted sales and marketing efforts, including our PEAK Process which was
introduced in 2002. See page 19 for further detail regarding deposit activity.
Typically, our primary use of funds is for the origination and purchase of
mortgage loans. However, during the three months ended March 31, 2003, despite
strong loan originations, our purchases of mortgage-backed securities exceeded
our origination and purchase of mortgage loans. During the three months ended
March 31, 2003, our gross originations and purchases of mortgage loans totaled
$1.47 billion, including originations of loans held-for-sale totaling $134.2
million, compared to $1.55 billion, including originations of loans
held-for-sale totaling $115.8 million, during the three months ended March 31,
2002. The strong levels of loan originations for both the three months ended
March 31, 2003 and 2002 are attributable to the continued low interest rate
environment which has resulted in continued high levels of mortgage refinance
activity. Cash flows in excess of mortgage and other loan fundings were
primarily utilized for the purchase of mortgage-backed securities. Purchases of
mortgage-backed securities totaled $3.36 billion during the three months ended
March 31, 2003 and $1.11 billion during the three months ended March 31, 2002.
As previously discussed, the decline in medium- and long-term U.S. Treasury
rates during 2002 resulted in a significant increase in loan and mortgage-backed
securities repayments during the three months ended March 31, 2003 compared to
the first quarter of 2002. Should the pace of repayment activity remain at its
recent levels and cash inflows continue to exceed mortgage and other loan
fundings, we will, in all likelihood, continue to purchase mortgage-backed and
other securities, resulting in continued growth of our securities portfolio. If
repayment activity declines in the future, we will likely reduce our purchases
of mortgage-backed and other securities.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, our most liquid
assets, totaled $334.1 million at March 31, 2003, compared to $677.9 million at
December 31, 2002. This decrease is the result of our use of funds for the
purchase of mortgage-backed securities. Borrowings maturing over the next twelve
months total $5.07 billion with a weighted average rate of 4.53%. We have the
flexibility to either repay or rollover such borrowings as they mature. In
addition, we have $2.65 billion in certificates of deposit with a weighted
average rate of 2.75% maturing over the next twelve months. We expect to retain
or replace a significant portion of such deposits based on our competitive
pricing and historical experience. Retained or replaced deposits and refinanced
borrowings during the next twelve months should carry lower weighted average
rates than those they replace, assuming that interest rates remain at or near
their current levels.
The most significant liquidity challenge we face is the variability in cash
flows as a result of mortgage refinance activity. As mortgage interest rates
decline, customers' refinance activities tend to accelerate causing the cash
flow from both our mortgage loan portfolio and our mortgage-backed securities
portfolio to accelerate. When mortgage rates increase the opposite effect tends
to occur. In addition, as mortgage interest rates decrease, some customers tend
to prefer fixed rate mortgage loan products over variable rate products. Since
we generally sell our fifteen year and thirty year fixed rate loan production
into the secondary mortgage market, the origination of such products for sale
does not significantly reduce our liquidity.
14
Additional sources of liquidity at the holding company level have included
issuances of securities into the capital markets, including private issuances of
trust preferred securities and senior debt. We may continue to access the
capital markets in the future. We also continue to receive periodic capital
distributions from Astoria Federal, consistent with applicable law and
regulation.
Stockholders' equity decreased to $1.54 billion at March 31, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of repurchases of our common stock of $53.7 million and dividends
declared of $17.3 million. These decreases were partially offset by net income
of $56.4 million, the amortization of the allocated portion of shares held by
the employee stock ownership plan, or ESOP, of $2.4 million, the effect of stock
options exercised and related tax benefit of $2.3 million and other
comprehensive income, net of tax, of $663,000.
On March 3, 2003, we paid a quarterly cash dividend of $0.20 per share on shares
of our common stock outstanding as of the close of business on February 18, 2003
totaling $15.8 million. During the three months ended March 31, 2003, we
declared a cash dividend on our Series B Preferred Stock totaling $1.5 million.
On April 16, 2003, we declared a quarterly cash dividend of $0.22 per share on
shares of our common stock payable on June 2, 2003 to stockholders of record as
of the close of business on May 15, 2003.
On October 16, 2002, our Board of Directors approved our ninth stock repurchase
plan authorizing the purchase, at management's discretion, of 10,000,000 shares,
or approximately 11% of our common stock then outstanding, over a two year
period in open-market or privately negotiated transactions. During the three
months ended March 31, 2003, we repurchased 2,114,300 shares of our common stock
at an aggregate cost of $53.7 million. In total, as of March 31, 2003, 2,432,300
shares of our common stock, at an aggregate cost of $62.2 million, have been
purchased under the ninth stock repurchase plan.
At March 31, 2003, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.25%, leverage
capital ratio of 7.25% and total risk-based capital ratio of 15.71%. The minimum
regulatory requirements are a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and total risk-based capital ratio of 8.00%.
Commitments and Contingencies
In the normal course of business, we routinely enter into various commitments,
primarily relating to the origination, purchase and sale of loans, the purchase
of securities and the leasing of certain office facilities. At March 31, 2003,
we had outstanding commitments to originate and purchase loans totaling $1.03
billion; outstanding unused lines of credit totaling $343.1 million, which
relate primarily to home equity lines of credit; outstanding commitments to sell
loans totaling $154.5 million; and outstanding commitments to purchase
securities totaling $778.2 million. We anticipate that we will have sufficient
funds available to meet our current commitments in the normal course of our
business.
15
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at March 31, 2003 and
December 31, 2002.
At March 31, 2003 At December 31, 2002
---------------------- ----------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
----------- -------- ----------- --------
Mortgage loans (gross):
One-to-four family $ 8,894,190 75.37% $ 9,209,360 76.86%
Multi-family 1,717,637 14.55 1,599,985 13.35
Commercial real estate 740,770 6.28 744,623 6.21
Construction 60,641 0.51 56,475 0.47
----------- ------ ----------- ------
Total mortgage loans 11,413,238 96.71 11,610,443 96.89
----------- ------ ----------- ------
Consumer and other loans (gross):
Home equity 341,487 2.90 323,494 2.70
Passbook 7,022 0.06 7,502 0.06
Other 39,267 0.33 41,642 0.35
----------- ------ ----------- ------
Total consumer and other loans 387,776 3.29 372,638 3.11
----------- ------ ----------- ------
Total loans 11,801,014 100.00% 11,983,081 100.00%
Net unamortized premiums and
deferred loan costs 71,769 76,280
Allowance for loan losses (83,454) (83,546)
----------- -----------
Total loans, net $11,789,329 $11,975,815
=========== ===========
16
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed and other securities available-for-sale and held-to-maturity at
March 31, 2003 and December 31, 2002.
At March 31, 2003 At December 31, 2002
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
---------- ---------- ---------- ----------
Securities available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates $ 221,696 $ 229,423 $ 241,146 $ 249,459
REMICs and CMOs:
Agency issuance 983,161 992,280 608,076 616,552
Non-agency issuance 1,082,455 1,081,384 1,581,475 1,587,622
---------- ---------- ---------- ----------
Total mortgage-backed securities 2,287,312 2,303,087 2,430,697 2,453,633
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies 31,308 31,820 132,011 133,448
FNMA and FHLMC preferred stock 140,015 140,443 140,015 136,682
Corporate debt and other securities 67,768 72,571 67,854 68,818
---------- ---------- ---------- ----------
Total other securities 239,091 244,834 339,880 338,948
---------- ---------- ---------- ----------
Total securities available-for-sale $2,526,403 $2,547,921 $2,770,577 $2,792,581
========== ========== ========== ==========
Securities held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates $ 21,915 $ 23,438 $ 24,534 $ 26,190
REMICs and CMOs:
Agency issuance 5,068,936 5,153,954 3,595,244 3,646,023
Non-agency issuance 1,422,671 1,427,749 1,306,113 1,313,349
---------- ---------- ---------- ----------
Total mortgage-backed securities 6,513,522 6,605,141 4,925,891 4,985,562
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies -- -- 65,776 66,018
Obligations of states and
political subdivisions 38,948 38,948 39,611 39,611
Corporate debt securities 9,980 9,656 9,979 9,374
---------- ---------- ---------- ----------
Total other securities 48,928 48,604 115,366 115,003
---------- ---------- ---------- ----------
Total securities held-to-maturity $6,562,450 $6,653,745 $5,041,257 $5,100,565
========== ========== ========== ==========
17
Comparison of Financial Condition as of March 31, 2003 and December 31, 2002 and
Operating Results for the Three Months Ended March 31, 2003 and 2002
Financial Condition
Total assets increased $793.0 million to $22.49 billion at March 31, 2003, from
$21.70 billion at December 31, 2002. The primary reason for the increase in
total assets was the increase in mortgage-backed securities, partially offset by
decreases in federal funds sold and repurchase agreements, other securities and
mortgage loans. This growth was funded primarily through increases in borrowings
and deposits.
Mortgage loans decreased $202.1 million to $11.48 billion at March 31, 2003,
from $11.68 billion at December 31, 2002. This decrease was primarily due to the
continued extraordinarily high level of mortgage loan repayments during the
three months ended March 31, 2003, which have outpaced our levels of mortgage
loan originations and purchases. Mortgage loan repayments increased to $1.54
billion for the three months ended March 31, 2003, from $1.21 billion for the
three months ended March 31, 2002. Gross mortgage loans originated and purchased
during the three months ended March 31, 2003 totaled $1.34 billion, excluding
originations of loans held-for-sale totaling $134.2 million, of which $992.9
million were originations and $344.7 million were purchases. This compares to
$985.9 million of originations and $450.9 million of purchases for a total of
$1.44 billion, excluding originations of loans held-for-sale totaling $115.8
million, during the three months ended March 31, 2002.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans, which represent 75.4% of our total loan portfolio at
March 31, 2003, decreased $315.2 million to $8.89 billion at March 31, 2003,
from $9.21 billion at December 31, 2002. As noted above, this decrease was
primarily due to the high level of loan repayments as a result of refinance
activity in the prevailing interest rate environment.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate loan
originations. Our multi-family mortgage loans, which tend to be less susceptible
to prepayment risk than our one-to-four family loans due to the inclusion of
prepayment penalties, increased $117.7 million to $1.72 billion at March 31,
2003, from $1.60 billion at December 31, 2002. Our commercial real estate loans
decreased slightly to $740.8 million at March 31, 2003, from $744.6 million at
December 31, 2002. Multi-family and commercial real estate loan originations
totaled $235.3 million for the three months ended March 31, 2003 and $191.6
million for the three months ended March 31, 2002. Our new multi-family and
commercial real estate loan originations are similar in type and have slightly
larger average balances than the loans currently in our portfolio. The average
loan balance of loans in our multi-family and commercial real estate portfolio
continues to be less than $1.0 million and we have not changed our underwriting
standards with respect to such loans. Our portfolio of consumer and other loans
increased $15.2 million to $387.8 million at March 31, 2003, from $372.6 million
at December 31, 2002. This increase is primarily in home equity lines of credit
as a result of the continued strong housing market and the low interest rate
environment.
Mortgage-backed securities increased $1.44 billion to $8.82 billion at March 31,
2003, from $7.38 billion at December 31, 2002. This increase was primarily the
result of purchases of real estate mortgage investment conduits, or REMICs, and
collateralized mortgage obligations,
18
or CMOs, totaling $3.36 billion, partially offset by principal payments received
of $1.71 billion and sales of $199.7 million. This increase in mortgage-backed
securities reflects our continued use of excess cash flows, as well as cash
flows from new medium-term borrowings, for the purchase of these securities.
Other securities decreased $160.5 million to $293.8 million at March 31, 2003,
from $454.3 million at December 31, 2002, primarily due to $169.4 million in
securities which were called or matured, partially offset by a decrease in the
net unrealized loss on securities available-for-sale of $6.7 million and the net
accretion of discounts of $2.1 million. The continued low interest rate
environment during the three months ended March 31, 2003 has resulted in a
significant portion of our callable investment securities being called.
Federal funds sold and repurchase agreements decreased $304.6 million to $205.7
million at March 31, 2003, from $510.3 million at December 31, 2002, primarily
due to our use of funds for the purchase of mortgage-backed securities. Federal
Home Loan Bank of New York, or FHLB-NY, stock increased $49.0 million to $296.6
million at March 31, 2003, from $247.6 million at December 31, 2002 as a result
of increased levels of FHLB-NY borrowings.
Deposits increased $190.9 million to $11.26 billion at March 31, 2003, from
$11.07 billion at December 31, 2002. The increase in deposits was primarily due
to an increase of $263.0 million in certificates of deposit to $5.42 billion at
March 31, 2003, from $5.15 billion at December 31, 2002, partially offset by a
decrease of $201.8 million in our money market accounts to $1.50 billion at
March 31, 2003, from $1.70 billion at December 31, 2002. The decrease in our
money market accounts is attributable to increased competition for money market
and checking accounts. Certain local competitors, as well as recent entrants
into the local market, have continued to offer well above market rates for these
types of deposits. We have not increased the rates we offer on these accounts
because we do not consider it a cost effective strategy. Partially offsetting
this decrease in our money market accounts were increases in savings accounts of
$40.9 million and NOW and demand deposit accounts of $88.9 million. Despite
increased local competition for checking accounts, we have been successful in
growing our NOW and demand deposits, including our business checking deposits,
due in large part to our concerted sales and marketing efforts, including our
PEAK Process which was introduced in 2002.
Reverse repurchase agreements increased $150.0 million to $6.44 billion at March
31, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances increased
$410.0 million to $2.47 billion at March 31, 2003, from $2.06 billion at
December 31, 2002. As previously discussed, the increase in borrowings reflects
management's decision to help protect against the impact on interest expense of
future interest rate increases. We borrowed $500.0 million with a weighted
average rate of 2.58% and a weighted average maturity of 3.2 years.
Additionally, during the three months ended March 31, 2003, $850.0 million in
borrowings with a weighted average rate of 3.71% matured and were refinanced
into short-term borrowings with a weighted average rate of 1.31%.
Stockholders' equity decreased to $1.54 billion at March 31, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of repurchases of our common stock of $53.7 million and dividends
declared of $17.3 million. These decreases were partially offset by net income
of $56.4 million, the amortization of the allocated portion of shares held by
the ESOP of $2.4 million, the effect of stock options exercised and related tax
benefit of $2.3 million and other comprehensive income, net of tax, of $663,000.
19
Results of Operations
General
Net income for the three months ended March 31, 2003 decreased $4.8 million to
$56.4 million, from $61.2 million for the three months ended March 31, 2002.
Diluted earnings per common share totaled $0.69 per share for the three months
ended March 31, 2003 and 2002. Return on average assets decreased to 1.01% for
the three months ended March 31, 2003, from 1.09% for the three months ended
March 31, 2002. Return on average stockholders' equity decreased to 14.58% for
the three months ended March 31, 2003, from 15.72% for the three months ended
March 31, 2002. Return on average tangible stockholders' equity, which
represents average stockholders' equity less average goodwill totaling $185.2
million, decreased to 16.56% for the three months ended March 31, 2003, from
17.85% for the three months ended March 31, 2002. The decreases in these ratios
are the result of the decrease in net income which is further discussed below.
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. See Item 3, "Quantitative and Qualitative Disclosures About
Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the three months ended March 31, 2003, net interest income decreased $5.9
million to $109.0 million, from $114.9 million for the three months ended March
31, 2002. This decrease was primarily attributable to a decrease in the net
interest margin to 2.09% for the three months ended March 31, 2003, from 2.16%
for the three months ended March 31, 2002. The decrease in the net interest
margin was primarily due to the more rapid decline in the yield on
interest-earning assets than the decline in the cost of interest-bearing
liabilities. The decrease in yields on interest-earning assets is primarily the
result of the high level of mortgage loan and mortgage-backed securities
repayments as a result of the continued low interest rate environment,
particularly for medium- and long-term instruments for which rates continued to
decline throughout 2002, resulting in reinvestment in those assets at lower
rates. The decrease in the cost of funds is due to the downward repricing of
deposits, along with the repayment and refinancing of various higher cost
borrowings. The average balance of net interest-earning assets decreased $300.5
million to $424.4 million for the three months ended March 31, 2003, from $724.9
million for the three months ended March 31, 2002. The decrease in the average
balance of net interest-earning assets was the result of a decrease of $364.2
million in the average balance of total interest-earning assets to $20.91
billion for the three months ended March 31, 2003, from $21.27 billion for the
three months ended March 31, 2002, partially offset by a decrease of $63.7
million in the average balance of total interest-bearing liabilities to $20.48
billion for the three months ended March 31, 2003, from $20.55 billion for the
three months ended March 31, 2002. The primary reasons for the decrease in net
interest earning assets are the additional $100.0 million premium paid in the
first quarter of 2002 to purchase additional BOLI, the repurchases of our common
stock over the past year and an increase in the monthly mortgage-backed
securities principal payments receivable, due to the accelerated mortgage-backed
securities cash flow. The net interest rate spread remained at 2.02% for the
20
three months ended March 31, 2003 and 2002. The average yield on
interest-earning assets decreased to 5.41% for the three months ended March 31,
2003, from 6.22% for the three months ended March 31, 2002. The average cost of
interest-bearing liabilities decreased to 3.39% for the three months ended March
31, 2003, from 4.20% for the three months ended March 31, 2002. The changes in
such costs and yields were a result of the lower interest rate environment
previously discussed. The changes in average interest-earning assets and
interest-bearing liabilities and their related yields and costs are discussed in
greater detail under "Interest Income" and "Interest Expense."
Analysis of Net Interest Income
The following table sets forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the three
months ended March 31, 2003 and 2002. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The yields and costs include amortization of fees, costs, premiums and discounts
which are considered adjustments to interest rates.
21
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
----------- -------- ------------ ----------- -------- ------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,073,408 $126,929 5.60% $10,397,683 $166,509 6.41%
Multi-family, commercial
real estate and construction 2,438,692 46,216 7.58 1,810,016 36,289 8.02
Consumer and other loans (1) 390,502 4,772 4.89 255,055 3,802 5.96
----------- -------- ----------- --------
Total loans 11,902,602 177,917 5.98 12,462,754 206,600 6.63
Mortgage-backed securities (2) 8,137,721 94,048 4.62 6,627,950 100,496 6.06
Other securities (2)(3) 613,094 9,849 6.43 1,188,237 19,656 6.62
Federal funds sold and
repurchase agreements 254,406 752 1.18 993,080 4,138 1.67
----------- -------- ----------- --------
Total interest-earning assets 20,907,823 282,566 5.41 21,272,021 330,890 6.22
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,223,593 1,021,331
----------- -----------
Total assets $22,316,567 $22,478,503
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,836,124 3,489 0.49 $ 2,633,088 8,103 1.23
Money market 1,570,874 3,476 0.89 1,956,641 10,360 2.12
NOW and demand deposit 1,385,620 490 0.14 1,192,758 825 0.28
Certificates of deposit 5,331,200 50,786 3.81 5,149,262 58,939 4.58
----------- -------- ----------- --------
Total deposits 11,123,818 58,241 2.09 10,931,749 78,227 2.86
Borrowed funds 9,359,600 115,317 4.93 9,615,354 137,736 5.73
----------- -------- ----------- --------
Total interest-bearing liabilities 20,483,418 173,558 3.39 20,547,103 215,963 4.20
-------- --------
Non-interest-bearing liabilities 286,081 374,039
----------- -----------
Total liabilities 20,769,499 20,921,142
Stockholders' equity 1,547,068 1,557,361
----------- -----------
Total liabilities and stockholders'
equity $22,316,567 $22,478,503
=========== ===========
Net interest income/net interest
rate spread (4) $109,008 2.02% $114,927 2.02%
-------- ---- -------- ----
Net interest-earning assets/net
interest margin (5) $ 424,405 2.09% $ 724,918 2.16%
----------- ---- ----------- ----
Ratio of interest-earning assets
to interest-bearing liabilities 1.02x 1.04x
---- ----
- ----------
(1) Mortgage and consumer and other loans include loans held-for-sale and
non-performing loans and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized cost.
(3) Other securities include Federal Home Loan Bank of New York stock.
(4) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
22
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)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the 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.
Three Months Ended March 31, 2003
Compared to
Three Months Ended March 31, 2002
---------------------------------
Increase (Decrease)
---------------------------------
(In Thousands) Volume Rate Net
-------- -------- --------
Interest-earning assets:
Mortgage loans:
One-to-four family $(19,868) $(19,712) $(39,580)
Multi-family, commercial
real estate and construction 12,012 (2,085) 9,927
Consumer and other loans 1,744 (774) 970
Mortgage-backed securities 20,201 (26,649) (6,448)
Other securities (9,258) (549) (9,807)
Federal funds sold and
repurchase agreements (2,428) (958) (3,386)
-------- -------- --------
Total 2,403 (50,727) (48,324)
-------- -------- --------
Interest-bearing liabilities:
Savings 582 (5,196) (4,614)
Money market (1,746) (5,138) (6,884)
NOW and demand deposit 122 (457) (335)
Certificates of deposit 2,027 (10,180) (8,153)
Borrowed funds (3,588) (18,831) (22,419)
-------- -------- --------
Total (2,603) (39,802) (42,405)
-------- -------- --------
Net change in net interest income $ 5,006 $(10,925) $ (5,919)
======== ======== =========
Interest Income
Interest income for the three months ended March 31, 2003 decreased $48.3
million to $282.6 million, from $330.9 million for the three months ended March
31, 2002. This decrease was primarily the result of a decrease in the average
yield on interest-earning assets to 5.41% for the three months ended March 31,
2003, from 6.22% for the three months ended March 31, 2002. The decrease in the
average yield on interest-earning assets was due to decreases in the average
yields on all asset categories. As previously discussed, the declines in medium-
and long-term U.S. Treasury rates as well as the reduction in short-term
interest rates during 2002 have created a lower interest rate environment during
the three months ended March 31, 2003 than that which existed during the three
months ended March 31, 2002. The average balance of interest-earning assets
decreased $364.2 million to $20.91 billion for the three months ended March 31,
2003, from $21.27 billion for the three months ended March 31, 2002. This
decrease was primarily due to decreases in the average balances of one-to-four
family mortgage loans, other securities and federal funds sold and repurchase
agreements, partially offset by increases in the average balances of
mortgage-backed securities, multi-family, commercial real estate and
construction loans and consumer and other loans.
23
Interest income on one-to-four family mortgage loans decreased $39.6 million to
$126.9 million for the three months ended March 31, 2003, from $166.5 million
for the three months ended March 31, 2002, which was the result of a decrease of
$1.32 billion in the average balance of such loans, coupled with a decrease in
the average yield to 5.60% for the three months ended March 31, 2003, from 6.41%
for the three months ended March 31, 2002. The decrease in the average balance
of one-to-four family mortgage loans reflects the extraordinarily high level of
repayment activity, due to refinancings, particularly in the second half of
2002, partially offset by originations and purchases of one-to-four family
mortgage loans. Interest income on multi-family, commercial real estate and
construction loans increased $9.9 million to $46.2 million for the three months
ended March 31, 2003, from $36.3 million for the three months ended March 31,
2002, which was primarily the result of an increase of $628.7 million in the
average balance of such loans, partially offset by a decrease in the average
yield to 7.58% for the three months ended March 31, 2003, from 8.02% for the
three months ended March 31, 2002. The increase in the average balance of
multi-family, commercial real estate and construction loans reflects our
increased emphasis on originations of such loans, coupled with the fact that we
have not experienced significant repayment activity within this portfolio in
part due to the prepayment penalties associated with these loans. The decrease
in the average yields on mortgage loans reflects the lower interest rate
environment during the three months ended March 31, 2003 as compared to the
three months ended March 31, 2002 as higher rate loans were repaid and replaced
with lower yielding new originations and purchases and ARM loans repriced.
Additionally, the yield is also negatively impacted by accelerated loan premium
amortization as a result of the increased refinance activity.
Interest income on consumer and other loans increased $970,000 for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002
resulting from an increase of $135.4 million in the average balance of this
portfolio partially offset by a decrease in the average yield to 4.89% for the
three months ended March 31, 2003, from 5.96% for the three months ended March
31, 2002. The changes in interest income on consumer and other loans are
primarily attributable to home equity lines of credit which represent 88.1% of
this portfolio at March 31, 2003. The increase in the average balance of home
equity lines of credit is a result of the strong housing market combined with
low interest rates over the past two years. Our home equity lines of credit
generally reset monthly and are indexed to the prime rate which decreased 50
basis points during the year ended December 31, 2002.
Interest income on mortgage-backed securities decreased $6.5 million to $94.0
million for the three months ended March 31, 2003, from $100.5 million for the
three months ended March 31, 2002. This decrease was the result of a decrease in
the average yield to 4.62% for the three months ended March 31, 2003, from 6.06%
for the three months ended March 31, 2002, partially offset by an increase of
$1.51 billion in the average balance of the portfolio. Similar to mortgage
loans, the decrease in the average yield on mortgage-backed securities reflects
the lower interest rate environment as higher yielding securities were repaid
and replaced with lower yielding securities coupled with accelerated premium
amortization. The increase in the average balance of mortgage-backed securities
was the result of increased levels of purchases of mortgage-backed securities
during the second half of 2002 and the first quarter of 2003 to effectively
deploy our cash flows in excess of mortgage and other loan fundings, partially
offset by increased levels of principal repayments due to the lower interest
rate environment. Interest income on other securities decreased $9.9 million to
$9.8 million for the three months ended March 31, 2003, from $19.7 million for
the three months ended March 31, 2002. This decrease resulted from a decrease of
$575.1 million in the average balance of this portfolio, primarily due to higher
yielding securities being called throughout 2002 and in the first quarter of
2003 as a result of the continued low interest rate environment, coupled with a
decrease in
24
the average yield to 6.43% for the three months ended March 31, 2003, from
6.62% for the three months ended March 31, 2002. Interest income on federal
funds sold and repurchase agreements decreased $3.4 million as a result of a
decrease of $738.7 million in the average balance of the portfolio, coupled
with a decrease in the average yield to 1.18% for the three months ended
March 31, 2003, from 1.67% for the three months ended March 31, 2002. We
maintained additional liquidity during the quarter ended March 31, 2002
which was used to both help fund our mortgage application pipeline and to
help repay a portion of borrowings which matured primarily at the end of
the 2002 first quarter.
Interest Expense
Interest expense for the three months ended March 31, 2003 decreased $42.4
million to $173.6 million, from $216.0 million for the three months ended March
31, 2002. This decrease was primarily the result of a decrease in the average
cost of interest-bearing liabilities to 3.39% for the three months ended March
31, 2003, from 4.20% for the three months ended March 31, 2002, coupled with a
decrease of $63.7 million in the average balance of interest-bearing liabilities
to $20.48 billion for the three months ended March 31, 2003, from $20.55 billion
for the three months ended March 31, 2002. The decrease in the overall average
cost of our interest-bearing liabilities reflects the impact of the continued
lower interest rate environment on the cost of our deposits and borrowings. The
decrease in the average balance of interest-bearing liabilities was attributable
to a decrease in borrowings, due to the repayment of matured borrowings,
partially offset by an increase in deposits, which reflects our decision over
the past several years to reposition the balance sheet through, in part, a shift
in our liability mix toward lower costing and less interest rate sensitive core
deposits.
Interest expense on deposits decreased $20.0 million, to $58.2 million for the
three months ended March 31, 2003, from $78.2 million for the three months ended
March 31, 2002, reflecting a decrease in the average cost of deposits to 2.09%
for the three months ended March 31, 2003, from 2.86% for the three months ended
March 31, 2002, partially offset by an increase of $192.1 million in the average
balance of total deposits. The decrease in the average cost of total deposits
was driven by decreases in rates in all deposit categories, primarily on our
money market accounts and certificates of deposit, as a result of the lower
interest rate environment which has continued into 2003. The increase in the
average balance of total deposits was primarily the result of increases in the
average balances of savings accounts, NOW and demand deposit accounts and
certificates of deposit, partially offset by a decrease in the average balance
of money market accounts.
Interest expense on certificates of deposit decreased $8.2 million resulting
from a decrease in the average cost to 3.81% for the three months ended March
31, 2003, from 4.58% for the three months ended March 31, 2002, partially offset
by an increase of $181.9 million in the average balance.
Interest expense on money market accounts decreased $6.9 million reflecting a
decrease in the average cost to 0.89% for the three months ended March 31, 2003,
from 2.12% for the three months ended March 31, 2002, coupled with a decrease of
$385.8 million in the average balance of such accounts. Interest paid on money
market accounts is on a tiered basis with 84.90% of the balance at March 31,
2003 in the highest tier (accounts with balances of $50,000 and higher). The
decrease in the average balance of money market accounts is attributable to
increased competition for these accounts, as previously discussed.
25
Interest expense on savings accounts decreased $4.6 million which was
attributable to a decrease in the average cost to 0.49% for the three months
ended March 31, 2003, from 1.23% for the three months ended March 31, 2002,
partially offset by an increase of $203.0 million in the average balance.
Interest expense on NOW and demand deposit accounts decreased $335,000 as a
result of a decrease in the average cost to 0.14% for the three months ended
March 31, 2003, from 0.28% for the three months ended March 31, 2002. The
average balance of NOW and demand deposit accounts increased $192.9 million. The
increases in the average balances of savings and NOW and demand deposit accounts
are consistent with our emphasis on deposit generation.
Interest expense on borrowed funds for the three months ended March 31, 2003
decreased $22.4 million to $115.3 million, from $137.7 million for the three
months ended March 31, 2002, resulting from a decrease in the average cost of
borrowings to 4.93% for the three months ended March 31, 2003, from 5.73% for
the three months ended March 31, 2002, coupled with a decrease of $255.8 million
in the average balance. The decreases in the average cost and average balance of
borrowings for the three months ended March 31, 2003 as compared to the three
months ended March 31, 2002 are the result of the repayment and refinancing of
higher cost borrowings as they matured.
Provision for Loan Losses
During the three months ended March 31, 2003, no provision for loan losses was
recorded. The provision for loan losses totaled $1.0 million for the three
months ended March 31, 2002. The decrease in the provision for loan losses is
due to an analysis performed, during the third quarter of 2002, of the actual
charge-off history of our loan portfolio compared to our previously determined
allowance coverage percentages which are utilized to determine our general
valuation allowances. Our analysis indicated that our projection of estimated
losses inherent in our portfolio exceeded our actual charge-off history during
the recent economic downturn. In response to the results of this analysis, we
lowered our projections of estimated losses inherent in our portfolio and we
adjusted our allowance coverage percentages for our portfolio segments
accordingly. The allowance for loan losses totaled $83.5 million at March 31,
2003 and at December 31, 2002. Net loan charge-offs totaled $92,000 for the
three months ended March 31, 2003 compared to $342,000 for the three months
ended March 31, 2002. Non-performing loans increased $4.5 million to $39.0
million at March 31, 2003, from $34.5 million at December 31, 2002. This
increase was primarily due to a $3.2 million multi-family mortgage loan which
was first classified as non-accrual at March 31, 2003. This loan became current
in April 2003 and, based on our evaluation of prior payment history and our
experience with the borrower, has been returned to accrual status. The allowance
for loan losses as a percentage of non-performing loans decreased to 213.73% at
March 31, 2003, from 242.04% at December 31, 2002 primarily due to the increase
in non-performing loans from December 31, 2002 to March 31, 2003. The allowance
for loan losses as a percentage of total loans was 0.70% at March 31, 2003 and
0.69% at December 31, 2002. For further discussion of non-performing loans and
allowance for loan losses, see "Critical Accounting Policies" and "Asset
Quality."
26
Non-Interest Income
Non-interest income for the three months ended March 31, 2003 decreased $1.1
million, to $25.9 million, from $27.0 million for the three months ended March
31, 2002. The decrease in non-interest income was primarily due to decreases in
mortgage banking income, net and other non-interest income, partially offset by
increases in net gain on sales of securities, customer service fees and income
from BOLI.
Mortgage banking income, net, which includes loan servicing fees, net gain on
sales of loans, amortization of MSR and valuation allowance adjustments for the
impairment of MSR, decreased $3.0 million to $436,000 for the three months ended
March 31, 2003, compared to $3.4 million for the three months ended March 31,
2002. This decrease was primarily due to increases in the provision for the
valuation allowance of MSR and the amortization of MSR, and a decrease in loan
servicing fees, partially offset by an increase in the net gain on sales of
loans. The valuation allowance adjustments for the impairment of MSR increased
$1.7 million to a provision of $879,000 for the three months ended March 31,
2003, from a recovery of $799,000 for the three months ended March 31, 2002. The
provision for the three months ended March 31, 2003 was related to the current
and forecasted lower interest rate environment and projected accelerated loan
prepayment speeds. Amortization of MSR increased $1.7 million to $3.8 million
for the three months ended March 31, 2003, from $2.1 million for the three
months ended March 31, 2002. The increase in MSR amortization is attributable to
the continued extraordinarily high level of mortgage loan repayments. Loan
servicing fees, which include all contractual and ancillary servicing revenue we
receive, decreased $960,000 to $2.3 million for the three months ended March 31,
2003, from $3.2 million for the three months ended March 31, 2002. This decrease
in loan servicing fees was the result of a decrease in the balance of loans
serviced for others to $2.48 billion at March 31, 2003, from $3.20 billion at
March 31, 2002. The decrease in the balance of loans serviced for others was the
result of runoff in that portfolio, due to repayments in the lower interest rate
environment exceeding the level of new servicing volume from loan sales. Net
gain on sales of loans increased $1.3 million to $2.8 million for the three
months ended March 31, 2003, from $1.5 million for the three months ended March
31, 2002. The increase in net gain on sales of loans was primarily due to more
favorable pricing opportunities during the three months ended March 31, 2003 as
compared to the three months ended March 31, 2002, coupled with an increase in
the volume of fixed rate loans originated and sold into the secondary market.
The current interest rate environment has resulted in a significant increase in
refinance activity and greater demand for fixed rate loans, the majority of
which are not retained for our portfolio.
During the three months ended March 31, 2003, a net gain on sales of securities
of $2.1 million was recognized to offset an anticipated increase in the
valuation allowance for MSR. There were no sales of securities during the three
months ended March 31, 2002.
Other non-interest income decreased $1.7 million to $1.5 million for the three
months ended March 31, 2003, from $3.2 million for the three months ended March
31, 2002, primarily due to income in the first quarter of 2002 related to the
sale of Prudential Financial, Inc. stock, which was received as a result of the
conversion of The Prudential Insurance Company of America from a mutual company
to a stock company, and income from an investment in a limited partnership.
Income from BOLI increased $937,000 to $5.2 million for the three months ended
March 31, 2003, from $4.3 million for the three months ended March 31, 2002.
This increase is
27
primarily attributable to the additional $100.0 million premium paid in the
first quarter of 2002 to purchase additional BOLI. Customer service fees
increased $902,000 to $14.8 million for the three months ended March 31, 2003,
from $13.9 million for the three months ended March 31, 2002.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2003 totaled $52.0
million, an increase of $3.9 million from $48.1 million for the three months
ended March 31, 2002. Non-interest expense consists of general and
administrative expense which includes compensation and benefits expense,
occupancy, equipment and systems expense, federal deposit insurance premiums,
advertising and other operating expense. The increase in non-interest expense
was primarily due to increases in compensation and benefits expense and
occupancy, equipment and systems expense.
Compensation and benefits expense increased $2.7 million to $28.8 million for
the three months ended March 31, 2003, from $26.1 million for the three months
ended March 31, 2002. This increase was attributable to an increase of $1.5
million in pension and other postretirement benefits expense, coupled with staff
additions, primarily in our retail banking network, and normal annual increases
in salaries. The increase in pension expense is primarily related to the
decrease in the value of our pension assets which is a result of the decline in
the equities markets. Occupancy, equipment and systems expense increased
$1.4 million to $14.6 million for the three months ended March 31, 2003,
from $13.2 million for the three months ended March 31, 2002, due to increases
in building and furniture, fixtures and equipment expense and depreciation as
a result of facilities and systems enhancements over the past year and
increases in rent and utilities expense.
Our percentage of general and administrative expense to average assets was 0.93%
for the three months ended March 31, 2003, compared to 0.86% for the three
months ended March 31, 2002. The efficiency ratio, which represents general and
administrative expense divided by the sum of net interest income plus
non-interest income, was 38.52% for the three months ended March 31, 2003,
compared to 33.92% for the three months ended March 31, 2002. The increases in
these ratios are primarily attributable to the increase in general and
administrative expense for the three months ended March 31, 2003 compared to the
three months ended March 31, 2002 discussed previously.
Income Tax Expense
For the three months ended March 31, 2003, income tax expense was $26.5 million,
representing an effective tax rate of 32.0%, compared to $31.5 million,
representing an effective tax rate of 34.0%, for the three months ended March
31, 2002. The reduction in the effective tax rate is primarily due to the
additional BOLI purchase and additional income from subsidiary activities.
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, aggressive collection efforts and 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
28
mortgage lending, the maintenance of sound credit standards for new loan
originations, and a strong real estate market, have resulted in our
maintaining a very low level of non-performing assets in relation to both the
size of our loan portfolio and relative to our peers.
Non-Performing Assets
The following table sets forth information regarding non-performing assets at
March 31, 2003 and December 31, 2002. In addition to the non-performing loans,
we had $819,000 of potential problem loans at March 31, 2003 compared to $1.5
million at December 31, 2002. Such loans are 60-89 days delinquent as shown on
page 30.
At March 31, At December 31,
(Dollars in Thousands) 2003 2002
------------ ---------------
Non-accrual delinquent mortgage loans (1) $37,022 $31,997
Non-accrual delinquent consumer and other loans 1,147 1,485
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 878 1,035
------- -------
Total non-performing loans 39,047 34,517
Real estate owned, net (3) 933 1,091
------- -------
Total non-performing assets $39,980 $35,608
======= =======
Non-performing loans to total loans 0.33% 0.29%
Non-performing loans to total assets 0.17 0.16
Non-performing assets to total assets 0.18 0.16
Allowance for loan losses to non-performing loans 213.73 242.04
Allowance for loan losses to total loans 0.70 0.69
(1) Consists primarily of loans secured by one-to-four family properties.
(2) 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 due, and are primarily secured by one-to-four family properties.
(3) Real estate 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
selling costs.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of March 31, 2003, $14.5 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$759,000 for the three months ended March 31, 2003 and $2.3 million for the year
ended December 31, 2002. This compares to actual payments recorded as interest
income, with respect to such loans, of $273,000 for the three months ended March
31, 2003, and $1.6 million for the year ended December 31, 2002.
29
Excluded from non-performing assets are restructured loans that have complied
with the terms of their restructure agreement for a satisfactory period and
have, therefore, been returned to performing status. Restructured loans that are
in compliance with their restructured terms totaled $4.7 million at March 31,
2003 and $5.0 million at December 31, 2002.
Delinquent Loans
The following table shows a comparison of delinquent loans at March 31, 2003 and
December 31, 2002.
At March 31, 2003 At December 31, 2002
---------------------------------- ----------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------- ---------------- --------------- ----------------
Number Number Number Number
of of of of
(Dollars in Thousands) Loans Amount Loans Amount Loans Amount Loans Amount
------ ------ ------ ------- ------ ------ ------ -------
Mortgage loans:
One-to-four family 5 $ 200 174 $29,582 12 $ 417 185 $30,130
Multi-family 1 51 10 7,356 1 192 6 2,114
Commercial real estate 1 78 3 962 2 324 1 788
Consumer and other loans 66 490 80 1,147 85 571 131 1,485
-- ----- --- ------- --- ------ --- -------
Total delinquent loans 73 $ 819 267 $39,047 100 $1,504 323 $34,517
== ===== === ======= === ====== === =======
Delinquent loans to total loans 0.01% 0.33% 0.01% 0.29%
Allowance for Loan Losses
The following table sets forth the change in our allowance for loan losses for
the three months ended March 31, 2003.
(In Thousands)
--------------
Balance at December 31, 2002 $83,546
Provision charged to operations --
Charge-offs:
One-to-four family (17)
Consumer and other (301)
-------
Total charge-offs (318)
-------
Recoveries:
One-to-four family 21
Consumer and other 205
-------
Total recoveries 226
-------
Net charge-offs (92)
-------
Balance at March 31, 2003 $83,454
=======
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. Net interest income is the primary component of our net
income. Net interest income is the difference between the interest earned on our
loans, securities and other interest-earning assets and the interest expense
incurred on our deposits and borrowings. The yields, costs, and volumes of
loans, securities, deposits and borrowings are directly affected by the levels
of and changes in market interest rates. Additionally, changes in interest rates
also affect the related cash flows of our assets and liabilities as the option
to prepay assets or withdraw liabilities remains with our customers, in most
cases without penalty. The objective of our IRR management policy is to maintain
an appropriate mix and level of assets, liabilities and
30
off-balance sheet items to enable us to meet our growth and/or earnings
objectives, while maintaining specified minimum capital levels as required by
the Office of Thrift Supervision, or OTS, in the case of Astoria Federal, and as
established by our Board of Directors. We use a variety of analyses to monitor,
control and adjust our asset and liability positions, primarily interest rate
sensitivity gap analysis, or gap analysis, and Net Interest Income Sensitivity,
or NII Sensitivity, analysis. Additional IRR modeling is done by Astoria Federal
in conformity with OTS requirements. In conjunction with performing these
analyses we also consider related factors including, but not limited to, our
overall credit profile, non-interest income and non-interest expense. We do not
enter into financial transactions or hold financial instruments for trading
purposes.
Gap Analysis
Gap analysis measures the difference between the amount of interest-earning
assets anticipated to mature or reprice within specific time periods and the
amount of interest-bearing liabilities anticipated to mature or reprice within
the same time periods. The table on page 32, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at March 31, 2003 that we anticipate will reprice or mature in each
of the future time periods shown using certain assumptions based on our
historical experience and other market-based data available to us. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. Prepayment rates will vary
due to a number of factors, including the regional economy in the area where the
underlying collateral is located, seasonal factors, demographic variables and
the assumability of the underlying mortgages. However, the major factors
affecting mortgage prepayment rates are prevailing interest rates and related
mortgage refinancing opportunities.
The Gap Table does not indicate the impact of general interest rate movements on
our net interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates 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.
The Gap Table includes $2.59 billion of callable borrowings classified according
to their maturity dates, primarily in the more than five years category, which
are callable within one year and at various times thereafter. In addition, the
Gap Table includes callable securities with an amortized cost of $231.1 million
classified according to their call dates, of which $130.2 million are callable
within one year and at various times thereafter. The classifications of callable
borrowings and securities are consistent with our experience with these
instruments in the current low interest rate environment. As indicated in the
Gap Table, our one-year cumulative gap at March 31, 2003 was 4.68%. This
compares to a one-year cumulative gap of 18.15% at December 31, 2002. The
decrease in our one-year cumulative gap is primarily attributable to $2.81
billion in borrowings which mature in the first quarter of 2004 which were
classified in the more than one year to three years category at December 31,
2002 and are classified in the one year or less category at March 31, 2003.
31
At March 31, 2003
-------------------------------------------------------------------
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) $ 4,148,441 $2,775,952 $2,981,742 $ 1,516,225 $11,422,360
Consumer and other loans (1) 363,595 25,451 -- -- 389,046
Federal funds sold and
repurchase agreements 205,657 -- -- -- 205,657
Mortgage-backed and other
securities available-for-sale and
FHLB stock 1,972,934 281,380 223,338 308,850 2,786,502
Mortgage-backed and other securities
held-to-maturity 3,512,694 1,501,096 767,005 724,830 6,505,625
----------- ---------- ---------- ----------- -----------
Total interest-earning assets 10,203,321 4,583,879 3,972,085 2,549,905 21,309,190
Net unamortized purchase premiums
and deferred costs (2) 97,450 39,778 30,762 18,623 186,613
----------- ---------- ---------- ----------- -----------
Net interest-earning assets 10,300,771 4,623,657 4,002,847 2,568,528 21,495,803
----------- ---------- ---------- ----------- -----------
Interest-bearing liabilities:
Savings 158,156 316,312 316,312 2,082,388 2,873,168
Money market 1,335,073 17,018 17,018 127,634 1,496,743
NOW and demand deposits 39,204 78,408 78,408 1,276,163 1,472,183
Certificates of deposit 2,647,418 1,634,190 1,056,041 78,374 5,416,023
Borrowed funds 5,069,264 1,297,526 738,526 2,279,423 9,384,739
----------- ---------- ---------- ----------- -----------
Total interest-bearing liabilities 9,249,115 3,343,454 2,206,305 5,843,982 20,642,856
----------- ---------- ---------- ----------- -----------
Interest sensitivity gap 1,051,656 1,280,203 1,796,542 (3,275,454) $ 852,947
----------- ---------- ---------- ----------- -----------
Cumulative interest sensitivity gap $ 1,051,656 $2,331,859 $4,128,401 $ 852,947
=========== ========== ========== ===========
Cumulative interest sensitivity gap
as a percentage of total assets 4.68% 10.37% 18.36% 3.79%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 111.37% 118.52% 127.90% 104.13%
(1) Mortgage loans and consumer and other loans include loans held-for-sale and
exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
NII Sensitivity Analysis
In managing IRR, we also use an internal income simulation model for our NII
Sensitivity analyses. These analyses measure changes in projected net interest
income over various time periods resulting from hypothetical changes in interest
rates. The interest rate scenarios most commonly analyzed reflect gradual and
reasonable changes over a specified time period, which is typically one year.
The base net interest income projection utilizes similar assumptions as those
reflected in the Gap Table, assumes that cash flows are reinvested in similar
assets and liabilities and that interest rates as of the reporting date remain
constant over the projection period. For each alternative interest rate
scenario, corresponding changes in the cash flow and repricing assumptions of
each financial instrument are made to determine the impact on net interest
income.
Assuming the entire yield curve was to increase 200 basis points, through
quarterly parallel increments of 50 basis points, and remain at that level
thereafter, our projected net interest income for the twelve month period
beginning April 1, 2003 would increase by approximately 2.62% from the base
projection. At December 31, 2002, in the up 200 basis point scenario,
32
our projected net interest income for the twelve month period beginning January
1, 2003 would have increased by approximately 1.10% from the base projection.
The current low interest rate environment prevents us from performing an income
simulation for a decline in interest rates of the same magnitude and timing as
our rising interest rate simulation, since certain asset yields, liability
costs, and related indexes are below 2.00%. However, assuming the entire yield
curve was to decrease 100 basis points, through quarterly parallel decrements of
25 basis points, and remain at that level thereafter, our projected net interest
income for the twelve month period beginning April 1, 2003 would decrease by
approximately 6.49% from the base projection. At December 31, 2002, in the down
100 basis point scenario, our projected net interest income for the twelve month
period beginning January 1, 2003 would have decreased by approximately 1.09%
from the base projection.
During the prevailing interest rate environment of the past two years, which has
been characterized by significant declines in market interest rates, we have
experienced very high levels of loan and mortgage-backed securities prepayments.
These very high levels of prepayments have continued during the first quarter of
2003. Although we have continued to reprice our interest-bearing liabilities
during this time, we have not been able to do so to the same degree as our
interest-earning assets. Given our current volume and mix of interest-bearing
liabilities and interest-earning assets, if market interest rates remain at
their present levels for a prolonged period of time or decline further, the cash
flows from continued high levels of prepayments would be reinvested at lower
yields while our cost of funds would decrease at a slower rate, resulting in an
adverse impact on our results of operations.
Various shortcomings are inherent in both the Gap Table and NII Sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII Sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from this analysis. These include, but are not limited to, BOLI, MSR, defined
benefit pension costs and the mark to market adjustments on certain derivative
instruments.
33
Item 4. Controls and Procedures
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act,
as of May 1, 2003. Based upon their evaluation, they each found that our
disclosure controls and procedures were adequate to ensure that information
required to be disclosed in the reports we file and submit under the Exchange
Act is recorded, processed, summarized and reported as and when required.
There were no significant changes in our disclosure controls and procedures or
internal controls for financial reporting or other factors that could
significantly affect those controls subsequent to May 1, 2003, and we identified
no significant deficiencies or material weaknesses requiring corrective action
with respect to such controls.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse affect on
our financial condition, operating results or liquidity.
We are a party to two actions pending against the United States, involving
assisted acquisitions made in the early 1980's and supervisory goodwill
accounting utilized in connection therewith, which could result in a gain. The
ultimate outcomes of such actions are uncertain and there can be no assurance
that we will benefit financially from such litigation.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
34
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
11 Statement regarding computation of per share earnings.
99.1 Written Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.
99.2 Written Statement of Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.
(b) Reports on Form 8-K
1. Report on Form 8-K dated March 4, 2003, which includes under Item 9 of
Form 8-K a press release dated February 21, 2003 announcing our
participation in an investor conference on March 5, 2003 and the text
of the written presentation to be made at the investor conference.
This report has been furnished but not filed pursuant to Regulation
FD.
2. Report on Form 8-K dated January 23, 2003 which includes under Item 9
of Form 8-K (including Item 12 disclosures) a press release dated
January 23, 2003 which includes highlights of our financial results
for the quarter and full year ended December 31, 2002. This report has
been furnished but not filed pursuant to Regulation FD and Regulation
G.
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: May 12, 2003 By: /s/ Monte N. Redman
------------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
35
CERTIFICATIONS
I, George L. Engelke, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astoria Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/S/ George L. Engelke, Jr.
- -----------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Astoria Financial Corporation
36
I, Monte N. Redman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astoria Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/S/ Monte N. Redman
- ----------------------------------------------------
Monte N. Redman
Executive Vice President and Chief Financial Officer
Astoria Financial Corporation
37
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11 Statement regarding computation of per share earnings.
99.1 Written Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
99.2 Written Statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
38