Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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
incorporation or organization) Identification No.)
One Astoria Federal Plaza, Lake Success, New York 11042
-------------------------------------------------------
(Address of principal executive offices)
(516) 327-3000
--------------
(Registrant's telephone number, including area code)
(Securities registered pursuant to Section 12(b) of the Act):
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value New York
$.01 per share, and related Stock Exchange
preferred share purchase rights
(Securities registered pursuant to Section 12(g) of the Act): None
Indicate by check mark whether the registrant (1) has filed all 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
- --------------------------------------------------------------------------------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 30, 2003, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.17 billion. The number of shares of the registrant's Common
Stock outstanding as of March 1, 2004 was 78,677,248 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the
Annual Meeting of Stockholders to be held on May 19, 2004 and any adjournment
thereof, which will be filed with the Securities and Exchange Commission within
120 days from December 31, 2003, are incorporated by reference into Part III.
================================================================================
ASTORIA FINANCIAL CORPORATION
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business...........................................................2
Item 2. Properties........................................................29
Item 3. Legal Proceedings.................................................30
Item 4. Submission of Matters to a Vote of Security Holders...............30
Part II
Item 5. Market for Astoria Financial Corporation's Common
Equity and Related Stockholder Matters.........................30
Item 6. Selected Financial Data...........................................32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........66
Item 8. Financial Statements and Supplementary Data.......................69
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................69
Item 9A. Controls and Procedures...........................................69
Part III
Item 10. Directors and Executive Officers of Astoria Financial
Corporation....................................................70
Item 11. Executive Compensation............................................70
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................70
Item 13. Certain Relationships and Related Transactions....................71
Item 14. Principal Accounting Fees and Services............................71
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................71
SIGNATURES...................................................................73
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K 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 we believe 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 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.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, including Astoria Federal Savings
and Loan Association and its subsidiaries, Astoria Capital Trust I and AF
Insurance Agency, Inc.
ITEM 1. BUSINESS
General
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and
coordinating the business activities of Astoria Federal, we invest primarily in
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. We have acquired, and may continue to acquire or organize
either directly or indirectly through Astoria Federal, other operating
subsidiaries and financial institutions. We continue to evaluate merger and
acquisition activity as part of our strategic objective for long term growth.
Astoria Federal's primary 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 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, general and administrative
expense, other 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. General and administrative expense
consists of compensation and benefits; occupancy, equipment and systems expense;
federal deposit insurance premiums; advertising; and other operating expenses.
Other non-interest expense consisted of extinguishment of debt in 2002 and,
prior to January 1, 2002, amortization of goodwill. Our earnings are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates and U.S. Treasury yield curves,
government policies and actions of regulatory authorities.
In addition to Astoria Federal, Astoria Financial Corporation has 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.
2
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
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at www.sec.gov.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2003, our loan portfolio totaled $12.69 billion, or 56.5% of total assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Mortgage loan originations
and purchases totaled $7.29 billion, including originations of loans
held-for-sale totaling $613.3 million, for the year ended December 31, 2003 and
$5.59 billion, including originations of loans held-for-sale totaling $484.3
million, for the year ended December 31, 2002. Our retail loan origination
program accounted for $3.14 billion of originations during 2003 and $2.22
billion of originations during 2002. We also have an extensive broker network in
nineteen states: New York, New Jersey, Connecticut, Pennsylvania, Massachusetts,
Delaware, Maryland, Ohio, Virginia, North Carolina, South Carolina, Georgia,
Illinois, California, Florida, Michigan, New Hampshire, Rhode Island and
Missouri. Our broker loan origination program consists of relationships with
mortgage brokers and accounted for $2.61 billion of originations during 2003 and
$1.84 billion of originations during 2002. Our third party loan origination
program includes relationships with other financial institutions and mortgage
bankers in forty-four states and accounted for $1.54 billion of originations
during 2003 and $1.53 billion of originations during 2002. See the "Loan
Portfolio Composition" table on page 7 and the "Loan Maturity, Repricing and
Activity" tables on pages 7 and 8.
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment by
the borrower. We also originate a limited number of second mortgage loans which
are underwritten according to the same standards as first mortgage loans.
At December 31, 2003, $8.97 billion, or 71.1%, of our total loan portfolio
consisted of one-to-four family loans, of which $8.14 billion, or 90.7%, were
adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists
primarily of hybrid ARM loans. We currently offer ARM loans which initially have
a fixed rate for one, three, five, seven or ten years and convert into one year
ARM loans at the end of the initial fixed rate period. The one, three, five and
seven year ARM loans have terms of up to forty years and the ten year ARM loans
have terms of up to thirty years. We also offer interest only ARM loans,
generally with thirty year terms, which have an initial fixed rate for three,
five or seven years and convert into one year interest only ARM loans at the end
of the initial fixed rate period. The interest only ARM loans require the
borrower to pay interest only during the first ten years of the loan term. After
the tenth anniversary of the loan, principal and interest payments are required
to amortize the loan over the remaining loan term.
3
All ARM loans we offer have annual and lifetime interest rate ceilings and
floors. Generally, ARM loans pose credit risks somewhat greater than the risks
posed by fixed rate loans primarily because, as interest rates rise, the
underlying payments of the borrower rise, increasing the potential for default.
ARM loans may carry, for a period of time, an initial interest rate which is
less than the fully indexed rate for the loan at the time of origination. We
determine the initial discounted rate in accordance with market and competitive
factors. However, in the current low interest rate environment, we generally
have not been offering our ARM loans at interest rates below the fully indexed
rate. To recognize the credit risks associated with ARM loans initially offered
below their fully-indexed rates, we generally underwrite our one-year ARM loans
assuming a rate equal to 200 basis points over the initial discounted rate, but
not less than 7.00%. For ARM loans with longer adjustment periods, and therefore
less credit risk due to the longer period for the borrower's income to adjust to
anticipated higher future payments, we underwrite the loans using the initial
rate, which may be a discounted rate. We use the same underwriting standards for
our retail, broker and third party mortgage loan originations.
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors with either servicing retained or released. Generally, the sale of
such loans is arranged through a master commitment either on a mandatory
delivery or best efforts basis. At December 31, 2003, loans serviced for others
totaled $1.90 billion.
One-to-four family loan originations and purchases, including originations of
loans held-for-sale, increased $1.04 billion to $5.57 billion in 2003, from
$4.53 billion in 2002. This increase was primarily the result of the significant
increase in mortgage refinance activity due to the continued decline in interest
rates in 2002 and the first half of 2003.
Multi-Family and Commercial Real Estate Lending
While we continue to primarily be a one-to-four family mortgage lender, over the
last several years we have increased our emphasis on multi-family and commercial
real estate loan originations. As of December 31, 2003, our total loan portfolio
contained $2.23 billion, or 17.7%, of multi-family loans and $880.3 million, or
7.0%, of commercial real estate loans. During 2003, we originated $1.65 billion
of multi-family, commercial real estate and mixed use loans compared to $1.01
billion in 2002. Mixed use loans are secured by properties which are intended
for both residential and business use and are classified as multi-family or
commercial real estate based on the greater number of residential versus
commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans generally are
provided as five to fifteen year term balloon loans amortized over fifteen to
thirty years. Our policy generally has been to originate multi-family and
commercial real estate loans in the New York metropolitan area, although, to a
much smaller degree, we also originate loans throughout New York state and in
New Jersey, Connecticut and Pennsylvania. Additionally, our board of directors
has recently authorized us to further expand the areas in which we originate
multi-family loans. In making such loans, we primarily consider the ability of
the net operating income generated by the real estate to support the debt
service, the financial resources, income level and managerial expertise of the
borrower, the marketability of the property and our lending experience
4
with the borrower. Our current practice is to require a minimum debt service
coverage ratio of 1.20 times for multi-family and commercial real estate loans.
Additionally, on multi-familyloans, our current practice is to finance up to 80%
of the lesser of the purchase price or appraised value of the property securing
the loan on purchases or 80% of the appraised value on refinances. On commercial
real estate loans, our current practice is to finance up to 75% of the lesser of
the purchase price or appraised value of the property securing the loans on
purchases or 75% of the appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
forty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2003, our single largest multi-family loan
had an outstanding balance of $10.0 million and was current and secured by a
275-unit apartment complex located in Staten Island, New York. At December 31,
2003, the average balance of loans in our multi-family portfolio was
approximately $700,000.
Commercial real estate loans are typically secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2003, our single largest commercial real estate loan had an
outstanding principal balance of $8.3 million and was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2003, the
average balance of loans in our commercial real estate portfolio was
approximately $1.1 million.
Multi-family and commercial real estate loans generally involve a greater degree
of credit risk than one-to-four family loans because they typically have larger
balances and are more affected by adverse conditions in the economy. As such,
these loans require more ongoing evaluation and monitoring. Because payments on
loans secured by multi-family properties and commercial real estate often depend
upon the successful operation and management of the properties and the
businesses which operate from within them, repayment of such loans may be
affected by factors outside the borrower's control, such as adverse conditions
in the real estate market or the economy or changes in government regulation.
Construction Loans
As of December 31, 2003, $99.0 million, or 0.8%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Generally, we offer
construction loans up to a maximum of $10.0 million. As of December 31, 2003,
our average construction loan commitment was approximately $2.7 million and the
average balance of loans in our construction loan portfolio was approximately
$1.5 million.
Construction lending generally involves additional credit risks to the lender as
compared with other types of mortgage lending. These credit risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Construction loans are funded monthly, based on the work completed,
and are generally monitored by a professional construction engineer and our
commercial real estate lending department. To a lesser extent, qualified bank
appraisers and certified home inspectors are utilized to monitor less complex
projects.
Consumer and Other Loans
At December 31, 2003, $430.1 million, or 3.4%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity and commercial lines of credit, are offered primarily on a fixed
rate, short-term basis. The underwriting standards we employ for consumer and
other loans include a
5
determination of the borrower's payment history on other debts and an assessment
of the borrower's ability to make payments on the proposed loan and other
indebtedness. In addition to the credit worthiness of the borrower, the
underwriting process also includes a review of the value of the collateral, if
any, in relation to the proposed loan amount. Our consumer and other loans tend
to have higher interest rates, shorter maturities and are considered to entail a
greater risk of default than one-to-four family mortgage loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 90% of the appraised value
of the property. Such lines of credit are underwritten based on our evaluation
of the borrower's ability to repay the debt. Home equity lines of credit are
adjustable rate loans which are indexed to the prime rate and generally reset
monthly.
Included in consumer and other loans were $21.9 million of commercial business
loans at December 31, 2003. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for loans in excess of $15.0 million or when the overall lending
relationship exceeds $60.0 million, mortgage loan approval authority has been
delegated by the Board of Directors to our underwriters and Loan Committee,
which consists of certain members of executive management and other Astoria
Federal officers.
For mortgage loans secured by one-to-four family properties, upon receipt of a
completed application from a prospective borrower, we generally order a credit
report, verify income and other information and, if necessary, obtain additional
financial or credit related information. For mortgage loans secured by
multi-family properties and commercial real estate, we obtain financial
information concerning the operation of the property. Personal guarantees are
generally not obtained with respect to such loans. An appraisal of the real
estate used as collateral for mortgage loans is also obtained as part of the
underwriting process. All appraisals are performed by licensed or certified
appraisers, the majority of which are licensed independent third party
appraisers. We have an internal appraisal review process to monitor third party
appraisals. The Board of Directors annually reviews and approves our appraisal
policy.
6
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
Percent Percent Percent
of of of
(Dollars in Thousands) Amount Total Amount Total Amount Total
- ---------------------------------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,971,048 71.13% $ 9,209,360 76.86% $10,105,063 83.59%
Multi-family 2,230,414 17.69 1,599,985 13.35 1,094,312 9.05
Commercial real estate 880,296 6.98 744,623 6.21 598,334 4.95
Construction 99,046 0.79 56,475 0.47 50,739 0.42
- ---------------------------------------------------------------------------------------------------------
Total mortgage loans 12,180,804 96.59 11,610,443 96.89 11,848,448 98.01
- ---------------------------------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 386,846 3.07 323,494 2.70 189,259 1.57
Commercial 21,937 0.17 22,569 0.19 18,124 0.15
Lines of Credit, Overdraft 12,963 0.10 15,475 0.13 18,046 0.15
Passbook 6,995 0.06 7,502 0.06 9,012 0.07
Other 1,405 0.01 3,598 0.03 5,753 0.05
- ---------------------------------------------------------------------------------------------------------
Total consumer and other loans 430,146 3.41 372,638 3.11 240,194 1.99
- ---------------------------------------------------------------------------------------------------------
Total loans (gross) 12,610,950 100.00% 11,983,081 100.00% 12,088,642 100.00%
Net unamortized premiums
and deferred loan costs 76,037 76,280 78,619
- ---------------------------------------------------------------------------------------------------------
Total loans 12,686,987 12,059,361 12,167,261
Allowance for loan losses (83,121) (83,546) (82,285)
- ---------------------------------------------------------------------------------------------------------
Total loans, net $12,603,866 $11,975,815 $12,084,976
=========================================================================================================
At December 31,
---------------------------------------------
2000 1999
---------------------------------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
- ---------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 9,850,390 86.79% $ 9,006,894 88.07%
Multi-family 801,917 7.07 615,438 6.02
Commercial real estate 480,211 4.23 398,198 3.89
Construction 34,599 0.30 34,837 0.34
- ---------------------------------------------------------------------------------
Total mortgage loans 11,167,117 98.39 10,055,367 98.32
- ---------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 133,748 1.18 116,726 1.14
Commercial 8,822 0.08 4,531 0.04
Lines of Credit, Overdraft 20,603 0.18 23,186 0.23
Passbook 8,710 0.08 7,481 0.07
Other 10,673 0.09 20,200 0.20
- ---------------------------------------------------------------------------------
Total consumer and other loans 182,556 1.61 172,124 1.68
- ---------------------------------------------------------------------------------
Total loans (gross) 11,349,673 100.00% 10,227,491 100.00%
Net unamortized premiums
and deferred loan costs 72,622 58,803
- ---------------------------------------------------------------------------------
Total loans 11,422,295 10,286,294
Allowance for loan losses (79,931) (76,578)
- ---------------------------------------------------------------------------------
Total loans, net $11,342,364 $10,209,716
=================================================================================
Loan Maturity, Repricing and Activity
The following table shows the contractual maturities of our loans receivable at
December 31, 2003 and does not reflect the effect of prepayments or scheduled
principal amortization.
At December 31, 2003
-----------------------------------------------------------------------------
One-to Consumer
-Four Multi- Commercial and Total Loans
(In Thousands) Family Family Real Estate Construction Other Receivable
- ---------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 5,784 $ 1,548 $ 3,978 $61,794 $ 18,072 $ 91,176
After one year:
One to three years 11,947 4,364 5,310 32,112 17,587 71,320
Three to five years 43,211 30,643 27,347 -- 9,727 110,928
Five to ten years 458,812 867,403 429,150 5,140 11,969 1,772,474
Ten to twenty years 549,836 1,039,538 399,337 -- 26,469 2,015,180
Over twenty years 7,901,458 286,918 15,174 -- 346,322 8,549,872
- ---------------------------------------------------------------------------------------------------------
Total due after one year 8,965,264 2,228,866 876,318 37,252 412,074 12,519,774
- ---------------------------------------------------------------------------------------------------------
Total amount due $8,971,048 $2,230,414 $880,296 $99,046 $430,146 12,610,950
Net unamortized premiums and deferred loan costs 76,037
Allowance for loan losses (83,121)
- ---------------------------------------------------------------------------------------------------------
Loans receivable, net $12,603,866
=========================================================================================================
7
The following table sets forth at December 31, 2003, the dollar amount of our
loans receivable contractually maturing after December 31, 2004, and whether
such loans have fixed interest rates or adjustable interest rates. Our hybrid
ARM loans are classified as adjustable rate loans.
Maturing After December 31, 2004
--------------------------------------
(In Thousands) Fixed Adjustable Total
- --------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 825,292 $ 8,139,972 $ 8,965,264
Multi-family 420,727 1,808,139 2,228,866
Commercial real estate 134,752 741,566 876,318
Construction -- 37,252 37,252
Consumer and other loans 20,470 391,604 412,074
- --------------------------------------------------------------------------------
Total $1,401,241 $11,118,533 $12,519,774
================================================================================
The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31,
---------------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------
Mortgage loans (gross) (1):
At beginning of year $11,671,567 $11,889,940 $11,180,662
Mortgage loans originated:
One-to-four family 4,036,573 2,992,746 2,510,227
Multi-family 1,231,944 750,196 413,518
Commercial real estate 418,107 259,986 178,246
Construction 64,300 50,942 29,187
- --------------------------------------------------------------------------------------
Total mortgage loans originated 5,750,924 4,053,870 3,131,178
- --------------------------------------------------------------------------------------
Purchases of mortgage loans (2) 1,536,139 1,534,999 1,427,099
Sales of mortgage loans (645,908) (463,984) (379,929)
Transfer of loans to real estate owned (2,028) (1,900) (5,420)
Principal repayments (6,108,400) (5,341,016) (3,462,677)
Net loans charged off (63) (342) (973)
- --------------------------------------------------------------------------------------
At end of year $12,202,231 $11,671,567 $11,889,940
======================================================================================
Consumer and other loans (gross) (3):
At beginning of year $ 374,183 $ 242,092 $ 184,710
Consumer and other loans originated 286,238 279,905 178,682
Sales of consumer and other loans (3,154) (3,518) (4,061)
Principal repayments (225,113) (143,592) (115,685)
Net loans charged off (362) (704) (1,554)
- --------------------------------------------------------------------------------------
At end of year $ 431,792 $ 374,183 $ 242,092
======================================================================================
(1) Includes loans classified as held-for-sale totaling $21.4 million, $61.2
million and $41.5 million at December 31, 2003, 2002 and 2001,
respectively.
(2) Purchases of mortgage loans represent third party loan originations and are
predominantly secured by one-to-four family properties.
(3) Includes loans classified as held-for-sale totaling $1.6 million, $1.5
million and $1.9 million at December 31, 2003, 2002 and 2001, respectively.
8
Asset Quality
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family 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. 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 strengthen our financial condition.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent,
in the case of one-to-four family mortgage loans and consumer loans, primarily
on employment and other sources of income, and in the case of multi-family and
commercial real estate loans, on the cash flow generated by the property, which
in turn is impacted by general economic conditions. Other factors, such as
unanticipated expenditures or changes in the financial markets may also impact a
borrower's ability to pay. Collateral values, particularly real estate values,
are also impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
Non-performing Assets
Non-performing assets include non-accrual loans, loans delinquent 90 days or
more and still accruing interest and real estate owned, or REO. Total
non-performing assets decreased to $31.3 million at December 31, 2003, from
$35.6 million at December 31, 2002. Non-performing loans, the most significant
component of non-performing assets, decreased $4.8 million to $29.7 million at
December 31, 2003, from $34.5 million at December 31, 2002. The ratio of
non-performing loans to total loans decreased to 0.23% at December 31, 2003,
from 0.29% at December 31, 2002. Our ratio of non-performing assets to total
assets was 0.14% at December 31, 2003, compared to 0.16% at December 31, 2002.
The allowance for loan losses as a percentage of total non-performing loans was
280.10% at December 31, 2003, compared to 242.04% at December 31, 2002. For a
further discussion of the allowance for loan losses and non-performing assets
and loans, see Item 7, "Management's Discussion and Analysis," or "MD&A."
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in most instances the borrower has only missed
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. In some
circumstances, we continue to accrue interest on loans delinquent 90 days or
more as to their maturity date, but not their interest due. In general, 90 days
prior to a loan's maturity, the borrower is reminded of the maturity date. Where
the borrower has continued to make monthly payments to us and where we do not
have a reason to believe that any loss will be incurred on the loan, we have
treated these loans as current and have continued to accrue interest. Such loans
consist primarily of one-to-four family mortgage loans and totaled $563,000 at
December 31, 2003 and $1.0 million at December 31, 2002.
Real Estate Owned
The net carrying value of our REO totaled $1.6 million at December 31, 2003 and
consisted of one-to-four family properties. The REO balance increased $544,000,
from $1.1 million at December 31, 2002. REO is carried net of all allowances for
losses at the lower of cost or fair value less estimated selling costs. See the
table on page 62 for further detail on our REO.
9
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our classified assets.
Federal regulations and our policy require the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as special mention, substandard, doubtful or loss. An asset classified as
special mention has potential weaknesses, which, if uncorrected, may result in
the deterioration of the repayment prospects or in our credit position at some
future date. An asset classified as substandard is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full satisfaction of the
loan amount, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. Assets classified as loss are those
considered uncollectible and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Those assets classified as substandard, doubtful or loss are considered
adversely classified. See the table on page 62 for additional information on our
classified assets.
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the estimated fair value.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2003, net of
their related allowance for loan losses of $1.4 million, totaled $10.2 million.
Interest income recognized on impaired loans amounted to $597,000 for the year
ended December 31, 2003. For further detail on our impaired loans, see Note 4 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies" in Item 7, "MD&A."
In addition to the requirements of accounting principles generally accepted in
the United States of America, or GAAP, related to loss contingencies, a
federally chartered savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other
federal banking agencies, provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking
10
agency examiners to use in determining the adequacy of valuation allowances. It
is required that all institutions have effective systems and controls to
identify, monitor and address asset quality problems, analyze all significant
factors that affect the collectibility of the portfolio in a reasonable manner
and establish acceptable allowance evaluation processes that meet the objectives
of the federal regulatory agencies. While we believe that the allowance for loan
losses has been established and maintained at adequate levels, future
adjustments may be necessary if economic or other conditions differ
substantially from the conditions used in making the initial determinations. In
addition, there can be no assurance that the OTS or other regulators, as a
result of reviewing our loan portfolio and/or allowance, will not request that
we alter our allowance for loan losses, thereby affecting our financial
condition and earnings.
Investment Activities
General
Our investment policy is designed to complement our lending activities, generate
a favorable return without incurring undue interest rate and credit risk, enable
us to manage the interest rate sensitivity of our overall assets and liabilities
and provide and maintain liquidity, primarily through cash flow. In establishing
our investment strategies, we consider our business and growth plans, the
economic environment, our interest rate sensitivity position, the types of
securities held and other factors. At December 31, 2003, our portfolio of
mortgage-backed and other securities totaled $8.45 billion, or 37.6% of total
assets.
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, including collateralized mortgage
obligations, or CMOs, and real estate mortgage investment conduits, or REMICs,
certain certificates of deposit of insured banks and federally chartered savings
associations, certain bankers acceptances and, subject to certain limits,
corporate securities, commercial paper and mutual funds. Our investment policy
also permits us to invest in certain derivative financial instruments. We do not
use derivatives for trading purposes. See Note 1 and Note 11 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data," for further discussion of such derivative financial
instruments.
Securities
Our securities portfolio is comprised primarily of mortgage-backed securities.
At December 31, 2003, our mortgage-backed securities totaled $8.24 billion, or
97.6% of total securities, of which $8.06 billion, or 95.5% of total securities,
were REMIC and CMO mortgage-backed securities, substantially all of which had
fixed rates. During the year ended December 31, 2003, we purchased $9.30 billion
of REMIC and CMO mortgage-backed securities as a result of our redeployment of
our cash flows in excess of our mortgage and other loan fundings. These
securities provide liquidity, collateral for borrowings and minimal credit risk
while providing appropriate returns and are an attractive alternative to other
investments due to the wide variety of maturity and repayment options available.
Of the REMIC and CMO mortgage-backed securities portfolio, $7.19 billion, or
89.1%, are insured or guaranteed, either directly or indirectly, by Fannie Mae,
or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, or the Government
National Mortgage Association, or GNMA, as issuer. The balance of this portfolio
is comprised of privately issued securities, substantially all of which have a
credit rating of AAA. In addition to our REMIC and CMO mortgage-backed
securities, at December 31, 2003, we had $181.1 million or 2.1% of total
securities, in mortgage-backed pass-through certificates insured or guaranteed
by either FNMA, FHLMC or GNMA.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, our mortgage-backed securities are weighted at no more
than 20% for
11
OTS risk-based capital purposes, compared to the 50% risk weighting assigned to
most non-securitized one-to-four family mortgage loans. While mortgage-backed
securities carry a reduced credit risk as compared to whole loans, they, along
with whole loans, remain subject to the risk of a fluctuating interest rate
environment. Changes in interest rates affect both the prepayment rate and
estimated fair value of mortgage-backed securities and mortgage loans.
The other securities portfolio totaled $203.7 million, or 2.4% of total
securities, and consisted of FNMA and FHLMC preferred stock, obligations of the
U.S. Government and agencies, obligations of states and political subdivisions
and corporate debt and other securities. Included in the other securities
portfolio are various securities, which, by their terms, may be called by the
issuer, typically after the passage of a fixed period of time. As of December
31, 2003, the amortized cost of such callable securities totaled $161.9 million.
Securities called during the year ended December 31, 2003 totaled $198.1
million.
At December 31, 2003, our securities available-for-sale totaled $2.65 billion
and our securities held-to-maturity totaled $5.79 billion. For a further
discussion of our securities portfolio, see the tables on pages 13 and 14, Item
7, "MD&A" and Note 1 and Note 3 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY,
Astoria Federal is required to maintain a specified investment in the capital
stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank
System."
Federal Funds Sold and Repurchase Agreements
We invest in various money market instruments, including overnight and term
federal funds and repurchase agreements (securities purchased under agreements
to resell). Money market instruments are used to invest our available funds
resulting from cash flow and to help satisfy liquidity needs. For a further
discussion of our federal funds sold and repurchase agreements, see Item 7,
"MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
12
Securities Portfolio
The following table sets forth the composition of our available-for-sale and
held-to-maturity securities portfolios at their respective carrying values in
dollar amounts and in percentages of the portfolios at the dates indicated.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
Percent Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 166,724 6.28% $ 249,459 8.93% $ 462,748 13.04%
REMICs and CMOs:
Agency issuance (1) 2,227,851 83.90 616,552 22.08 1,402,093 39.50
Non-agency issuance 103,740 3.91 1,587,622 56.86 1,150,122 32.41
Obligations of the U.S. Government
and agencies 1,767 0.07 133,448 4.78 359,561 10.13
FNMA and FHLMC preferred stock 131,361 4.95 136,682 4.89 111,276 3.14
Corporate debt and other securities 23,549 0.89 68,818 2.46 63,383 1.78
- ------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,654,992 100.00% $2,792,581 100.00% $3,549,183 100.00%
==================================================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 14,345 0.25% $ 24,534 0.49% $ 36,620 0.82%
REMICs and CMOs:
Agency issuance (1) 4,958,633 85.60 3,595,244 71.31 2,979,357 66.74
Non-agency issuance 772,728 13.34 1,306,113 25.91 1,043,110 23.37
Obligations of the U.S. Government
and agencies -- -- 65,776 1.30 362,034 8.11
Obligations of states and
political subdivisions 37,038 0.64 39,611 0.79 42,807 0.96
Corporate debt securities 9,983 0.17 9,979 0.20 -- --
- ------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,792,727 100.00% $5,041,257 100.00% $4,463,928 100.00%
==================================================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
During the quarter ended June 30, 2001, we transferred agency REMIC and CMO
securities with an amortized cost of $2.90 billion and a fair value of $2.88
billion from available-for-sale to held-to-maturity. The net unrealized loss,
which was being amortized over the life of the securities transferred, was $22.6
million at the date of the transfer and was included, net of taxes, in
accumulated other comprehensive income. The balance of the net unrealized loss
was fully amortized as of December 31, 2003 and totaled $1.3 million at December
31, 2002 and $15.7 million at December 31, 2001.
13
The table below sets forth certain information regarding the amortized costs,
estimated fair values, weighted average yields and contractual maturities of our
federal funds sold and repurchase agreements, FHLB-NY stock and mortgage-backed
and other securities available-for-sale and held-to-maturity portfolios at
December 31, 2003.
Within One to Five to
One Year Five Years Ten Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield
- ------------------------------------------------------------------------------------------------------------
Federal funds sold and
repurchase agreements $65,926 0.96% $ -- --% $ -- --%
===========================================================================================================
FHLB-NY stock (1)(2) $ -- --% $ -- --% $ -- --%
===========================================================================================================
Mortgage-backed and other
securities available-for-sale:
Agency pass-through certificates (3) $ -- --% $ 1,409 5.87% $4,532 7.73%
REMICs and CMOs:
Agency issuance (3) -- -- 173 6.55 -- --
Non-agency issuance -- -- 4 8.00 585 6.40
Obligations of the U.S.
Government and agencies 500 3.21 738 4.04 500 3.00
FNMA and FHLMC preferred stock (1) -- -- -- -- -- --
Corporate debt and other securities -- -- 1,000 6.80 -- --
- -----------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 500 3.21% $ 3,324 5.78% $5,617 7.17%
===========================================================================================================
Mortgage-backed and other
securities held-to-maturity:
Agency pass-through certificates (3) $ 1 7.76% $ 2,171 7.98% $4,839 7.06%
REMICs and CMOs:
Agency issuance (3) -- -- -- -- 275 10.07
Non-agency issuance -- -- -- -- -- --
Obligations of states and
political subdivisions -- -- -- -- 754 6.50
Corporate debt securities -- -- 9,983 5.80 -- --
- -----------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 1 7.76% $12,154 6.19% $5,868 7.13%
===========================================================================================================
Over
Ten Years Total Securities
--------------------- ----------------------------------
Weighted Estimated Weighted
Amortized Average Amortized Fair Average
(Dollars in Thousands) Cost Yield Cost Value Yield
- ----------------------------------------------------------------------------------------------------
Federal funds sold and
repurchase agreements $ -- --% $ 65,926 $ 65,926 0.96%
===================================================================================================
FHLB-NY stock (1)(2) $ 213,450 1.45% $ 213,450 $ 213,450 1.45%
===================================================================================================
Mortgage-backed and other
securities available-for-sale:
Agency pass-through certificates (3) $ 155,258 4.49% $ 161,199 $ 166,724 4.59%
REMICs and CMOs:
Agency issuance (3) 2,297,711 3.92 2,297,884 2,227,851 3.92
Non-agency issuance 109,080 3.40 109,669 103,740 3.42
Obligations of the U.S.
Government and agencies -- -- 1,738 1,767 3.50
FNMA and FHLMC preferred stock (1) 140,015 5.03 140,015 131,361 5.03
Corporate debt and other securities 20,991 7.92 21,991 23,549 7.87
- ---------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,723,055 4.02% $2,732,496 $2,654,992 4.03%
===================================================================================================
Mortgage-backed and other
securities held-to-maturity:
Agency pass-through certificates (3) $ 7,334 8.20% $ 14,345 $ 15,329 7.78%
REMICs and CMOs:
Agency issuance (3) 4,958,358 4.36 4,958,633 4,974,316 4.36
Non-agency issuance 772,728 4.29 772,728 772,021 4.29
Obligations of states and
political subdivisions 36,284 6.70 37,038 37,038 6.70
Corporate debt securities -- -- 9,983 10,413 5.80
- ---------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,774,704 4.37% $5,792,727 $5,809,117 4.38%
===================================================================================================
(1) As equity securities have no maturities, they are classified in the over
ten years category.
(2) The carrying amount of FHLB-NY stock equals cost.
(3) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
14
Sources of Funds
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, NOW accounts, money
market accounts, demand deposit accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on our sales and marketing efforts, including our PEAK Process, new
products, quality service, competitive rates and long-standing customer
relationships to attract and retain these deposits. Brokered deposits are used
occasionally to supplement retail customer deposits in raising funds for
financing and liquidity purposes. At December 31, 2003, our deposits totaled
$11.19 billion. Of the total deposit balance, $1.45 billion, or 13.0%, represent
Individual Retirement Accounts. We held no brokered deposits at December 31,
2003.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. Although we have experienced continued intense
competition for deposits, particularly money market and checking accounts, we
have not increased the rates we offer on these types of accounts as we do not
consider it a cost effective strategy in the current low interest rate
environment. Nevertheless, we have maintained a strong level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 50.8% of total deposits at December 31, 2003 and 53.4% of total
deposits at December 31, 2002.
For a further discussion of our deposits, see the tables below and on page 16,
Item 7, "MD&A" and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
The following table presents our deposit activity for the years indicated.
For the Year Ended December 31,
----------------------------------------
(Dollars in Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Opening balance $11,067,196 $10,903,693 $10,071,687
Net (withdrawals) deposits (105,853) (124,497) 432,017
Interest credited 225,251 288,000 399,989
- --------------------------------------------------------------------------------
Ending balance $11,186,594 $11,067,196 $10,903,693
================================================================================
Net increase $ 119,398 $ 163,503 $ 832,006
================================================================================
Percentage increase 1.08% 1.50% 8.26%
================================================================================
The following table sets forth the maturity periods of our certificates of
deposit in amounts of $100,000 or more at December 31, 2003.
(In Thousands) Amount
- ----------------------------------------
Within three months $ 225,230
Three to six months 116,667
Six to twelve months 164,222
Over twelve months 556,160
- ----------------------------------------
Total $1,062,279
========================================
15
The following table sets forth the distribution of our average deposit balances
for the periods indicated and the weighted average nominal interest rates for
each category of deposit presented.
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Average Percent Nominal Average Percent Nominal Average Percent Nominal
(Dollars in Thousands) Balance of Total Rate Balance of Total Rate Balance of Total Rate
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 2,907,541 25.96% 0.45% $ 2,754,000 24.80% 1.05% $ 2,495,532 23.70% 1.83%
Money market 1,403,363 12.53 0.71 1,876,107 16.90 1.72 1,734,232 16.47 3.71
NOW 851,723 7.60 0.18 732,905 6.60 0.43 599,919 5.70 0.85
Non-interest bearing NOW
and demand deposit 618,082 5.52 -- 536,961 4.84 -- 475,605 4.52 --
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,780,709 51.61 0.43 5,899,973 53.14 1.09 5,305,288 50.39 2.17
- -------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit (1):
Within one year 1,424,825 12.72 1.55 1,493,726 13.45 2.31 1,698,436 16.13 4.23
One to three years 1,688,220 15.07 3.51 1,790,529 16.12 4.48 1,769,563 16.81 5.61
Three to five years 2,071,864 18.51 5.22 1,658,333 14.94 5.67 1,410,231 13.39 6.08
Over five years 86,749 0.77 4.95 79,177 0.71 5.53 94,409 0.90 6.61
Jumbo 148,067 1.32 1.74 181,845 1.64 2.75 250,524 2.38 5.01
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,419,725 48.39 3.62 5,203,610 46.86 4.19 5,223,163 49.61 5.28
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $11,200,434 100.00% 1.97% $11,103,583 100.00% 2.54% $10,528,451 100.00% 3.71%
===============================================================================================================================
(1) Terms indicated are original, not term remaining to maturity.
The following table presents, by rate categories, the remaining periods to
maturity of our certificates of deposit outstanding at December 31, 2003 and the
balances of our certificates of deposit outstanding at December 31, 2003, 2002
and 2001.
Period to maturity from December 31, 2003 At December 31,
--------------------------------------------------- ------------------------------------
Within One to two Two to three Over three
(In Thousands) one year years years years 2003 2002 2001
- ------------------------------------------------------------------------------ ------------------------------------
Certificates of deposit:
1.99% or less $1,300,602 $128,521 $ 17,014 $ -- $1,446,137 $ 919,465 $ 516,841
2.00% to 2.99% 373,621 249,806 161,222 12,857 797,506 1,003,774 329,506
3.00% to 3.99% 490,179 16,135 357,825 403,978 1,268,117 625,858 493,062
4.00% to 4.99% 218,371 86,469 160,363 146,772 611,975 775,861 1,037,154
5.00% to 5.99% 89,624 928 231,500 356,504 678,556 955,627 947,565
6.00% and over 238,039 416,716 44,051 301 699,107 872,453 1,836,170
- ---------------------------------------------------------------------------------------------------------------------
Total $2,710,436 $898,575 $971,975 $920,412 $5,501,398 $5,153,038 $5,160,298
=====================================================================================================================
Borrowings
Borrowings are used as a complement to deposit generation as a funding source
for asset growth and are an integral part of our interest rate risk management
strategy. We enter into reverse repurchase agreements (securities sold under
agreements to repurchase) with nationally recognized primary securities dealers
and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings
and are secured by the securities sold under the agreements. We also obtain
advances from the FHLB-NY which are generally secured by a blanket lien against,
among other things, our one-to-four family mortgage loan portfolio and our
investment in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will
advance, for purposes other than for meeting withdrawals, fluctuates from time
to time in accordance with the policies of the FHLB-NY. See "Regulation and
Supervision - Federal Home Loan Bank System." Occasionally, we will obtain funds
through the issuance of unsecured debt obligations. These obligations are
classified as other borrowings in our statement of financial condition. At
December 31, 2003, borrowings totaled $9.63 billion.
16
In addition, at December 31, 2003, we had available a 12-month commitment for
overnight and one month lines of credit with the FHLB-NY totaling $100.0
million. Both lines of credit are generally priced at the federal funds rate
plus 10.0 basis points and reprice daily.
Included in our borrowings are various obligations which, by their terms, may be
called by the securities dealers and the FHLB-NY. At December 31, 2003, we had
$2.59 billion of borrowings which are callable within one year and at various
times thereafter and have contractual maturities of up to five years.
For further information regarding our borrowings, including our borrowings
outstanding, average borrowings, maximum borrowings and weighted average
interest rates at and for each of the years ended December 31, 2003, 2002 and
2001, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and
growing our mutual fund, deferred annuities and insurance sales. Our mutual
fund, deferred annuities and insurance sales occur through our wholly-owned
subsidiaries. See "Subsidiary Activities."
Market Area and Competition
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our retail banking network includes
multiple delivery channels including full service banking offices, automated
teller machines, or ATMs, and telephone and internet banking capabilities. We
consider our strong retail banking network, together with our reputation for
financial strength and customer service, as our major strengths in attracting
and retaining customers in our market areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. Astoria Federal ranked third in deposit market share, with an
8.3% market share, in the Long Island market, which includes the counties of
Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance
Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30,
2003.
Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network in nineteen states and through a third party loan origination
program in forty-four states. Our broker and third party loan origination
programs provide efficient and diverse delivery channels for deployment of our
cash flows. Additionally, they provide geographic diversification, reducing our
exposure to concentrations of credit risk. At December 31, 2003, $6.49 billion,
or 53.3%, of our total mortgage loan portfolio was secured by properties located
in 46 states other than New York. Excluding New York, we have a concentration of
mortgage lending of greater than 5.0% in four states: Connecticut, which
comprises 10.0% of our total mortgage loan portfolio; New Jersey, which
comprises 9.9% of our total mortgage loan portfolio; Illinois, which comprises
6.0% of our total mortgage loan portfolio; and Massachusetts, which comprises
5.7% of our total mortgage loan portfolio.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past several years, various large
out-of-state financial institutions have entered the New York metropolitan area
market. All are our competitors to varying degrees. Our competition for loans,
both locally and in the aggregate, comes principally from mortgage banking
companies, commercial banks, savings
17
banks and savings and loan associations. We also have experienced continued
intense competition for deposits, particularly money market and checking
accounts, from certain local competitors, as well as recent entrants into the
local market, who have offered these accounts at well above market rates. Our
most direct competition for deposits comes from commercial banks, savings banks,
savings and loan associations and credit unions. We also face intense
competition for deposits from money market mutual funds and other corporate and
government securities funds as well as from other financial intermediaries such
as brokerage firms and insurance companies.
During 2003, the nation continued its recovery from the recession. The national
and local real estate markets have remained strong and continue to support new
and existing home sales. While the recovering economy and strength of the real
estate markets has helped us maintain our strong credit quality and purchase
mortgage activity, the continued decline in interest rates during the first half
of 2003 resulted in an extraordinary increase in refinance and prepayment
activity during most of 2003. As a result, we, along with other mortgage
originators and investors, were faced with the increased challenge of
redeployment of funds in a lower interest rate environment. The rise in interest
rates during the second half of 2003 has resulted in a decrease in refinance
activity and cash flows. Interest rates, however, remain at historical lows. To
date, other than the additional challenges resulting from the low interest rate
environment, our banking and lending operations have not been negatively
affected by the national and local economies. However, we cannot guarantee that
our operations will not be affected in the future should current economic
conditions worsen.
Subsidiary Activities
We have three direct wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., which are reported on a consolidated
basis at December 31, 2003.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million of Capital Securities. Effective January 1, 2004, we adopted revised
Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN
46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51," which requires us to deconsolidate Astoria Capital Trust I for
financial reporting purposes. The impact of this deconsolidation is immaterial
to our financial condition and results of operations. See Note 8 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data" for further discussion of the Capital Securities and the
deconsolidation of Astoria Capital Trust I upon adoption of FIN 46(R) effective
January 1, 2004.
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.
At December 31, 2003, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety
of mutual funds through its licensed agents and stock brokerage services through
an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses
and administrative services it provides to AF Agency, Inc. Fees generated by AF
Agency, Inc. totaled $9.3 million for the year ended December 31, 2003, which
represented 7.7% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. The initial premium paid was $250.0 million. An additional
$100.0 million premium was paid in the first quarter of 2002 to purchase
additional BOLI.
18
Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999, to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, which qualifies as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. APFC
mortgage loans totaled $5.47 billion at December 31, 2003.
Suffco Service Corporation serves as document custodian in connection with
mortgage loans being serviced for FNMA and certain other investors.
Infoserve Corporation provides research information services for Astoria Federal
and other financial institutions. The research generally relates to check
clearing and processing as well as check and money order issuances.
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has four subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
Astoria Federal has five additional subsidiaries, one of which is a single
purpose entity that has an interest in a real estate investment, which is not
material to our financial condition; one of which had an interest in a real
estate investment which was sold in December 2003; and two of which have no
assets or operations but may be used to acquire interests in real estate in the
future. The fifth such subsidiary serves as a holding company for one of the
other four.
Astoria Federal has two additional subsidiaries which are inactive, one of which
Astoria Federal intends to dissolve.
Personnel
As of December 31, 2003, we had 1,824 full-time employees and 294 part-time
employees, or 1,971 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
Regulation and Supervision
General
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its
deposit accounts are insured up to applicable limits by the FDIC under the
Savings Association Insurance Fund, or SAIF, except for those deposits acquired
from The Greater New York Savings Bank, which are insured by the FDIC under the
Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the
OTS concerning our activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other financial institutions. The OTS
periodically performs safety and soundness examinations of Astoria Federal and
us and tests our compliance with various regulatory requirements. The FDIC
reserves the right to do so as well. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the
19
OTS that enforcement action be taken with respect to a particular federally
chartered savings association and, if action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.
This regulation and supervision establish a comprehensive framework to regulate
and control the activities in which we can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OTS, FDIC or Congress, could have a material adverse
impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
Federally Chartered Savings Association Regulation
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations, Astoria Federal may invest in mortgage loans secured
by residential and non-residential real estate, commercial and consumer loans,
certain types of debt securities and certain other assets. Astoria Federal may
also establish service corporations that may engage in activities not otherwise
permissible for Astoria Federal, including certain real estate equity
investments and securities and insurance brokerage activities. These investment
powers are subject to various limitations, including (1) a prohibition against
the acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (2) a limit of 400% of an association's capital
on the aggregate amount of loans secured by non-residential real estate
property, (3) a limit of 20% of an association's assets on commercial loans,
with the amount of commercial loans in excess of 10% of assets being limited to
small business loans, (4) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt securities,
(5) a limit of 5% of assets on non-conforming loans (loans in excess of the
specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or
an association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core capital) ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2003, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 7.37%, leverage capital ratio of 7.37% and total risk-based
capital ratio of 15.39%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS regulations do not include a specific IRR
component of the risk-
20
based capital requirement. However, the OTS monitors the IRR of individual
institutions through a variety of means, including an analysis of the change in
net portfolio value, or NPV. NPV is defined as the net present value of the
expected future cash flows of an entity's assets and liabilities and, therefore,
hypothetically represents the value of an institution's net worth. The OTS has
also used this NPV analysis as part of its evaluation of certain applications or
notices submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a
provides guidance on the management of IRR and the responsibility of boards of
directors in that area. The OTS, through its general oversight of the safety and
soundness of savings associations, retains the right to impose minimum capital
requirements on individual institutions to the extent the institution is not in
compliance with certain written guidelines established by the OTS regarding NPV
analysis. The OTS has not imposed any such requirements on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to take other, supervisory actions
against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized," the severity of which depends upon the
institution's degree of capitalization. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2003, Astoria Federal was considered
"well capitalized" by the OTS.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2003 for
the assessment for the FICO payments was $1.9 million.
21
Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are secured by readily-marketable collateral. Astoria
Federal is in compliance with applicable loans to one borrower limitations. At
December 31, 2003, Astoria Federal's largest aggregate amount of loans to one
borrower totaled $57.8 million. All of the loans for the largest borrower were
performing in accordance with their terms and the borrower had no affiliation
with Astoria Federal.
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, credit card loans, student loans, and small business loans) on a
monthly basis during at least 9 out of every 12 months. As of December 31, 2003,
Astoria Federal maintained in excess of 93% of its portfolio assets in qualified
thrift investments and had more than 65% of its portfolio assets in qualified
thrift investments for each of the 12 months ended December 31, 2003. Therefore,
Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Our ability to pay dividends, service our debt obligations and repurchase our
common stock is dependent primarily upon receipt of dividend payments from
Astoria Federal. Astoria Federal may not pay dividends to us if, after paying
those dividends, it would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified Astoria Federal that it was in need of
more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA,
an insured depository institution such as Astoria Federal is prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institution would become "undercapitalized" (as
such term is used in the FDIA).
22
Payment of dividends by Astoria Federal also may be restricted at any time at
the discretion of the appropriate regulator if it deems the payment to
constitute an unsafe and unsound banking practice.
In addition, Astoria Federal may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below the amounts required for the
liquidation accounts which were established as a result of Astoria Federal's
conversion from mutual to stock form of ownership and the acquisitions of
Fidelity New York, FSB, The Greater New York Savings Bank and Long Island
Bancorp, Inc. For further discussion on the liquidation accounts, see Note 9 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
results in an additional assessment based on a percentage of the basic
assessment for any savings association that managed over $1.00 billion in trust
assets, serviced for others loans aggregating more than $1.00 billion, or had
certain off-balance sheet assets aggregating more than $1.00 billion. For the
year ended December 31, 2003, we paid $2.8 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with its examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans in its designated assessment
areas; (2) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs benefiting
low or moderate income individuals and businesses; and (3) a service test, to
evaluate the institution's delivery of banking services throughout its CRA
assessment area. The CRA also requires all institutions to make public
disclosure of their CRA ratings. Astoria Federal has been rated as "outstanding"
over its last four CRA examinations. Regulations require that we publicly
disclose certain agreements that are in fulfillment of CRA. We have no such
agreements in place at this time.
23
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
as well as additional limitations as may be adopted by the Director of the OTS.
These provisions, among other things, prohibit, limit or place restrictions upon
a savings institution extending credit to, or entering into certain transactions
with, its affiliates (which for Astoria Federal would include us and our
non-federally chartered savings association subsidiaries, if any), principal
stockholders, directors and executive officers.
Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its
interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. Regulation W made various changes to certain
interpretations regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
The OTS issued a final rule, effective as of October 6, 2003, which conforms the
OTS's regulations on transactions with affiliates to Regulation W. In addition,
the rule implements additional restrictions imposed on savings associations
under Section 11 of HOLA, including provisions prohibiting a savings association
from making a loan to an affiliate that is engaged in non-bank holding company
activities and provisions prohibiting a savings association from purchasing or
investing in securities issued by an affiliate that is not a subsidiary. The
final rule also includes certain specific exemptions from these prohibitions.
The FRB and the OTS expect each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure compliance
with Regulation W and the final OTS rule. We do not expect that the changes made
by Regulation W and the final OTS rule will have a material adverse effect on
our business.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Astoria
Federal, that is subject to the insider lending restrictions of Section 22(h) of
the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, or Community Development
Act, the OTS, together with the other federal bank regulatory agencies, adopted
guidelines establishing general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS adopted regulations
pursuant to FDICIA to require a savings association that is given notice by the
OTS that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the OTS. If, after being so notified, a savings
association fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing corrective actions and may issue an order directing other
actions of the types to which a significantly undercapitalized institution is
subject under the "prompt corrective action" provisions of FDICIA. If a savings
association fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties. For further
discussion, see "Regulation and Supervision - Federally Chartered Savings
Association Regulation - Prompt Corrective Regulatory Action."
24
Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
Privacy Protection
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the ability
to "opt-out" of having Astoria Federal share their nonpublic personal
information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.
Anti-Money Laundering and Customer Identification
Astoria Federal is subject to OTS regulations implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act
gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Title III of the USA PATRIOT Act and the related OTS regulations impose the
following requirements with respect to financial institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable
period of time.
o Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks and
compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
25
The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and
adopted final rules implementing the customer identification requirements on May
9, 2003. The final rule became effective June 9, 2003, however, financial
institutions had until October 1, 2003 to come into compliance with such final
rule. Compliance with the regulations adopted under the USA PATRIOT Act did not
have a material adverse impact on our financial condition or results of
operations.
Federal Home Loan Bank System
Astoria Federal is a member of the FHLB System which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year or 5% of its
outstanding borrowings from the FHLB-NY, whichever is greater. Astoria Federal
was in compliance with this requirement with an investment in FHLB-NY stock at
December 31, 2003, of $213.5 million. Dividends from the FHLB-NY to Astoria
Federal amounted to $10.6 million for the year ended December 31, 2003,
$10.7 million for the year ended December 31, 2002 and $17.5 million for the
year ended December 31, 2001. The FHLB-NY did not pay a quarterly dividend to
stockholders in October 2003, but did pay a quarterly dividend to stockholders
in January 2004.
Pursuant to regulations promulgated by the Federal Housing Finance Board, as
required by Gramm-Leach, the FHLB-NY has adopted a capital plan that will change
the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the
new capital plan, each member of the FHLB-NY will have to maintain a minimum
investment in FHLB-NY capital stock in an amount equal to the sum of (1) the
greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50%
of the dollar amount of any outstanding advances under such member's Advances,
Collateral Pledge and Security Agreement with the FHLB-NY. The FHLB-NY, however,
has postponed the implementation of the new capital plan, and the new
implementation date has not yet been determined.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $6.6 million and $45.4 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $45.4 million. The first $6.6 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation
We are a unitary savings and loan association holding company within the meaning
of the HOLA. As such, we are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over us and our savings association
subsidiary. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan association holding
companies that are "grandfathered," i.e., unitary savings
26
and loan association holding companies in existence or with applications filed
with the OTS on or before May 4, 1999, such as us, retain their authority under
the prior law. All other unitary savings and loan association holding companies
are limited to financially related activities permissible for bank holding
companies, as defined under Gramm-Leach. Gramm-Leach also prohibits
non-financial companies from acquiring grandfathered unitary savings and loan
association holding companies.
The HOLA prohibits a savings and loan association holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
Federal Securities Laws
We are subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Exchange Act.
Delaware Corporation Law
We are incorporated under the laws of the State of Delaware. Thus, we are
subject to regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
Federal Taxation
General
We report our income on a calendar year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations.
Corporate Alternative Minimum Tax
In addition to the regular income tax, corporations (including savings and loan
associations) generally are subject to an alternative minimum tax, or AMT, in an
amount equal to 20% of alternative minimum taxable income to the extent the AMT
exceeds the corporation's regular tax. The AMT is available as a credit against
future regular income tax. We do not expect to be subject to the AMT.
Tax Bad Debt Reserves
Effective 1996, federal tax legislation modified the methods by which a thrift
computes its bad debt deduction. As a result, Astoria Federal is required to
claim a deduction equal to its actual loss experience, and the "reserve method"
is no longer available. Any cumulative reserve additions (i.e., bad debt
deductions) in excess of actual loss experience for tax years 1988 through 1995
were recaptured over a six year period. Generally, reserve balances as of
December 31, 1987 will only be subject to recapture upon distribution of such
reserves to shareholders. For a further discussion of bad debt reserves see
"Distributions."
27
Distributions
To the extent that Astoria Federal makes "nondividend distributions" to
shareholders, such distributions will be considered to result in distributions
from Astoria Federal's "base year reserve," (i.e., its reserve as of December
31, 1987), to the extent thereof, and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in Astoria Federal's taxable income. Nondividend distributions include
distributions in excess of Astoria Federal's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Astoria Federal's current or accumulated earnings
and profits will not constitute nondividend distributions and, therefore, will
not be included in Astoria Federal's taxable income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 35% federal corporate income tax rate.
Dividends Received Deduction and Other Matters
We may exclude from our income 100% of dividends received from Astoria Federal
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which we will not file a consolidated tax
return, except that if we own more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
State and Local Taxation
New York State Taxation
New York State imposes an annual franchise tax on banking corporations, based on
net income allocable to New York State, at a rate of 7.5%. If, however, the
application of an alternative minimum tax (based on taxable assets allocated to
New York, "alternative" net income, or a flat minimum fee) results in a greater
tax, an alternative minimum tax will be imposed. In addition, New York State
imposes a tax surcharge of 17.0% of the New York State franchise tax, calculated
using an annual franchise tax rate of 9.0% (which represents the 2000 annual
franchise tax rate), allocable to business activities carried on in the
Metropolitan Commuter Transportation District. These taxes apply to us, Astoria
Federal and certain of Astoria Federal's subsidiaries. Certain subsidiaries of a
banking corporation may be subject to a general business corporation tax in lieu
of the tax on banking corporations. The rules regarding the determination of
income allocated to New York and alternative minimum taxes differ for these
subsidiaries.
Bad Debt Deduction
New York State passed legislation that incorporated the former provisions of
Internal Revenue Code, or IRC, Section 593 into New York State tax law. The
impact of this legislation enabled Astoria Federal to defer the recapture of the
New York State tax bad debt reserves that would have otherwise occurred as a
result of the federal amendment to IRC 593. The legislation also enabled Astoria
Federal to continue to utilize the reserve method for computing its bad debt
deduction. Astoria Federal must meet certain definitional tests, primarily
relating to its assets and the nature of its business to be a qualifying thrift
and would then be permitted to establish a reserve for bad debts and to make
annual additions thereto, which additions may, within specified formula limits,
be deducted in arriving at its taxable income. Astoria Federal will be a
qualifying thrift if, among other requirements, at least 60% of its assets are
assets described in Section 1453(h)(1) of the New York State tax law, or the 60%
Test.
28
Astoria Federal presently satisfies the 60% Test. Although there can be no
assurance that Astoria Federal will satisfy the 60% Test in the future, we
believe that this level of qualifying assets can be maintained by Astoria
Federal. Astoria Federal's deduction for additions to its bad debt reserve with
respect to qualifying loans may be computed using the experience method or a
percentage equal to 32% of Astoria Federal's taxable income, computed with
certain modifications, without regard to Astoria Federal's actual loss
experience, and reduced by the amount of any addition permitted to the reserve
for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria
Federal's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on its actual loss experience.
Under the experience method, the amount of a reasonable addition, in general,
equals the amount necessary to increase the balance of the bad debt reserve at
the close of the taxable year to the greater of (1) the amount that bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years
bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the base year (assuming
that the loans outstanding have not declined since then). The "base year" for
these purposes is the last taxable year beginning before the NYS Percentage of
Taxable Income Method bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the addition to the
reserve for qualifying real property loans calculated under the NYS Percentage
of Taxable Income Method. Each year Astoria Federal reviews the most favorable
way to calculate the deduction attributable to an addition to the bad debt
reserve.
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS Percentage of Taxable Income Method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which 12% of the amount
that the total deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeded the sum of the qualifying
thrift's surplus, undivided profits and reserves at the beginning of such year.
New York City Taxation
Astoria Federal is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. New York City has enacted
legislation regarding the use and treatment of tax bad debt reserves that is
substantially similar to the New York State legislation described above. A
significant portion of Astoria Federal's entire net income for New York City
purposes is allocated outside the jurisdiction which has the effect of
significantly reducing the New York City taxable income of Astoria Federal.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, we are exempt from
Delaware corporate income tax but are required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
ITEM 2. PROPERTIES
At December 31, 2003 we operated 86 full-service banking offices, of which 50
were owned and 36 were leased. At December 31, 2003, we owned our principal
executive office and the office for our mortgage operations, both located in
Lake Success, New York. We believe such facilities are suitable and adequate for
our operational needs.
29
For further information regarding our lease obligations, see Item 7, "MD&A" and
Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
At December 31, 2003, we leased our previous mortgage operating facility in
Mineola, New York which we no longer occupy. At December 31, 2003 this facility
was fully sublet.
ITEM 3. 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, results of operations 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ended December 31, 2003 to a vote of
our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On May 17, 2002, our common stock began trading on the New York Stock Exchange,
or NYSE, under the symbol "AF." Previously, our common stock traded on The
Nasdaq Stock Market, or Nasdaq, under the symbol "ASFC." The table below shows
the reported high and low sale prices reported on the NYSE for our common stock
during the periods indicated in 2003 and the high and low sale prices reported
on the NYSE or the high and low closing prices reported on Nasdaq, as
applicable, for our common stock during the periods indicated in 2002.
2003 2002
--------------------------------------
High Low High Low
- -------------------------------------------------------------
First Quarter $28.30 $23.23 $31.02(1) $26.34(1)
Second Quarter 29.18 23.27 35.17(2) 28.85(1)
Third Quarter 34.16 27.00 34.45(2) 23.66(2)
Fourth Quarter 38.53 30.88 27.75(2) 21.60(2)
(1) Closing price as reported on Nasdaq
(2) Sale price as reported on the NYSE
As of March 1, 2004, we had approximately 3,830 shareholders of record. As of
December 31, 2003, there were 78,670,254 shares of common stock outstanding.
30
The following schedule summarizes the cash dividends paid per common share for
2003 and 2002.
2003 2002
- ----------------------------------------
First Quarter $0.20 $0.17
Second Quarter 0.22 0.20
Third Quarter 0.22 0.20
Fourth Quarter 0.22 0.20
On January 21, 2004, our Board of Directors declared a quarterly cash dividend
of $0.25 per common share, payable on March 1, 2004, to common stockholders of
record as of the close of business on February 17, 2004. Our Board of Directors
intends to review the payment of dividends quarterly and plans to continue to
maintain a regular quarterly dividend in the future, dependent upon our
earnings, financial condition and other factors.
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. Our payment of dividends is dependent, in large part,
upon receipt of dividends from Astoria Federal. Astoria Federal is subject to
certain restrictions which may limit its ability to pay us dividends. See Item
1, "Business - Regulation and Supervision" and Note 9 of Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data"
for an explanation of the impact of the liquidation accounts and regulatory
capital requirements on Astoria Federal's ability to pay dividends. See Item 1,
"Business - Federal Taxation" and Note 13 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data" for an
explanation of the tax impact of the unlikely event that Astoria Federal (1)
makes distributions in excess of current and accumulated earnings and profits,
as calculated for federal income tax purposes; (2) redeems its stock; or (3)
liquidates.
31
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other data. This
financial data is derived in part from, and should be read in conjunction with,
our consolidated financial statements and related notes.
At December 31,
-------------------------------------------------------------------
(In Thousands) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Selected Financial Data:
Total assets $22,457,665 $21,697,829 $22,667,706 $22,336,802 $22,696,536
Federal funds sold and repurchase agreements 65,926 510,252 1,309,164 171,525 335,653
Mortgage-backed and other securities
available-for-sale 2,654,992 2,792,581 3,549,183 7,703,222 8,862,749
Mortgage-backed and other securities
held-to-maturity 5,792,727 5,041,257 4,463,928 1,712,191 1,899,957
Loans held-for-sale, net 23,023 62,669 43,390 15,699 14,156
Loans receivable, net 12,603,866 11,975,815 12,084,976 11,342,364 10,209,716
Mortgage servicing rights, net 17,952 20,411 35,295 40,962 48,369
Deposits 11,186,594 11,067,196 10,903,693 10,071,687 9,554,534
Borrowed funds, net 9,628,171 8,821,180 9,821,795 10,320,350 11,524,349
Stockholders' equity 1,396,531 1,553,998 1,542,586 1,513,163 1,196,912
For the Year Ended December 31,
--------------------------------------------------------------
(In Thousands, Except Per Share Data) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $1,057,291 $1,266,262 $1,438,563 $1,517,934 $1,495,279
Interest expense 677,753 801,838 981,605 1,023,353 957,500
- --------------------------------------------------------------------------------------------------------------------
Net interest income 379,538 464,424 456,958 494,581 537,779
Provision for loan losses -- 2,307 4,028 4,014 4,119
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 379,538 462,117 452,930 490,567 533,660
Non-interest income 119,561 107,407 90,105 69,246 86,696
Non-interest expense:
General and administrative 205,877 195,827 178,767 190,040 201,786
Extinguishment of debt -- 2,202 -- -- --
Amortization of goodwill -- -- 19,078 19,078 19,136
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 205,877 198,029 197,845 209,118 220,922
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of accounting change 293,222 371,495 345,190 350,695 399,434
Income tax expense 96,376 123,066 120,036 134,146 163,764
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 196,846 248,429 225,154 216,549 235,670
Cumulative effect of accounting change, net of tax -- -- (2,294) -- --
- --------------------------------------------------------------------------------------------------------------------
Net income 196,846 248,429 222,860 216,549 235,670
Preferred dividends declared 4,500 6,000 6,000 6,000 6,000
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 192,346 $ 242,429 $ 216,860 $ 210,549 $ 229,670
====================================================================================================================
Basic earnings per common share $ 2.52 $ 2.90 $ 2.40 $ 2.20 $ 2.24
Diluted earnings per common share $ 2.49 $ 2.85 $ 2.35 $ 2.16 $ 2.19
32
At or For the Year Ended December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 0.87% 1.12% 0.99% 0.97% 1.04%
Return on average stockholders' equity 13.26 15.87 14.13 16.70 17.31
Return on average tangible stockholders' equity (1) 15.15 18.00 16.12 20.01 20.90
Average stockholders' equity to average assets 6.55 7.07 7.01 5.81 5.99
Average tangible stockholders' equity
to average tangible assets (1)(2) 5.78 6.29 6.19 4.90 5.01
Stockholders' equity to total assets 6.22 7.16 6.81 6.77 5.27
Core deposits to total deposits (3) 50.82 53.44 52.67 48.87 48.41
Net interest rate spread 1.72 2.11 1.91 1.98 2.22
Net interest margin 1.78 2.23 2.12 2.27 2.45
Average interest-earning assets to average
interest-bearing liabilities 1.02x 1.03x 1.05x 1.06x 1.05x
General and administrative expense to average assets 0.91% 0.88% 0.79% 0.85% 0.89%
Efficiency ratio (4) 41.25 34.25 32.68 33.71 32.31
Cash dividends paid per common share $ 0.86 $ 0.77 $ 0.61 $ 0.51 $ 0.48
Dividend payout ratio 34.54% 27.02% 25.96% 23.61% 21.92%
Asset Quality Ratios:
Non-performing loans to total loans (5) 0.23 0.29 0.31 0.32 0.52
Non-performing loans to total assets (5) 0.13 0.16 0.16 0.16 0.24
Non-performing assets to total assets (5)(6) 0.14 0.16 0.18 0.18 0.26
Allowance for loan losses to non-performing loans 280.10 242.04 221.70 220.88 143.49
Allowance for loan losses to non-accrual loans 285.51 249.53 229.60 226.85 151.77
Allowance for loan losses to total loans 0.66 0.69 0.68 0.70 0.74
Other Data:
Number of deposit accounts 963,120 990,873 985,473 972,777 952,514
Mortgage loans serviced for others (in thousands) $1,895,102 $2,671,085 $3,322,087 $3,929,483 $4,414,684
Number of full service banking offices 86 86 86 86 87
Regional lending offices 3 1 1 1 1
Full time equivalent employees 1,971 1,956 1,885 1,862 1,914
(1) Average tangible stockholders' equity represents average stockholders'
equity less average goodwill.
(2) Average tangible assets represents average assets less average goodwill.
(3) Core deposits are comprised of savings, money market, NOW and demand
deposit accounts.
(4) Efficiency ratio represents general and administrative expense divided by
the sum of net interest income plus non-interest income.
(5) Non-performing loans consist of all non-accrual loans and all mortgage
loans delinquent 90 days or more as to their maturity date but not their
interest due and exclude loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $3.9 million, $5.0 million, $5.4
million, $5.2 million and $6.7 million at December 31, 2003, 2002, 2001,
2000 and 1999, respectively.
(6) Non-performing assets consist of all non-performing loans and real estate
owned.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
Executive Summary
The following overview should be read in conjunction with our MD&A in its
entirety.
We are a Delaware corporation organized as the unitary savings and loan
association holding company of Astoria Federal and our principal business is the
operation of Astoria Federal. Astoria Federal's primary 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. 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 the interest paid on
our deposits and borrowings. Our earnings are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates and U.S. Treasury yield curves, government policies and actions
of regulatory authorities.
During 2003, as the nation continued its recovery from the recession, the
national and local real estate markets remained strong and continued to support
new and existing home sales. While this has helped us maintain our strong credit
quality and purchase mortgage activity, the continued decline in interest rates
during the first half of 2003 resulted in an extraordinary increase in refinance
and prepayment activity during most of 2003. As a result, we, along with other
mortgage originators and investors, were faced with the increased challenge of
redeployment of funds in a lower interest rate environment. The rise in interest
rates during the second half of 2003 has resulted in a decrease in refinance
activity and cash flows. Interest rates, however, remain at historical lows.
Additionally, we have experienced continued intense local competition for
deposits, particularly money market and checking accounts, from certain local
competitors and new market entrants who have offered these accounts at well
above market rates. We have not increased the rates we offer on these types of
accounts as we do not consider it a cost effective strategy in the current low
interest rate environment.
As a premier community bank, our goal is to enhance shareholder value while
building a solid banking franchise. We focus on growing our core businesses of
mortgage lending and retail banking while maintaining superior asset quality and
controlling operating expenses. We have been successful in achieving these goals
over the past several years and that trend has continued during 2003. The
refinance activity we experienced resulted in record loan originations during
2003 which outpaced repayment activity, resulting in growth in our total loan
portfolio. This growth was in our multi-family and commercial real estate loan
portfolio, which is attributable to our increased emphasis on the origination of
these loans over the past several years, partially offset by a decrease in our
one-to-four family mortgage loan portfolio, where repayments outpaced
originations. Even with the growth in the loan portfolio, our total
non-performing assets declined from the prior year. Total deposits also
increased, despite the continued competition for deposits we experienced. This
increase was attributable to increases in savings accounts, NOW and demand
deposit accounts and certificates of deposit, partially offset by a decrease in
money market accounts. Additionally, we continued to provide returns to
shareholders through increased dividends and our stock repurchases.
We had implemented a strategy over the past several years to reposition our
balance sheet through decreases in our securities portfolio and our borrowings.
While we have been successful with our repositioning strategy over the past
several years, the interest rate environment we experienced in 2003 presented us
with significant challenges in our ability to continue our repositioning. We
significantly
34
increased our purchases of mortgage-backed securities during 2003 in order to
effectively redeploy our securities cash flows and excess mortgage cash flows,
which resulted in an increase in our securities portfolio. Additionally, we
utilized borrowings to fund asset growth during 2003 since, in this low interest
rate environment, borrowings offer a low cost alternative to deposit generation
as a funding source. As a result, our borrowings also increased.
Net income decreased from the prior year. This decrease was primarily
attributable to a decrease in interest income resulting from the increase in net
premium amortization on our mortgage loan and mortgage-backed securities
portfolios as a result of the extraordinarily high levels of repayments we
experienced in those portfolios during 2003, and the reinvestment of the cash
flows we received in lower yielding assets due to the low interest rate
environment. Partially offsetting the decrease in interest income were decreases
in interest expense on both deposits and borrowings. The decrease in interest
expense on deposits relates primarily to the reduction in rates offered on our
deposit products as a result of the low interest rate environment. The decrease
in interest expense on borrowings relates to the refinancing of higher cost
borrowings which matured throughout 2003 at substantially lower rates.
The rise in interest rates during the latter half of 2003 resulted in a
reduction in refinance activity and cash flows during the fourth quarter of
2003. With the reduced refinance activity and a projected continuation of a
relatively steep U.S. Treasury yield curve, we expect to continue growth in our
mortgage loan portfolio in 2004. With mortgage refinance activity significantly
reduced, premium amortization should return to more normalized levels.
Additionally, we have a sizable amount of high rate borrowings maturing in the
first half of 2004, a portion of which have already been refinanced at
substantially lower rates and the remainder of which are expected to be repaid
or repriced at substantially lower rates. This combination of events is expected
to result in robust earnings growth in 2004.
Critical Accounting Policies
Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" 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 at 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 mortgage servicing rights, or 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.
The 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.
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process including the procedures for
impairment recognition under Statement of Financial Accounting Standards, or
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
35
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. We segment our loan portfolio into like categories by
composition and size and perform analyses against each category. The
determination of the adequacy of the valuation allowance takes into
consideration a variety of factors. 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. We also evaluate and consider the
allowance ratios and coverage percentages of both peer group and regulatory
agency data; however, our focus is primarily on our historical loss experience
and the impact of current economic conditions. 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.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining our general valuation
allowances. Our evaluations of general valuation allowances 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, we periodically 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.
During 2002 we performed an analysis of the actual charge-off history of our
loan portfolio compared to our previously determined allowance coverage
percentages. Our analysis indicated that our estimate of losses inherent in our
portfolio exceeded our actual charge-off history. In response to the results of
that analysis, we adjusted our allowance coverage percentages for our portfolio
segments accordingly. Our loss experience in 2003 was consistent with 2002 and,
as a result, our 2003 analysis did not indicate that changes in our allowance
coverage percentages were required. Our allowance for loan losses to
non-performing loans was 280.10% at December 31, 2003, compared to 242.04% at
December 31, 2002. Our allowance for loan losses to total loans was 0.66% at
December 31, 2003, compared to 0.69% at December 31, 2002. We believe our
current allowance coverage percentages are adequate to reflect the risks
inherent in our loan portfolio.
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 for loan losses. While we believe that the
allowance for loan losses has been established and maintained at levels that
reflect the risks inherent in our loan portfolio, future adjustments may be
necessary if economic or market conditions differ 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."
36
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, including the market's perception of future interest rate movements. All
assumptions are reviewed for reasonableness on a quarterly basis to ensure they
reflect current and anticipated market conditions.
At December 31, 2003, our MSR, net, had an estimated fair value of $18.0 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.34%, a weighted average constant prepayment rate on
mortgages of 15.82% and a weighted average life of 4.5 years. At December 31,
2002, our MSR, net, had an estimated fair value of $20.4 million and were valued
based on expected future cash flows considering a weighted average discount rate
of 9.62%, a weighted average constant prepayment rate on mortgages of 23.11% and
a weighted average life of 3.5 years. The decrease in the weighted average
constant prepayment rate from 2002 to 2003 reflects the increase in interest
rates from December 31, 2002 to December 31, 2003 and the projected decline in
future prepayments as of December 31, 2003.
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 tested, at least
annually, for impairment at the reporting unit level. Impairment exists when the
carrying amount of goodwill exceeds its implied fair value. As of December 31,
2003, the carrying value of our goodwill totaled $185.2 million. 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. 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.
For purposes of our goodwill impairment testing, we identified a single
reporting unit. On September 30, 2003 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 by $986.0 million, 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. Differences in the identification of reporting units and the use of
valuation techniques could result in materially different evaluations of
impairment.
37
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value,
with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive loss/income in stockholders' equity. Debt 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. The fair values of our
securities, which are primarily fixed rate mortgage-backed securities at
December 31, 2003, are based on published or securities dealers' market values
and are affected by changes in interest rates. In general, as interest rates
rise, the fair value of fixed rate securities will decrease; as interest rates
fall, the fair value of fixed rate securities will increase. 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. We generally view changes in fair value caused by changes in interest
rates as temporary, which is consistent with our experience. 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. At December 31, 2003, we
had 120 securities with an estimated fair value totaling $4.26 billion which had
an unrealized loss totaling $106.0 million. Of the securities in an unrealized
loss position at December 31, 2003, $3.5 million, with an unrealized loss of
$48,000, have been in a continuous unrealized loss position for more than one
year. We determined the cause of all unrealized losses at December 31, 2003 to
be interest rate related, and, as such, have deemed the unrealized losses as
temporary. There were no securities write downs during the year ended December
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 $13.42 billion for the year ended December 31, 2003 and
$12.15 billion for the year ended December 31, 2002. Management considers both
the 2003 and 2002 cash flows to be extraordinarily high. The increase in loan
and security repayments was primarily the result of the continued high level of
mortgage loan refinance activity, primarily in the first nine months of 2003,
caused by the continued low interest rate environment. While medium- and
long-term U.S. Treasury rates (maturities of two to ten years) have increased on
average 38 basis points from December 31, 2002 to December 31, 2003, average
interest rates were lower in 2003 than 2002 and rates were extremely volatile
during the second and third quarters of 2003. During the second quarter of 2003
medium- and long-term rates dropped an average of 26 basis points. This created
a surge of refinance activity which was greater than that which we had
previously experienced. As a result, third quarter cash flows were at record
highs. During the third quarter of 2003, medium- and long-term interest rates
rose on average 32 basis points resulting in a reduction in cash flows during
the fourth quarter of 2003. Even with the rise in interest rates over the prior
year, interest rates remain at historical lows.
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 $358.2 million during the year ended December 31, 2003 and $157.4
million during the year ended December 31, 2002. During the year ended December
31, 2003, net borrowings increased $807.0 million and net deposits increased
$119.4 million. During the year ended December 31, 2003, we extended $1.70
billion of borrowings with a weighted average rate of 2.55% and a weighted
average original term of 3.0 years to help protect against the impact on
interest expense of future interest rate increases. All other borrowings that
matured in 2003 were rolled over into short-term borrowings. During the year
ended December 31, 2002, net borrowings decreased $1.00 billion, while net
deposits increased $163.5 million. The decrease in net borrowings was consistent
with our strategy of repositioning the balance sheet through, in part, a shift
in our liability mix toward deposits, particularly lower costing and less
interest rate sensitive core deposits, consisting of savings, money market, NOW
and demand deposits. The net increases in deposits for the years ended December
31, 2003 and 2002 reflect our continued emphasis on attracting customer deposits
38
through competitive rates, extensive product offerings and quality service.
Despite continued intense local competition for checking accounts, we have been
successful in growing our NOW and demand deposit account balances, including our
business checking deposits, due in large part to our concerted sales and
marketing efforts, including our PEAK Process. See page 50 for further detail
regarding deposit activity.
Typically, our primary use of funds is for the origination and purchase of
mortgage loans. However, during the years ended December 31, 2003 and 2002,
despite strong loan originations, our purchases of mortgage-backed securities
exceeded our originations and purchases of mortgage loans. During the year ended
December 31, 2003, our gross originations and purchases of mortgage loans
totaled $7.29 billion, including originations of loans held-for-sale totaling
$613.3 million, compared to $5.59 billion, including originations of loans
held-for-sale totaling $484.3 million, during the year ended December 31, 2002.
The strong levels of loan originations and purchases for the years ended
December 31, 2003 and 2002 are attributable to the continued low interest rate
environment which has resulted in continued high levels of mortgage refinance
activity, particularly in the second half of 2002 and the first nine months of
2003. Purchases of mortgage-backed securities totaled $9.30 billion during the
year ended December 31, 2003 and $6.84 billion during the year ended December
31, 2002. The increase in mortgage-backed securities purchases reflects the
continued utilization of cash flows in excess of mortgage and other loan
fundings arising from the significant refinance activity we have experienced.
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 $239.8 million at December 31, 2003, compared to $677.9 million
at December 31, 2002. This decrease reflects the net effect of our operating,
investing and financing activities, in particular, our use of funds for the
purchase of mortgage-backed securities. Borrowings maturing over the next year
total $4.75 billion with a weighted average rate of 4.03%. During the 2003
fourth quarter, we entered into forward borrowing commitments totaling $500.0
million, with a weighted average rate of 3.05% and a weighted average term of
3.3 years, and in January 2004 we entered into an additional $700.0 million of
forward borrowing commitments, with a weighted average rate of 3.01% and a
weighted average term of 3.7 years. The effect of these commitments will be to
extend a portion of the $2.81 billion in borrowings, with a weighted average
rate of 4.97%, scheduled to mature in the first quarter of 2004. We have the
flexibility to either repay or rollover the remaining borrowings as they mature.
Refinanced borrowings during the next year are expected to carry lower weighted
average rates than those they replace, assuming that interest rates remain at or
near their current levels. In addition, we have $2.71 billion in certificates of
deposit with a weighted average rate of 2.70% maturing over the next year. We
expect to retain or replace a significant portion of such deposits based on our
competitive pricing and historical experience.
The following table details borrowing and certificate of deposit maturities over
the next year and their weighted average rates:
Borrowings Certificates of Deposit
----------------- -----------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- ------------------------------------------------------------------------------
Contractual Maturity:
First quarter 2004 (1) $1,310 1.11% $ -- --%
First quarter 2004 2,810 4.97 1,065 2.26
Second quarter 2004 500 5.80 751 2.28
Third quarter 2004 20 7.67 371 2.69
Fourth quarter 2004 105 5.98 523 4.19
------ ------
Total $4,745 4.03 $2,710 2.70
====== ======
(1) Overnight and other short-term borrowings.
39
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 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.
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 (Capital Securities) and senior debt. Holding company
debt obligations, which are included in other borrowings, are further described
below.
Our Capital Securities total $125.0 million, are due November 1, 2029 and are
prepayable, in whole or in part, at our option on or after November 1, 2009 at
declining premiums to November 1, 2019, after which the Capital Securities are
prepayable at par value. The terms of the Capital Securities limit our ability
to pay dividends or otherwise make distributions if we are in default or have
elected to defer interest payments otherwise due under the Capital Securities.
Such limitations do not apply, however, to dividends payable in our common
stock, or our dividend reinvestment plan, our stock option plans or our
shareholders rights plan.
We have $100.0 million of 7.67% senior unsecured notes, which were issued in a
private placement, mature in 2008 and require annual principal payments of $20.0
million per year beginning in 2004. The terms of our $100.0 million 7.67% senior
unsecured notes do not preclude our merger or sale of all or substantially all
of our assets. The terms of these notes preclude a sale of more than 30% of our
deposit liabilities and preclude us from incurring long-term debt, which
excludes debt of Astoria Federal incurred in the ordinary course of business,
including FHLB-NY advances, in excess of 90% of our consolidated stockholders'
equity. The terms also require that we maintain a consolidated capital to assets
ratio of not less than 4.0%; a non-performing asset ratio, net of our allowance
for loan losses, of less than 3.5% of assets; and a consolidated interest
coverage ratio of at least 3.0 to 1.0. As of December 31, 2003, we were in
compliance with each of these covenants, and we do not anticipate these
covenants will have a material effect on our operations.
We have $250.0 million of 5.75% senior unsecured notes which are due in 2012 and
are redeemable, in whole or in part, at any time at a "make-whole" redemption
price, together with accrued interest to the redemption date. The terms of our
$250.0 million 5.75% senior unsecured notes restrict our ability to sell,
transfer or pledge as collateral, separate from a sale or transfer involving
Astoria Financial Corporation, the shares of Astoria Federal or any other
significant subsidiary or of all, or substantially all, of the assets of Astoria
Federal or any other significant subsidiary.
Our ability to continue to access the capital markets for additional financing
at favorable terms may be limited by, among other things, market demand,
interest rates, our capital levels, our ability to pay dividends from Astoria
Federal to Astoria Financial Corporation, our credit profile and our business
model. For further discussion of our debt obligations see Note 8 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
We also continue to receive periodic capital distributions from Astoria Federal,
consistent with applicable laws and regulations. During 2003, Astoria Federal
paid dividends to Astoria Financial Corporation totaling $120.0 million,
amounting to 55.9% of Astoria Federal's net income for 2003.
Astoria Financial Corporation's primary uses of funds include the payment of
dividends, payment of principal and interest on its debt obligations and
repurchases of common stock. Additionally, in 2003, we redeemed our 12%
Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred
40
Stock. Astoria Financial Corporation paid interest on the Capital Securities and
senior unsecured notes totaling $28.9 million in 2003. Our payment of dividends,
repurchases of our common stock and the redemption of the Series B Preferred
Stock, which are further discussed below, totaled $322.1 million in 2003. Our
ability to pay dividends, service our debt obligations and repurchase common
stock is dependent primarily upon receipt of capital distributions from Astoria
Federal. Since Astoria Federal is a federally chartered savings association,
there are limits on its ability to make distributions to Astoria Financial
Corporation. Additionally, all proposed distributions must be submitted to the
OTS for review.
Stockholders' equity decreased to $1.40 billion at December 31, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $195.5 million, dividends declared of
$70.1 million, a decrease in accumulated other comprehensive income, net of tax,
of $56.3 million, which was primarily due to the decrease in the fair value of
our mortgage-backed securities available-for-sale, and the redemption of our
Series B Preferred Stock totaling $54.5 million. These decreases were partially
offset by net income of $196.8 million, the effect of stock options exercised
and related tax benefit of $14.9 million and the amortization of the allocated
portion of shares held by the Employee Stock Ownership Plan, or ESOP, of $7.2
million.
We declared cash dividends on our common stock totaling $65.6 million during the
year ended December 31, 2003 and $64.2 million during the year ended December
31, 2002. On January 21, 2004, we declared a quarterly cash dividend of $0.25
per share on shares of our common stock payable on March 1, 2004 to stockholders
of record as of the close of business on February 17, 2004. We declared cash
dividends on our Series B Preferred Stock totaling $4.5 million during the year
ended December 31, 2003 and $6.0 million during the year ended December 31,
2002.
On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of our
Series B Preferred Stock at a redemption price of $27.25 per share, plus $1.00
per share in accrued and unpaid dividends, for an aggregate redemption price of
$28.25 per share. Accrued and unpaid dividends covered the period from June 1,
2003 through September 30, 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 year
ended December 31, 2003, we repurchased 7,073,800 shares of our common stock at
an aggregate cost of $195.5 million. In total, as of December 31, 2003, we
repurchased 7,391,800 shares of our common stock, at an aggregate cost of $203.9
million, under the ninth stock repurchase plan.
At December 31, 2003, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.37%, leverage
capital ratio of 7.37% and total risk-based capital ratio of 15.39%. 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%.
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the
normal course of our business to meet the financing needs of our customers and
in connection with our overall interest rate risk management strategy. These
instruments involve, to varying degrees, elements of credit, interest rate and
liquidity risk. In accordance with GAAP, these instruments are either not
recorded in the consolidated financial statements or are recorded in amounts
that differ from the notional amounts. Our off-balance sheet arrangements, which
primarily include lending commitments and derivative instruments, are described
below.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Commitments to extend credit are
agreements to lend to a customer as long as
41
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate creditworthiness on a
case-by-case basis. Our maximum exposure to credit risk is represented by the
contractual amount of the instruments.
In addition to our lending commitments, we have contractual obligations related
to the purchases of securities, operating lease commitments and forward
borrowing commitments. Operating lease commitments are obligations under various
non-cancelable operating leases on buildings and land used for office space and
banking purposes. Forward borrowing commitments totaled $500.0 million at
December 31, 2003 and represent commitments to enter into borrowings at
predetermined amounts, interest rates and maturity and settlement dates. We
enter into forward borrowing commitments to help protect against the impact of
future interest rate increases.
Derivative instruments include interest rate caps, locks and swaps which are
recorded as either assets or liabilities in the consolidated statements of
financial condition at fair value. We are exposed to credit risk in the event of
non-performance by counterparties to derivative instruments. In the event of
default by a counterparty, we would be subject to an economic loss that
corresponds to the cost to replace the agreement. We control the credit risk
associated with our derivative instruments through dealing only with
counterparties with the highest credit ratings, establishing counterparty
exposure limits and monitoring procedures.
Additionally, in connection with our mortgage banking activities, we had
commitments to fund loans held-for-sale and commitments to sell loans at
December 31, 2003 which are considered derivative instruments. Commitments to
sell loans totaled $48.6 million at December 31, 2003 and represent obligations
to sell loans either servicing retained or servicing released on a mandatory
delivery or best efforts basis. We enter into commitments to sell loans as a
hedge against our pipeline of fixed rate loans which we originate primarily for
sale into the secondary market.
The following table details our contractual obligations as of December 31, 2003.
Payments due by period
---------------------------------------------------------------
Less than One to Three to More than
(In Thousands) Total One Year Three Years Five Years Five Years
- -----------------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Borrowings with original terms greater than three months $8,324,000 $3,435,000 $1,794,000 $2,720,000 $375,000
Minimum rental payments due under non-cancelable
operating leases 75,978 6,684 13,193 11,988 44,113
Commitments to originate and purchase loans 572,407 572,407 -- -- --
Commitments to fund unused lines of credit (1) 335,640 335,640 -- -- --
Commitments to purchase securities 99,969 99,969 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total $9,407,994 $4,449,700 $1,807,193 $2,731,988 $419,113
============================================================================================================================
(1) Unused lines of credit relate primarily to home equity lines of credit.
In addition to the contractual obligations previously discussed, at December 31,
2003 we had contingent liabilities related to assets sold with recourse and
standby letters of credit. We are obligated under various recourse provisions
associated with certain first mortgage loans we sold in the secondary market.
The principal balance of loans sold with recourse amounted to $640.7 million at
December 31, 2003. We also have two collateralized repurchase obligations due to
the sale of certain long-term fixed rate municipal revenue bonds and Federal
Housing Administration project loans to investment trust funds for proceeds that
approximated par value. The trust funds have put options that require us to
repurchase the securities or loans for specified amounts prior to maturity under
certain specified circumstances, as defined in the agreements. The outstanding
option balance on the two agreements totaled $46.3 million at December 31, 2003.
42
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$4.4 million at December 31, 2003.
See Notes 1, 11 and 12 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data," for additional information
regarding our commitments, contingent liabilities and derivative instruments.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2003 and 2002
Financial Condition
Total assets increased $759.8 million to $22.46 billion at December 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 and mortgage loans,
partially offset by decreases in federal funds sold and repurchase agreements
and other securities. This growth was funded primarily through increases in
borrowings and deposits.
Mortgage loans increased $568.6 million to $12.25 billion at December 31, 2003,
from $11.68 billion at December 31, 2002. This increase was primarily due to an
increase in our multi-family and commercial real estate loan portfolios,
partially offset by a decrease in our one-to-four family mortgage loan
portfolio. Gross mortgage loans originated and purchased during the year ended
December 31, 2003 totaled $7.29 billion, including originations of loans
held-for-sale totaling $613.3 million, of which $5.75 billion were originations
and $1.54 billion were purchases. This compares to $4.06 billion of originations
and $1.53 billion of purchases for a total of $5.59 billion, including
originations of loans held-for-sale totaling $484.3 million, during the year
ended December 31, 2002. Mortgage loan repayments increased to $6.11 billion for
the year ended December 31, 2003, from $5.34 billion for the year ended December
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 represented 71.1% of our total loan portfolio at
December 31, 2003, decreased $238.3 million to $8.97 billion at December 31,
2003, from $9.21 billion at December 31, 2002. This decrease was primarily due
to the continued high level of one-to-four family loan repayments during 2003,
particularly during the first nine months, which have outpaced our levels of
one-to-four family loan originations and purchases. As previously discussed,
although medium- and long-term U.S. Treasury rates have increased on average 38
basis points from December 31, 2002 to December 31, 2003, interest rates remain
at historical lows and were extremely volatile during the second and third
quarters of 2003. The decline in rates during the second quarter of 2003 created
a surge of refinance activity which was greater than that which we had
previously experienced. The rise in rates during the third quarter of 2003
resulted in a reduction in repayments on our mortgage loans in the 2003 fourth
quarter.
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 loan portfolio increased $630.4 million
to $2.23 billion at December 31, 2003, from $1.60 billion at December 31, 2002.
Our commercial real estate loan portfolio increased $135.7 million to $880.3
million at December 31, 2003, from $744.6 million at December 31, 2002.
Multi-family and commercial real estate loan originations totaled $1.65 billion
for the year ended December 31, 2003 and $1.01 billion for the year ended
December 31, 2002. This increase reflects the increase in refinance activity,
our emphasis on this type of lending and the competitive rates we offer on these
types of loans. Prepayment activity within our multi-family and commercial real
estate loan portfolio
43
increased in 2003 as compared to 2002, however, such activity is not as
significant as that which we have experienced in our one-to-four family mortgage
loan portfolio due in part to the prepayment penalties associated with these
loans. Our new multi-family and commercial real estate loan originations are
similar in type to the loans currently in our portfolio. The average loan
balance of loans in our combined multi-family and commercial real estate
portfolio continues to be less than $1.0 million. Our portfolio of consumer and
other loans increased by $57.5 million to $430.1 million at December 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 $864.5 million to $8.24 billion at December
31, 2003, from $7.38 billion at December 31, 2002. This increase was primarily
the result of purchases of REMICs and CMOs totaling $9.30 billion, partially
offset by principal payments received of $6.87 billion, sales of $1.40 billion,
net premium amortization of $71.0 million and a decrease of $93.4 million in the
net unrealized gain on our available-for-sale portfolio. This increase in
mortgage-backed securities reflects our use of excess cash flows, as well as
cash flows from increased deposits and borrowings, for the purchase of these
securities. The decrease in the net unrealized gain on our mortgage-backed
securities available-for-sale portfolio is primarily due to the substantial
turnover of securities in our portfolio resulting in a decrease in the average
coupon rate of the portfolio, coupled with the increase in interest rates from
December 31, 2002 to December 31, 2003.
Other securities decreased $250.6 million to $203.7 million at December 31,
2003, from $454.3 million at December 31, 2002, primarily due to $201.9 million
in securities which were called or matured and sales of $45.6 million. The
continued low interest rate environment in 2003 resulted in a significant
portion of our remaining callable investment securities being called, primarily
in the first half of 2003.
Federal funds sold and repurchase agreements decreased $444.4 million to $65.9
million at December 31, 2003, from $510.3 million at December 31, 2002,
primarily due to our use of funds for the purchase of mortgage-backed
securities. Other assets increased $29.0 million to $118.4 million at December
31, 2003, primarily due to an increase in the net deferred tax asset which was
related to the decrease in the fair value of our mortgage-backed securities
available-for-sale.
Deposits increased $119.4 million to $11.19 billion at December 31, 2003, from
$11.07 billion at December 31, 2002. The increase in deposits was primarily due
to an increase of $348.4 million in certificates of deposit to $5.50 billion at
December 31, 2003, from $5.15 billion at December 31, 2002, an increase of
$126.7 million in savings accounts to $2.96 billion at December 31, 2003 and an
increase of $110.1 million in NOW and demand deposit accounts to $1.49 billion
at December 31, 2003. These increases were partially offset by a decrease of
$465.8 million in our money market accounts to $1.23 billion at December 31,
2003, from $1.70 billion at December 31, 2002. The increase in our certificates
of deposit was primarily the result of our efforts to extend the maturities of
our certificates of deposit through promotional rates and targeted marketing and
sales efforts in the prevailing low interest rate environment. During 2003,
$3.45 billion of certificates of deposit, with an average rate of 2.31% and an
average maturity at inception of thirteen months, matured and $3.60 billion of
certificates of deposit were issued or repriced, with an average rate of 1.93%
and an average maturity at inception of sixteen months. The decrease in our
money market accounts is attributable to continued intense competition for these
accounts. As previously discussed, certain local competitors have continued to
offer well above market rates for money market and checking accounts. We have
not increased the rates we offer on these accounts because we do not consider it
a cost effective strategy. However, despite the continued intense competition
for checking accounts, we have been successful in increasing our NOW and demand
deposit account balances, including our business checking deposits, due in large
part to our concerted sales and marketing efforts, including our PEAK Process.
44
Reverse repurchase agreements increased $950.0 million to $7.24 billion at
December 31, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances
decreased $140.0 million to $1.92 billion at December 31, 2003, from $2.06
billion at December 31, 2002. The overall increase in borrowings was a cost
effective strategy to fund asset growth. As previously discussed, during the
year ended December 31, 2003, we extended $1.70 billion of borrowings with a
weighted average rate of 2.55% and a weighted average original term of 3.0 years
to help protect against the impact on interest expense of future interest rate
increases. All other borrowings that matured in 2003 were rolled over into
short-term borrowings. During the 2003 fourth quarter, we entered into forward
borrowing commitments totaling $500.0 million, with a weighted average rate of
3.05% and a weighted average term of 3.3 years, and in January 2004 we entered
into an additional $700.0 million of forward borrowing commitments, with a
weighted average rate of 3.01% and a weighted average term of 3.7 years, to
replace a portion of the $2.81 billion in borrowings, with a weighted average
rate of 4.97%, scheduled to mature in the first quarter of 2004.
Stockholders' equity decreased to $1.40 billion at December 31, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $195.5 million, dividends declared of
$70.1 million, a decrease in accumulated other comprehensive income, net of tax,
of $56.3 million, which was primarily due to the decrease in the fair value of
our mortgage-backed securities available-for-sale, and the redemption of our
Series B Preferred Stock totaling $54.5 million. These decreases were partially
offset by net income of $196.8 million, the effect of stock options exercised
and related tax benefit of $14.9 million and the amortization of the allocated
portion of shares held by the ESOP of $7.2 million.
Results of Operations
General
Net income for the year ended December 31, 2003 decreased $51.6 million to
$196.8 million, from $248.4 million for the year ended December 31, 2002.
Diluted earnings per common share totaled $2.49 per share for the year ended
December 31, 2003 and $2.85 per share for the year ended December 31, 2002.
Return on average assets decreased to 0.87% for the year ended December 31,
2003, from 1.12% for the year ended December 31, 2002. Return on average
stockholders' equity decreased to 13.26% for the year ended December 31, 2003,
from 15.87% for the year ended December 31, 2002. Return on average tangible
stockholders' equity, which represents average stockholders' equity less average
goodwill, decreased to 15.15% for the year ended December 31, 2003, from 18.00%
for the year ended December 31, 2002. The decreases in net income and the
related return ratios for the year ended December 31, 2003 were primarily the
result of the decrease in net interest income which is discussed further 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 and their related impact on cash flows. See Item 7A,
"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 year ended December 31, 2003, net interest income decreased $84.9
million to $379.5 million, from $464.4 million for the year ended December 31,
2002. The net interest margin decreased to 1.78% for the year ended December 31,
2003, from 2.23% for the year ended December 31, 2002. The decreases in net
interest income and the net interest margin were the result of a decrease in
interest income, partially offset by a decrease in interest expense, primarily
due to the more rapid decline in the
45
yields on interest-earning assets than the decline in the costs of
interest-bearing liabilities and the impact of repurchases of our common stock
over the past year. The decrease in the yield 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 and the first half of 2003, as previously
discussed, resulting in reinvestment in those assets at lower rates. These high
levels of repayments have also resulted in accelerated premium amortization
which has further contributed to the decline in the yields on these portfolios.
Net premium amortization on our mortgage-backed securities and mortgage loan
portfolios increased $60.4 million to $113.0 million for the year ended December
31, 2003, from $52.6 million for the year ended December 31, 2002. The decrease
in interest expense was primarily attributable to the decrease in our cost of
funds, which is due to the repayment and refinancing of various higher cost
borrowings, along with the downward repricing of deposits.
The average balance of net interest-earning assets decreased $206.7 million to
$428.3 million for the year ended December 31, 2003, from $635.0 million for the
year ended December 31, 2002. The decrease in the average balance of net
interest-earning assets was the result of an increase of $686.1 million in the
average balance of total interest-bearing liabilities to $20.89 billion for the
year ended December 31, 2003, from $20.20 billion for the year ended December
31, 2002, partially offset by an increase of $479.4 million in the average
balance of total interest-earning assets to $21.32 billion for the year ended
December 31, 2003, from $20.84 billion for the year ended December 31, 2002. The
primary reasons for the decrease in net interest-earning assets are the
repurchases of our common stock over the past year, an increase in the monthly
mortgage-backed securities principal payments receivable due to the accelerated
mortgage-backed securities cash flow, and the $100.0 million premium paid in the
first quarter of 2002 to purchase additional BOLI. The net interest rate spread
decreased to 1.72% for the year ended December 31, 2003, from 2.11% for the year
ended December 31, 2002. The average yield on interest-earning assets decreased
to 4.96% for the year ended December 31, 2003, from 6.08% for the year ended
December 31, 2002. The average cost of interest-bearing liabilities decreased to
3.24% for the year ended December 31, 2003, from 3.97% for the year ended
December 31, 2002. The changes in the yields on interest-earning assets and the
costs of interest-bearing liabilities for the year ended December 31, 2003 were
a result of the continued low 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 years
ended December 31, 2003, 2002 and 2001. 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.
46
For the Year Ended December 31,
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ----------------------------------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,990,636 $ 466,544 5.19% $10,077,810 $ 626,251 6.21%
Multi-family, commercial real
estate and construction 2,757,481 203,785 7.39 2,072,805 162,677 7.85
Consumer and other loans (1) 410,095 19,247 4.69 307,103 17,623 5.74
----------- ---------- ----------- ----------
Total loans 12,158,212 689,576 5.67 12,457,718 806,551 6.47
Mortgage-backed securities (2) 8,491,108 337,222 3.97 6,599,887 377,623 5.72
Other securities (2)(3) 529,592 28,955 5.47 1,011,280 69,211 6.84
Federal funds sold and
repurchase agreements 136,272 1,538 1.13 766,906 12,877 1.68
----------- ---------- ----------- ----------
Total interest-earning assets 21,315,184 1,057,291 4.96 20,835,791 1,266,262 6.08
---------- ----------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,172,962 1,116,863
----------- -----------
Total assets $22,673,297 $22,137,805
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,907,541 13,198 0.45 $ 2,754,000 29,096 1.06
Money market 1,403,363 9,934 0.71 1,876,107 32,512 1.73
NOW and demand deposit 1,469,805 1,526 0.10 1,269,866 3,176 0.25
Certificates of deposit 5,419,725 200,593 3.70 5,203,610 223,216 4.29
----------- ---------- ----------- ----------
Total deposits 11,200,434 225,251 2.01 11,103,583 288,000 2.59
Borrowed funds 9,686,459 452,502 4.67 9,097,198 513,838 5.65
----------- ---------- ----------- ----------
Total interest-bearing liabilities 20,886,893 677,753 3.24 20,200,781 801,838 3.97
---------- ----------
Non-interest-bearing liabilities 302,311 372,050
----------- -----------
Total liabilities 21,189,204 20,572,831
Stockholders' equity 1,484,093 1,564,974
----------- -----------
Total liabilities and
stockholders' equity $22,673,297 $22,137,805
=========== ===========
Net interest income/net
interest rate spread (4) $ 379,538 1.72% $ 464,424 2.11%
========== ==== ========== ====
Net interest-earning assets/
net interest margin (5) $ 428,291 1.78% $ 635,010 2.23%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.02x 1.03x
=========== ===========
For the Year Ended December 31,
----------------------------------
2001
----------------------------------
Average
Average Yield/
(Dollars in Thousands) Balance Interest Cost
- ---------------------------------------------------------------------------
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $10,069,593 $ 694,596 6.90%
Multi-family, commercial real
estate and construction 1,487,504 124,163 8.35
Consumer and other loans (1) 206,903 17,853 8.63
----------- ----------
Total loans 11,764,000 836,612 7.11
Mortgage-backed securities (2) 7,282,666 462,621 6.35
Other securities (2)(3) 1,519,647 107,315 7.06
Federal funds sold and
repurchase agreements 940,394 32,015 3.40
----------- ----------
Total interest-earning assets 21,506,707 1,438,563 6.69
----------
Goodwill 195,191
Other non-interest-earning assets 813,033
-----------
Total assets $22,514,931
===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,495,532 46,283 1.85
Money market 1,734,232 65,484 3.78
NOW and demand deposit 1,075,524 5,097 0.47
Certificates of deposit 5,223,163 283,125 5.42
----------- ----------
Total deposits 10,528,451 399,989 3.80
Borrowed funds 10,014,736 581,616 5.81
----------- ----------
Total interest-bearing liabilities 20,543,187 981,605 4.78
----------
Non-interest-bearing liabilities 394,302
-----------
Total liabilities 20,937,489
Stockholders' equity 1,577,442
-----------
Total liabilities and
stockholders' equity $22,514,931
===========
Net interest income/net
interest rate spread (4) $ 456,958 1.91%
========== ====
Net interest-earning assets/
net interest margin (5) $ 963,520 2.12%
=========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.05x
===========
(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.
47
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.
Year Ended December 31, 2003 Year Ended December 31, 2002
Compared to Compared to
Year Ended December 31, 2002 Year Ended December 31, 2001
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
-------------------------------- --------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $(63,312) $ (96,395) $(159,707) $ 572 $ (68,917) $ (68,345)
Multi-family, commercial real
estate and construction 51,111 (10,003) 41,108 46,338 (7,824) 38,514
Consumer and other loans 5,224 (3,600) 1,624 6,934 (7,164) (230)
Mortgage-backed securities 92,179 (132,580) (40,401) (41,296) (43,702) (84,998)
Other securities (28,339) (11,917) (40,256) (34,857) (3,247) (38,104)
Federal funds sold and
repurchase agreements (8,110) (3,229) (11,339) (5,114) (14,024) (19,138)
- ---------------------------------------------------------------------------------------------------------
Total 48,753 (257,724) (208,971) (27,423) (144,878) (172,301)
- ---------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 1,564 (17,462) (15,898) 4,342 (21,529) (17,187)
Money market (6,760) (15,818) (22,578) 4,998 (37,970) (32,972)
NOW and demand deposit 449 (2,099) (1,650) 783 (2,704) (1,921)
Certificates of deposit 8,994 (31,617) (22,623) (1,057) (58,852) (59,909)
Borrowed funds 31,804 (93,140) (61,336) (52,113) (15,665) (67,778)
- ---------------------------------------------------------------------------------------------------------
Total 36,051 (160,136) (124,085) (43,047) (136,720) (179,767)
- ---------------------------------------------------------------------------------------------------------
Net change in net interest income $ 12,702 $ (97,588) $ (84,886) $ 15,624 $ (8,158) $ 7,466
=========================================================================================================
Interest Income
Interest income for the year ended December 31, 2003 decreased $209.0 million to
$1.06 billion, from $1.27 billion for the year ended December 31, 2002. This
decrease was primarily the result of a decrease in the average yield on
interest-earning assets to 4.96% for the year ended December 31, 2003, from
6.08% for the year ended December 31, 2002, partially offset by an increase of
$479.4 million in the average balance of interest-earning assets to $21.32
billion for the year ended December 31, 2003, from $20.84 billion for the year
ended December 31, 2002. The decrease in the average yield on interest-earning
assets was due to decreases in the average yields on all asset categories,
primarily our mortgage-backed securities and one-to-four family mortgage loans.
The declines in medium- and long-term U.S. Treasury rates during 2002 and the
first half of 2003 resulted in continued high levels of repayments on our
mortgage-backed securities and one-to-four family mortgage loan portfolios and
accelerated premium amortization. The increase in the average balance of
interest-earning assets was primarily due to increases in the average balances
of mortgage-backed securities and multi-family, commercial real estate and
construction loans, partially offset by decreases in the average balances of
one-to-four family mortgage loans, federal funds sold and repurchase agreements
and other securities.
48
Interest income on one-to-four family mortgage loans decreased $159.8 million to
$466.5 million for the year ended December 31, 2003, from $626.3 million for the
year ended December 31, 2002, which was the result of a decrease in the average
yield to 5.19% for the year ended December 31, 2003, from 6.21% for the year
ended December 31, 2002, coupled with a decrease of $1.09 billion in the average
balance of such loans. The decrease in the average yield on one-to-four family
mortgage loans reflects the impact of the continued low interest rate
environment as higher rate loans were repaid and replaced with lower yielding
new originations and purchases, coupled with the lower repricing of ARM loans.
Additionally, the yield has been negatively impacted by accelerated loan premium
amortization, discussed previously, as a result of the increased refinance
activity. 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 and continuing through the
first nine months of 2003, partially offset by originations and purchases of
one-to-four family mortgage loans. The previously discussed increase in medium-
and long-term U.S. Treasury rates during the third quarter of 2003 resulted in a
reduction in the one-to-four family mortgage refinance activity which reduced
the repayments on our mortgage loans in the 2003 fourth quarter. With mortgage
refinance activity significantly reduced and a projected continuation of a
relatively steep U.S. Treasury yield curve, premium amortization expense should
return to more normalized levels and we expect to resume growth in our
one-to-four family mortgage loan portfolio during 2004.
Interest income on multi-family, commercial real estate and construction loans
increased $41.1 million to $203.8 million for the year ended December 31, 2003,
from $162.7 million for the year ended December 31, 2002, which was primarily
the result of an increase of $684.7 million in the average balance of such
loans, partially offset by a decrease in the average yield to 7.39% for the year
ended December 31, 2003, from 7.85% for the year ended December 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 repayment activity within this portfolio is
not as significant as that which we have experienced on our one-to-four family
mortgage loan portfolio in part due to the prepayment penalties associated with
these loans. The decrease in the average yield on multi-family, commercial real
estate and construction loans reflects the growth in this portfolio resulting
from lower yielding new originations due to the impact of the continued low
interest rate environment. The yield on multi-family, commercial real estate and
construction loans has not declined to the same extent as the yield on
one-to-four family mortgage loans primarily as a result of the lower level of
repayment activity within this portfolio as well as the additional income from
prepayment penalties received on loans which have prepaid. Prepayment penalties
totaled $16.0 million for the year ended December 31, 2003 and $4.9 million for
the year ended December 31, 2002.
Interest income on mortgage-backed securities decreased $40.4 million to $337.2
million for the year ended December 31, 2003, from $377.6 million for the year
ended December 31, 2002. This decrease was the result of a decrease in the
average yield to 3.97% for the year ended December 31, 2003, from 5.72% for the
year ended December 31, 2002, partially offset by an increase of $1.89 billion
in the average balance of the portfolio. The decrease in the average yield on
mortgage-backed securities reflects the substantial turnover we have experienced
in this portfolio as a result of the continued low interest rate environment as
higher yielding securities were repaid and replaced with lower yielding
securities, coupled with accelerated premium amortization. Net premium
amortization on mortgage-backed securities increased $57.3 million to $71.0
million for the year ended December 31, 2003, from $13.7 million for the year
ended December 31, 2002. The increase in the average balance of mortgage-backed
securities was the result of increased levels of purchases of REMICs and CMOs
during the second half of 2002 and throughout 2003 to effectively deploy our
cash flows in excess of mortgage and other loan fundings, partially offset by
increased levels of principal repayments. At December 31, 2003 we had $8.06
billion in REMIC and CMO mortgage-backed securities, which comprised 95.5% of
our total securities portfolio, substantially all of which had fixed rates. The
amortized cost of our fixed rate REMICs and CMOs totaled $8.11 billion at
December 31, 2003. Included in this total is $2.53 billion of securities which
have a remaining gross premium of $26.9 million, a weighted average current
coupon of 5.04%, a weighted average collateral coupon of 6.10% and a weighted
average life of 2.6 years. The remaining $5.58 billion of these securities have
a remaining gross discount of $18.5 million, a weighted average current coupon
of 4.14%, a weighted
49
average collateral coupon of 5.80% and a weighted average life of 3.5 years.
Included in the totals for discount securities are $617.7 million of securities
at par.
Interest income on other securities decreased $40.2 million to $29.0 million for
the year ended December 31, 2003, from $69.2 million for the year ended December
31, 2002. This decrease resulted from a decrease of $481.7 million in the
average balance of this portfolio, coupled with a decrease in the average yield
to 5.47% for the year ended December 31, 2003, from 6.84% for the year ended
December 31, 2002, primarily due to higher yielding securities being called
throughout 2002 and the first half of 2003 as a result of the continued low
interest rate environment. Interest income on other securities includes
dividends on FHLB-NY stock. Dividends on FHLB-NY stock totaled $10.6 million for
the year ended December 31, 2003 and $10.7 million for the year ended December
31, 2002. The FHLB-NY suspended dividend payments to stockholders in the fourth
quarter of 2003, due to losses in its securities portfolio, but resumed payment
in January 2004, at a rate of 1.45%, as compared to a rate of 5.05% paid in July
2003, the last dividend payment prior to the FHLB-NY's dividend suspension.
Interest income on federal funds sold and repurchase agreements decreased $11.3
million as a result of the $630.6 million decrease in the average balance of the
portfolio, coupled with a decrease in the average yield to 1.13% for the year
ended December 31, 2003, from 1.68% for the year ended December 31, 2002.
Interest Expense
Interest expense for the year ended December 31, 2003 decreased $124.0 million
to $677.8 million, from $801.8 million for the year ended December 31, 2002.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 3.24% for the year ended December 31, 2003, from
3.97% for the year ended December 31, 2002, partially offset by an increase of
$686.1 million in the average balance of interest-bearing liabilities to $20.89
billion for the year ended December 31, 2003, from $20.20 billion for the year
ended December 31, 2002. The decrease in the average cost of our
interest-bearing liabilities reflects the impact of the continued low interest
rate environment on the cost of our deposits and borrowings. The increase in the
average balance of interest-bearing liabilities was attributable to increases in
the average balances of borrowings and deposits.
Interest expense on deposits decreased $62.7 million, to $225.3 million for the
year ended December 31, 2003, from $288.0 million for the year ended December
31, 2002, reflecting a decrease in the average cost of deposits to 2.01% for the
year ended December 31, 2003, from 2.59% for the year ended December 31, 2002,
slightly offset by an increase of $96.9 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 as a result of the continued low
interest rate environment. The increase in the average balance of total deposits
was primarily the result of increases in the average balances of certificates of
deposit, NOW and demand deposit accounts and savings accounts, partially offset
by a decrease in the average balance of money market accounts.
Interest expense on certificates of deposit decreased $22.6 million resulting
from a decrease in the average cost to 3.70% for the year ended December 31,
2003, from 4.29% for the year ended December 31, 2002, partially offset by a
$216.1 million increase in the average balance. The increase in the average
balance of certificates of deposit was primarily the result of our efforts to
extend the maturities of our certificates of deposit through promotional rates
and targeted marketing and sales efforts in the prevailing low interest rate
environment. During 2003, $3.45 billion of certificates of deposit, with an
average rate of 2.31% and an average maturity at inception of thirteen months,
matured and $3.60 billion of certificates of deposit were issued or repriced,
with an average rate of 1.93% and an average maturity at inception of sixteen
months.
Interest expense on money market accounts decreased $22.6 million reflecting a
decrease in the average cost to 0.71% for the year ended December 31, 2003, from
1.73% for the year ended December 31,
50
2002, coupled with a decrease of $472.7 million in the average balance of such
accounts. Interest paid on money market accounts is on a tiered basis with 82.7%
of the balance at December 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 the continued intense competition for these
accounts, previously discussed.
Interest expense on savings accounts decreased $15.9 million which was
attributable to a decrease in the average cost to 0.45% for the year ended
December 31, 2003, from 1.06% for the year ended December 31, 2002, partially
offset by an increase of $153.5 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $1.7 million as a result of a
decrease in the average cost to 0.10% for the year ended December 31, 2003, from
0.25% for the year ended December 31, 2002, slightly offset by an increase of
$199.9 million in the average balance of these accounts. The increases in the
average balances of savings and NOW and demand deposit accounts are consistent
with our emphasis on core deposit generation.
Interest expense on borrowed funds for the year ended December 31, 2003
decreased $61.3 million to $452.5 million, from $513.8 million for year ended
December 31, 2002, resulting from a decrease in the average cost of borrowings
to 4.67% for the year ended December 31, 2003, from 5.65% for the year ended
December 31, 2002, partially offset by an increase of $589.3 million in the
average balance. The decrease in the average cost of borrowings is the result of
the refinancing of higher cost borrowings as they matured at substantially lower
rates. The increase in the average balance of borrowed funds is a result of our
issuance of $250.0 million senior unsecured notes during the 2002 fourth quarter
and our use of short-term borrowings during the year to fund our loan
originations and securities purchases.
Provision for Loan Losses
During the year ended December 31, 2003, no provision for loan losses was
recorded. The provision for loan losses totaled $2.3 million for the year ended
December 31, 2002. The decrease in the provision for loan losses is due to an
analysis performed during 2002 of the actual charge-off history of our loan
portfolio compared to our previously determined allowance coverage percentages.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining our general valuation
allowances. Our analysis indicated that our estimate of losses inherent in our
portfolio exceeded our actual charge-off history. In response to the results of
that analysis, we adjusted our allowance coverage percentages for our portfolio
segments accordingly. We review our allowance coverage percentages on a
quarterly basis. Our 2003 analyses did not indicate that changes in our
allowance coverage percentages were required. We believe our current allowance
coverage percentages are adequate to reflect the risks inherent in our loan
portfolio.
The allowance for loan losses totaled $83.1 million at December 31, 2003, and
$83.5 million at December 31, 2002. Net loan charge-offs totaled $425,000 for
the year ended December 31, 2003 compared to $1.0 million for the year ended
December 31, 2002. Non-performing loans decreased $4.8 million to $29.7 million
at December 31, 2003, from $34.5 million at December 31, 2002. The allowance for
loan losses as a percentage of non-performing loans increased to 280.10% at
December 31, 2003, from 242.04% at December 31, 2002, primarily due to the
decrease in non-performing loans from December 31, 2002 to December 31, 2003.
The allowance for loan losses as a percentage of total loans decreased to 0.66%
at December 31, 2003 from 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."
Non-Interest Income
Non-interest income for the year ended December 31, 2003 increased $12.2
million, to $119.6 million, from $107.4 million for the year ended December 31,
2002. The increase in non-interest income was primarily due to increases in
mortgage banking income, net, and other non-interest income, partially offset by
a decrease in net gain on sales of securities.
51
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, increased $12.6 million to net mortgage banking income of
$10.3 million for the year ended December 31, 2003, from net mortgage banking
loss of $2.3 million for the year ended December 31, 2002. This increase is
primarily due to the change in the valuation allowance adjustments for the
impairment of MSR, to a recovery recorded for the year ended December 31, 2003
compared to a provision recorded for the year ended December 31, 2002, and an
increase in net gain on sales of loans, partially offset by a decrease in loan
servicing fees and an increase in amortization of MSR. We recorded a recovery in
the valuation allowance of MSR of $3.1 million for the year ended December 31,
2003 compared to a provision of $10.8 million for the year ended December 31,
2002. The recovery in the valuation allowance of MSR for the year ended December
31, 2003 is a result of a decrease in projected loan prepayment speeds at
December 31, 2003, compared to the projected loan prepayment speeds used in
valuing our MSR at December 31, 2002. The decrease in projected loan prepayment
speeds reflects the increase in medium- and long-term interest rates during the
second half of 2003. Net gain on sales of loans increased $5.5 million to $12.1
million for the year ended December 31, 2003 from $6.6 million for the year
ended December 31, 2002. The increase in net gain on sales of loans was
primarily due to more favorable pricing opportunities during the year ended
December 31, 2003 as compared to the year ended December 31, 2002 and an
increase in the volume of fixed rate loans originated and sold into the
secondary market during 2003. Loan servicing fees, which include all contractual
and ancillary servicing revenue we receive, decreased $4.2 million to $7.9
million for the year ended December 31, 2003, from $12.1 million for the year
ended December 31, 2002, primarily as a result of the decrease in the balance of
loans serviced for others to $1.90 billion at December 31, 2003, from $2.67
billion at December 31, 2002. The decrease in the balance of loans serviced for
others was due to increased repayments in that portfolio in the continued low
interest rate environment which have exceeded the level of new servicing volume
from loan sales. Amortization of MSR increased $2.6 million to $12.8 million for
the year ended December 31, 2003, from $10.2 million for the year ended December
31, 2002. The increase in MSR amortization is attributable to the continued high
level of mortgage loan repayments, particularly during the first nine months of
2003.
Other non-interest income increased $4.9 million to $14.5 million for the year
ended December 31, 2003, from $9.6 million for the year ended December 31, 2002.
This increase was primarily due to a $10.1 million gain on the sale of our
interest in a joint venture real estate investment held by one of our
wholly-owned subsidiaries in the 2003 fourth quarter, partially offset by the
receipt of a $3.8 million net insurance settlement in 2002 regarding a lawsuit.
Net gain on sales of securities decreased $3.5 million to $7.3 million for the
year ended December 31, 2003, from $10.8 million for the year ended December 31,
2002. During 2003, we sold mortgage-backed and other securities with an
amortized cost of $1.45 billion. During 2002, we sold mortgage-backed securities
with an amortized cost of $438.6 million.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2003 totaled $205.9
million, an increase of $7.9 million from $198.0 million for the year ended
December 31, 2002. This increase was primarily due to an increase of $10.1
million in general and administrative expense to $205.9 million for the year
ended December 31, 2003, from $195.8 million for the year ended December 31,
2002, partially offset by a $2.2 million prepayment penalty incurred in December
2002 on the prepayment of a $100.0 million reverse repurchase agreement. The
increase in general and administrative expense was primarily due to increases in
occupancy, equipment and systems expense and compensation and benefits expense.
Occupancy, equipment and systems expense increased $6.8 million to $59.9 million
for the year ended December 31, 2003, from $53.1 million for the year ended
December 31, 2002, due to increases in building and furniture, fixtures and
equipment expense, data processing and depreciation, as a result of facilities
and systems enhancements over the past year, and increases in rent and utilities
expense.
52
Compensation and benefits expense increased $3.6 million to $110.3 million for
the year ended December 31, 2003, from $106.7 million for the year ended
December 31, 2002. The increase was primarily attributable to increases in
pension and other postretirement benefits expense, partially offset by a
decrease in ESOP expense. The increase in pension expense is primarily related
to the decrease in the value of our pension assets which was a result of the
decline in the equities markets during 2002. The decrease in ESOP expense is
primarily attributable to a reduction in the number of shares of our common
stock allocated to participant accounts, due to an increase in the market value
of our common stock during the period used for the calculations, during the year
ended December 31, 2003, compared to the year ended December 31, 2002.
Although non-interest expense increased in 2003, we continue to focus on expense
control, with expense ratios that are significantly lower than our peer
averages. Our percentage of general and administrative expense to average assets
increased to 0.91% for the year ended December 31, 2003, from 0.88% for the year
ended December 31, 2002, primarily due to the increase in general and
administrative expense, partially offset by the increase in average assets. The
efficiency ratio, which represents general and administrative expense divided by
the sum of net interest income plus non-interest income, increased to 41.25% for
the year ended December 31, 2003, from 34.25% for the year ended December 31,
2002, primarily due to the decrease in net interest income, coupled with the
increase in general and administrative expense. The increase in general and
administrative expense and the decrease in net interest income for the year
ended December 31, 2003 compared to the year ended December 31, 2002 were
discussed previously.
Income Tax Expense
For the year ended December 31, 2003, income tax expense totaled $96.4 million,
representing an effective tax rate of 32.9%, compared to $123.1 million,
representing an effective tax rate of 33.1%, for the year ended December 31,
2002.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2002 and 2001
Financial Condition
Total assets decreased $969.9 million to $21.70 billion at December 31, 2002,
from $22.67 billion at December 31, 2001. The primary reason for the decrease in
total assets was the decrease in federal funds sold and repurchase agreements.
Federal funds sold and repurchase agreements decreased $798.9 million to $510.3
million at December 31, 2002, from $1.31 billion at December 31, 2001. The
unusually high level of liquidity at December 31, 2001 reflected the increased
cash flows from loan and security repayments which we held and used, in part, to
both help fund our mortgage application pipeline at December 31, 2001 and to
repay a portion of borrowings which matured, primarily during the first quarter
of 2002.
Mortgage loans decreased $244.0 million to $11.68 billion at December 31, 2002,
from $11.92 billion at December 31, 2001. This decrease was primarily due to the
extraordinarily high level of mortgage loan repayments in 2002, partially offset
by an increase in gross mortgage loans originated and purchased in 2002 as
compared to 2001. Mortgage loan repayments increased to $5.34 billion for the
year ended December 31, 2002, from $3.46 billion for the year ended December 31,
2001. Gross mortgage loans originated and purchased during the year ended
December 31, 2002 totaled $5.59 billion, including originations of loans
held-for-sale totaling $484.3 million, of which $4.06 billion were originations
and $1.53 billion were purchases. This compares to $3.13 billion of originations
and $1.43 billion of purchases for a total of $4.56 billion, including
originations of loans held-for-sale totaling $405.7 million, during the year
ended December 31, 2001. The increase in mortgage loan repayments, originations
and purchases was primarily a result of the lower interest rate environment
during 2002 compared to 2001, which increased the level of mortgage refinance
activity in 2002.
53
Our one-to-four family mortgage loans, which represented 76.9% of our total loan
portfolio at December 31, 2002, decreased $895.7 million to $9.21 billion at
December 31, 2002, from $10.11 billion at December 31, 2001. As noted above,
this decrease was primarily due to the extraordinarily high level of one-to-four
family mortgage 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 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, increased $505.7 million to $1.60 billion at December 31, 2002, from
$1.09 billion at December 31, 2001. Similarly, our commercial real estate loans
increased $146.3 million to $744.6 million at December 31, 2002, from $598.3
million at December 31, 2001. Our multi-family and commercial real estate loan
originations in 2002 were similar in type to the loans in our portfolio at
December 31, 2001. Our portfolio of consumer and other loans increased by $132.4
million to $372.6 million at December 31, 2002, from $240.2 million at December
31, 2001. This increase was primarily in home equity lines of credit as a result
of the strong housing market and the low interest rate environment.
Mortgage-backed securities increased $305.5 million to $7.38 billion at December
31, 2002, from $7.07 billion at December 31, 2001. This increase was primarily
the result of purchases of $6.84 billion of REMICs and CMOs, partially offset by
principal payments received of $6.09 billion and sales of $438.6 million. During
the year ended December 31, 2001, our purchases of mortgage-backed securities
totaled $2.03 billion and principal payments received totaled $3.01 billion.
There were no security sales during the year ended December 31, 2001.
Other securities decreased $484.8 million to $454.3 million at December 31,
2002, from $939.1 million at December 31, 2001, primarily due to $573.2 million
in securities which were called or matured, partially offset by the net
accretion of discounts of $41.4 million, purchases of other securities totaling
$31.0 million and a decrease in the net unrealized loss on securities
available-for-sale of $16.0 million. The continued decline in interest rates in
2002 resulted in a significant portion of our callable investment securities
being called. The improvement in the fair value of our other securities
available-for-sale portfolio was related to the decrease in medium-term market
interest rates that occurred from December 31, 2001 to December 31, 2002.
BOLI increased $116.1 million to $358.9 million at December 31, 2002, from
$242.8 million at December 31, 2001, primarily as a result of an additional
$100.0 million premium paid in the first quarter of 2002 to purchase additional
BOLI. BOLI is classified as a non-interest earning asset. Increases in the cash
surrender value are recorded as non-interest income and insurance proceeds are
recorded as a reduction of the cash surrender value. Other assets decreased
$23.3 million to $89.4 million at December 31, 2002, from $112.7 million at
December 31, 2001, primarily due to a decrease in the net deferred tax asset
which was primarily related to a decrease in the net unrealized loss on
securities available-for-sale.
During 2002, we continued shifting our liability emphasis from borrowings to
deposits, particularly lower costing core deposits. Deposits increased $163.5
million to $11.07 billion at December 31, 2002, from $10.90 billion at December
31, 2001. The increase in deposits was primarily due to an increase of $170.8
million in core deposits to $5.91 billion at December 31, 2002, from $5.74
billion at December 31, 2001 which was attributable to our continued emphasis on
deposit generation through competitive rates, extensive product offerings and
quality service. While total core deposits increased, our money market accounts,
which are a component of core deposits, decreased $256.7 million to $1.70
billion at December 31, 2002, from $1.96 billion at December 31, 2001. The
decrease in our money market accounts can be attributed to increased competition
for money market and checking accounts. Certain local competitors, as well as
recent entrants into the local market, have offered 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. Offsetting
this decrease in our money market accounts were increases in savings accounts of
$244.1 million and NOW and demand deposit
54
accounts of $183.3 million. Despite increased local competition for checking
accounts, we were successful in increasing the number of NOW and demand deposit
accounts opened in 2002 due in large part to our PEAK process and an integrated
checking account promotion, which were introduced in the first and second
quarters of 2002, respectively. Reverse repurchase agreements decreased $1.10
billion to $6.29 billion at December 31, 2002, from $7.39 billion at December
31, 2001. FHLB-NY advances increased $150.0 million to $2.06 billion at December
31, 2002, from $1.91 billion at December 31, 2001. Other borrowings, net,
decreased $50.6 million to $472.2 million at December 31, 2002, from $522.8
million at December 31, 2001. The net decrease in other borrowings was the
result of the maturity of a $300.0 million medium-term note in June 2002,
partially offset by the issuance of $250.0 million of senior unsecured notes
during the quarter ended December 31, 2002. The decrease in borrowings reflects
management's decision to utilize excess cash flow to repay various borrowings
which matured during the year ended December 31, 2002.
Stockholders' equity increased to $1.55 billion at December 31, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $248.4 million, the effect of stock options exercised
and related tax benefit of $22.3 million, an increase in accumulated other
comprehensive income, net of tax, of $11.8 million and the amortization of the
allocated portion of shares held by the ESOP of $10.2 million. These increases
were partially offset by common stock repurchased of $211.1 million and
dividends declared of $70.2 million.
Results of Operations
General
Net income for the year ended December 31, 2002 increased $25.5 million to
$248.4 million, from $222.9 million for the year ended December 31, 2001. For
the year ended December 31, 2002, diluted earnings per common share increased to
$2.85 per share, from $2.35 per share for the year ended December 31, 2001.
Return on average assets increased to 1.12% for the year ended December 31,
2002, from 0.99% for the year ended December 31, 2001. Return on average
stockholders' equity increased to 15.87% for the year ended December 31, 2002,
from 14.13% for the year ended December 31, 2001. Return on average tangible
stockholders' equity increased to 18.00% for the year ended December 31, 2002,
from 16.12% for the year ended December 31, 2001.
The results of operations for the year ended December 31, 2002 include the
benefit derived from the adoption of SFAS No. 142. SFAS No. 142 eliminated
goodwill amortization which totaled $19.1 million, or $0.21 per diluted common
share, for the year ended December 31, 2001. The results of operations for the
year ended December 31, 2001 also include a $2.3 million, after tax, charge for
the cumulative effect of accounting change related to the adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," effective January 1, 2001.
See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data," for further discussion of
the impact of the implementation of SFAS No. 142, SFAS No. 133 and SFAS No. 138.
Net Interest Income
For the year ended December 31, 2002, net interest income increased $7.4 million
to $464.4 million, from $457.0 million for the year ended December 31, 2001.
This increase was primarily attributable to an increase in the net interest
margin to 2.23% for the year ended December 31, 2002, from 2.12% for the year
ended December 31, 2001. The increase in the net interest margin was primarily
due to the decrease in the cost of funds due to the downward repricing of
deposits as a result of the lower interest rate environment which persisted
since June of 2001, along with the repayment of various higher cost borrowings.
The average balance of net interest-earning assets decreased $328.5 million to
$635.0 million at December 31, 2002, from $963.5 million at December 31, 2001.
The decrease in the
55
average balance of net interest-earning assets was the result of a decrease of
$670.9 million in the average balance of total interest-earning assets to $20.84
billion for the year ended December 31, 2002, from $21.51 billion for the year
ended December 31, 2001, partially offset by a decrease of $342.4 million in the
average balance of total interest-bearing liabilities to $20.20 billion for the
year ended December 31, 2002, from $20.54 billion for the year ended December
31, 2001. The net interest rate spread increased to 2.11% for the year ended
December 31, 2002, from 1.91% for the year ended December 31, 2001. The change
in the net interest rate spread was the result of a decrease in the average cost
of interest-bearing liabilities to 3.97% for the year ended December 31, 2002,
from 4.78% for the year ended December 31, 2001, partially offset by a decrease
in the average yield on interest-earning assets to 6.08% for the year ended
December 31, 2002, from 6.69% for the year ended December 31, 2001. The changes
in such costs and yields were a result of the lower interest rate environment,
in 2002 as compared to 2001, 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."
Interest Income
Interest income for the year ended December 31, 2002 decreased $172.3 million to
$1.27 billion, from $1.44 billion for the year ended December 31, 2001. This
decrease was the result of a decrease in the average yield on interest-earning
assets to 6.08% for the year ended December 31, 2002, from 6.69% for the year
ended December 31, 2001, coupled with a decrease of $670.9 million in the
average balance of interest-earning assets to $20.84 billion for the year ended
December 31, 2002, from $21.51 billion for the year ended December 31, 2001. The
decrease in the average yield on interest-earning assets was due to the
decreases in the average yields on all asset categories as a result of the lower
interest rate environment during the year ended December 31, 2002 than that
which existed during the year ended December 31, 2001. The decrease in the
average balance of interest-earning assets was primarily due to decreases in the
average balances of mortgage-backed and other securities, resulting from
principal repayments, maturities, calls and sales, and a decrease in the average
balance of federal funds sold and repurchase agreements, partially offset by
increases in the average balances of mortgage loans, primarily multi-family,
commercial real estate and construction loans, and consumer and other loans.
Also contributing to the decrease in the average balance of interest-earning
assets was the purchase of an additional $100.0 million of BOLI in the first
quarter of 2002. The decrease and shift in the average balances of
interest-earning assets reflects our decision over the past several years to
limit balance sheet growth and reposition the balance sheet by emphasizing
mortgage lending.
Interest income on one-to-four family mortgage loans decreased $68.3 million to
$626.3 million for the year ended December 31, 2002, from $694.6 million for the
year ended December 31, 2001, which was primarily the result of a decrease in
the average yield to 6.21% for the year ended December 31, 2002, from 6.90% for
the year ended December 31, 2001, slightly offset by an increase of $8.2 million
in the average balance of such loans. The slight increase in the average balance
of one-to-four family mortgage loans reflects the strong level of originations
and purchases in 2002, substantially offset by the extraordinarily high level of
repayment activity, due to refinancings, particularly in the second half of
2002. Interest income on multi-family, commercial real estate and construction
loans increased $38.5 million to $162.7 million for the year ended December 31,
2002, from $124.2 million for the year ended December 31, 2001, which was
primarily the result of an increase of $585.3 million in the average balance of
such loans, partially offset by a decrease in the average yield to 7.85% for the
year ended December 31, 2002, from 8.35% for the year ended December 31, 2001.
The increase in the average balance of multi-family, commercial real estate and
construction loans reflects the increase in originations of such loans, coupled
with the fact that we have not experienced significant repayment activity within
this portfolio in 2002 in part due to the prepayment penalties associated with
these loans. The increase in the average balance of total mortgage loans
reflects our continued emphasis on the origination of mortgage loans. The
decrease in the average yields on mortgage loans reflects the lower interest
rate environment during 2002 as compared to 2001 as higher rate loans were
repaid and replaced with lower yielding new originations and purchases and ARM
loans repriced. Additionally,
56
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 decreased $230,000 for the year
ended December 31, 2002 compared to the year ended December 31, 2001 resulting
from a decrease in the average yield to 5.74% for the year ended December 31,
2002, from 8.63% for the year ended December 31, 2001, partially offset by an
increase of $100.2 million in the average balance of this portfolio. The changes
in interest income on consumer and other loans were primarily attributable to
home equity lines of credit which represented 86.5% of this portfolio at
December 31, 2002. The decrease in the average yield on consumer and other loans
was primarily the result of a decrease in the average yield on our home equity
lines of credit which are adjustable rate loans which generally reset monthly
and are indexed to the prime rate. The prime rate decreased 475 basis points
during the year ended December 31, 2001 and 50 basis points during the year
ended December 31, 2002. The increase in the average balance of consumer and
other loans was due to the increase in home equity lines of credit as a result
of the strong housing market combined with low interest rates during 2002 and
2001.
Interest income on mortgage-backed securities decreased $85.0 million to $377.6
million for the year ended December 31, 2002, from $462.6 million for the year
ended December 31, 2001. This decrease was the result of a decrease in the
average yield to 5.72% for the year ended December 31, 2002, from 6.35% for the
year ended December 31, 2001, coupled with a decrease of $682.8 million 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 during 2002 as higher yielding securities were repaid and replaced
with lower yielding purchases and security premium amortization accelerated. The
decrease in the average balance of mortgage-backed securities was the result of
our strategy of repositioning the balance sheet over the past several years,
increased levels of principal repayments due to the lower interest rate
environment which has existed since June 2001 and sales of securities during the
second half of 2002. Interest income on other securities decreased $38.1 million
to $69.2 million for the year ended December 31, 2002, from $107.3 million for
the year ended December 31, 2001. This decrease resulted from a decrease of
$508.4 million in the average balance of this portfolio, primarily due to higher
yielding securities being called throughout 2001 and 2002 as a result of the
declining interest rate environment. As a result of the decrease in the balance
of higher yielding securities, the average yield decreased to 6.84% for the year
ended December 31, 2002, from 7.06% for the year ended December 31, 2001.
Interest income on federal funds sold and repurchase agreements decreased $19.1
million as a result of a decrease in the average yield to 1.68% for the year
ended December 31, 2002, from 3.40% for the year ended December 31, 2001,
coupled with a decrease of $173.5 million in the average balance of the
portfolio.
Interest Expense
Interest expense for the year ended December 31, 2002 decreased $179.8 million
to $801.8 million, from $981.6 million for the year ended December 31, 2001.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 3.97% for the year ended December 31, 2002, from
4.78% for the year ended December 31, 2001, coupled with a decrease of $342.4
million in the average balance of interest-bearing liabilities to $20.20 billion
for the year ended December 31, 2002, from $20.54 billion for the year ended
December 31, 2001. The decrease in the overall average cost of our
interest-bearing liabilities reflects the impact of the lower interest rate
environment, which has prevailed since June 2001 and throughout 2002, primarily
on the cost of our deposits. 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.
57
Interest expense on deposits decreased $112.0 million, to $288.0 million for the
year ended December 31, 2002, from $400.0 million for the year ended December
31, 2001, reflecting a decrease in the average cost of deposits to 2.59% for the
year ended December 31, 2002, from 3.80% for the year ended December 31, 2001,
partially offset by an increase of $575.1 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 certificates of
deposit and money market accounts, as a result of the lower interest rate
environment which has continued into 2002. The increase in the average balance
of total deposits was primarily the result of increases in the average balances
of savings, NOW and demand deposit and money market accounts, partially offset
by a slight decrease in the average balance of certificates of deposit.
Interest expense on certificates of deposit decreased $59.9 million resulting
from a decrease in the average cost to 4.29% for the year ended December 31,
2002, from 5.42% for the year ended December 31, 2001, coupled with a $19.6
million decrease in the average balance.
Interest expense on money market accounts decreased $33.0 million reflecting a
decrease in the average cost to 1.73% for the year ended December 31, 2002, from
3.78% for the year ended December 31, 2001, partially offset by an increase of
$141.9 million in the average balance of such accounts. Interest paid on money
market accounts is on a tiered basis with 87.1% of the balance at December 31,
2002 in the highest tier.
Interest expense on savings accounts decreased $17.2 million which was
attributable to a decrease in the average cost to 1.06% for the year ended
December 31, 2002, from 1.85% for the year ended December 31, 2001, partially
offset by an increase of $258.5 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $1.9 million as a result of a
decrease in the average cost to 0.25% for the year ended December 31, 2002, from
0.47% for the year ended December 31, 2001, partially offset by an increase of
$194.3 million in the average balance. 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 year ended December 31, 2002
decreased $67.8 million to $513.8 million, from $581.6 million for year ended
December 31, 2001, resulting from a decrease of $917.5 million in the average
balance, coupled with a decrease in the average cost of borrowings to 5.65% for
the year ended December 31, 2002, from 5.81% for the year ended December 31,
2001. During the year ended December 31, 2002, $1.90 billion in borrowings with
an average rate of 6.81% matured, of which $1.40 billion were repaid and $500.0
million were rolled into short-term borrowings at substantially lower rates.
Additionally, we issued $250.0 million of 5.75% senior unsecured notes during
the quarter ended December 31, 2002.
Provision for Loan Losses
Provision for loan losses decreased $1.7 million, to $2.3 million for the year
ended December 31, 2002 compared to $4.0 million for the year ended December 31,
2001. During the third quarter of 2002, we performed an analysis of the actual
charge-off history of our loan portfolio compared to our previously determined
allowance coverage percentages. Our allowance coverage percentages are used to
estimate the amount of probable losses inherent in our loan portfolio in
determining our general valuation allowances. Our analysis indicated that our
estimate of losses inherent in our portfolio exceeded our actual charge-off
history during the 2002 economic downturn. In response to the results of that
analysis, we adjusted our allowance coverage percentages for our portfolio
segments accordingly. As a result of our analysis, no provision for loan losses
was recorded for the 2002 fourth quarter.
The allowance for loan losses increased to $83.5 million at December 31, 2002,
from $82.3 million at December 31, 2001. Net loan charge-offs totaled $1.0
million for the year ended December 31, 2002 compared to $1.7 million for the
year ended December 31, 2001. Non-performing loans decreased $2.6
58
million to $34.5 million at December 31, 2002, from $37.1 million at December
31, 2001. The allowance for loan losses as a percentage of non-performing loans
increased to 242.04% at December 31, 2002, from 221.70% at December 31, 2001
primarily due to the decrease in non-performing loans from December 31, 2001 to
December 31, 2002. The allowance for loan losses as a percentage of total loans
was 0.69% at December 31, 2002 and 0.68% at December 31, 2001. For further
discussion of non-performing loans and allowance for loan losses, see "Critical
Accounting Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the year ended December 31, 2002 increased $17.3
million, to $107.4 million, from $90.1 million for the year ended December 31,
2001. The increase in non-interest income was primarily due to increases in net
gain on sales of securities, customer service fees and income from BOLI,
partially offset by a decrease in mortgage banking income, net.
Customer service fees increased $8.2 million to $60.2 million for the year ended
December 31, 2002, from $52.0 million for the year ended December 31, 2001. The
increase in customer service fees was primarily attributable to an increase in
the number of NOW and demand deposit accounts, which was primarily due to an
integrated checking account promotion initiated in the second quarter of 2002
and continued focus on our retail sales initiatives, including the introduction
of our PEAK Process in the first quarter of 2002.
Mortgage banking income, net, decreased $9.8 million to net mortgage banking
loss of $2.3 million for the year ended December 31, 2002, compared to net
mortgage banking income of $7.5 million for the year ended December 31, 2001.
This decrease was primarily due to increases in the provision for the valuation
allowance of MSR and the amortization of MSR, coupled with a decrease in loan
servicing fees. These changes were partially offset by an increase in the gain
on sales of loans. The valuation allowance adjustments for the impairment of MSR
increased $9.5 million to $10.8 million for the year ended December 31, 2002,
from $1.3 million for the year ended December 31, 2001. This increase was
related to the current and forecasted lower interest rate environment and
projected accelerated loan prepayment speeds at December 31, 2002 as compared to
December 31, 2001. Amortization of mortgage servicing rights increased $655,000
to $10.2 million for the year ended December 31, 2002, from $9.6 million for the
year ended December 31, 2001. Loan servicing fees decreased $3.0 million to
$12.1 million for the year ended December 31, 2002, from $15.1 million for the
year ended December 31, 2001. This decrease in loan servicing fees was the
result of a decrease in the balance of loans serviced for others to $2.67
billion at December 31, 2002, from $3.32 billion at December 31, 2001. 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 $3.3 million to $6.6 million for the year ended December 31,
2002, from $3.3 million for the year ended December 31, 2001. The increase in
net gain on sales of loans was primarily due to an increase in the volume of
fixed rate loans originated and sold into the secondary market during 2002. The
lower interest rate environment in 2002 as compared to 2001 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.
Net gain on sales of securities totaled $10.8 million for the year ended
December 31, 2002. During the second half of 2002, we sold mortgage-backed
securities with an amortized cost of $438.6 million. These gains were used as a
natural hedge to offset MSR valuation allowance adjustments caused by the
impairment of MSR discussed previously. There were no sales of securities in
2001.
Income from BOLI increased $4.6 million to $21.4 million for the year ended
December 31, 2002, from $16.8 million for the year ended December 31, 2001. As
discussed previously, during the first quarter of 2002 we purchased an
additional $100.0 million of BOLI.
59
Other non-interest income increased $2.7 million to $9.6 million for the year
ended December 31, 2002, from $6.9 million for the year ended December 31, 2001.
This increase was primarily due to the receipt in 2002 of a $3.8 million net
insurance settlement regarding a lawsuit, partially offset by income recognized
in 2001 related to the dissolution of a trust account previously established for
certain former executives.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2002 totaled $198.0
million, an increase of $184,000 from $197.8 million for the year ended December
31, 2001. This increase was primarily due to an increase of $17.0 million in
general and administrative expense to $195.8 million for the year ended December
31, 2002, from $178.8 million for the year ended December 31, 2001, coupled with
a $2.2 million prepayment penalty incurred in December 2002 on the prepayment of
a $100.0 million reverse repurchase agreement. These increases were
substantially offset by the elimination of goodwill amortization upon adoption
of SFAS No. 142 effective January 1, 2002, which totaled $19.1 million for the
year ended December 31, 2001. The increase in general and administrative expense
was primarily due to an increase in compensation and benefits expense.
Compensation and benefits expense increased $13.9 million to $106.7 million for
the year ended December 31, 2002, from $92.8 million for the year ended December
31, 2001. This increase was attributable to staff additions, primarily in our
retail banking network, and normal annual increases in salaries, coupled with an
increase in pension and other postretirement benefits expense of $3.4 million
and an increase in ESOP expense of $2.4 million for the year ended December 31,
2002 as compared to the year ended December 31, 2001. The increase in pension
expense is primarily related to the decrease in the value of our pension assets
which is a result of the continued decline in the equities markets during 2002.
The increase in ESOP expense was due to the increase in eligible compensation,
coupled with the higher average market value of our common stock during the year
ended December 31, 2002 compared to the year ended December 31, 2001.
Other expense increased $2.6 million to $29.2 million for the year ended
December 31, 2002, from $26.6 million for the year ended December 31, 2001,
primarily due to a decrease in the fair value of our $300.0 million notional
amount of interest rate cap agreements. The interest rate caps, which did not
qualify for hedge accounting treatment, were purchased in the second half of
2001 as protection against interest rate increases during the next several years
as part of management's interest rate risk strategy.
Our percentage of general and administrative expense to average assets increased
to 0.88% for the year ended December 31, 2002, from 0.79% for the year ended
December 31, 2001. The efficiency ratio increased to 34.25% for the year ended
December 31, 2002, from 32.68% for the year ended December 31, 2001. The
increases in these ratios are attributable to the increase in general and
administrative expense for the year ended December 31, 2002 compared to the year
ended December 31, 2001.
Income Tax Expense
For the year ended December 31, 2002, income tax expense was $123.1 million,
representing an effective tax rate of 33.1%, compared to $120.0 million,
representing an effective tax rate of 34.8%, for the year ended December 31,
2001. The reduction in the effective tax rate for the year ended December 31,
2002 was primarily due to the adoption of SFAS No. 142, which eliminated the
amortization of goodwill which was not deductible for tax purposes.
Asset Quality
Our non-performing assets continue to remain at very low levels in relation to
both the size of our loan portfolio and relative to our peers. Non-performing
assets decreased $4.3 million to $31.3 million at December 31, 2003, from $35.6
million at December 31, 2002. The ratio of non-performing loans to
60
total loans decreased to 0.23% at December 31, 2003, from 0.29% at December 31,
2002. The ratio of non-performing assets to total assets decreased to 0.14% at
December 31, 2003, from 0.16% at December 31, 2002. See Item 1, "Business" for
further discussion of our asset quality.
Non-Performing Assets
The following table sets forth information regarding non-performing assets. In
addition to the non-performing loans, we had $839,000 of potential problem loans
at December 31, 2003 compared to $1.5 million at December 31, 2002. Such loans
are 60-89 days delinquent as shown on page 62.
At December 31,
-----------------------------------------------
(Dollars in Thousands) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $28,321 $31,997 $34,848 $34,332 $48,830
Non-accrual delinquent consumer and other loans 792 1,485 991 903 1,626
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 563 1,035 1,277 952 2,913
- -------------------------------------------------------------------------------------------------
Total non-performing loans 29,676 34,517 37,116 36,187 53,369
Real estate owned, net (3) 1,635 1,091 2,987 3,801 5,080
- -------------------------------------------------------------------------------------------------
Total non-performing assets $31,311 $35,608 $40,103 $39,988 $58,449
=================================================================================================
Non-performing loans to total loans 0.23% 0.29% 0.31% 0.32% 0.52%
Non-performing loans to total assets 0.13 0.16 0.16 0.16 0.24
Non-performing assets to total assets 0.14 0.16 0.18 0.18 0.26
(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.
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
$1.9 million for the year ended December 31, 2003 and $2.3 million for each of
the years ended December 31, 2002 and 2001. This compares to actual payments
recorded as interest income, with respect to such loans, of $1.2 million for the
year ended December 31, 2003, $1.6 million for the year ended December 31, 2002
and $1.8 million for the year ended December 31, 2001.
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 $3.9 million at December 31,
2003, $5.0 million at December 31, 2002, $5.4 million at December 31, 2001, $5.2
million at December 31, 2000 and $6.7 million at December 31, 1999.
61
Delinquent Loans
The following table shows a comparison of delinquent loans at December 31, 2003,
2002 and 2001.
Principal Balance of Loans Past Due
--------------------------------------
60-89 Days 90 Days or More
--------------------------------------
Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount
- -------------------------------------------------------------------------------
At December 31, 2003:
Mortgage loans:
One-to-four family 5 $ 192 143 $22,744
Multi-family 1 60 10 3,448
Commercial real estate -- -- 4 2,692
Consumer and other loans 83 587 90 792
- -------------------------------------------------------------------------------
Total delinquent loans 89 $ 839 247 $29,676
===============================================================================
Delinquent loans to total loans 0.01% 0.23%
At December 31, 2002:
Mortgage loans:
One-to-four family 12 $ 417 185 $30,130
Multi-family 1 192 6 2,114
Commercial real estate 2 324 1 788
Consumer and other loans 85 571 131 1,485
- -------------------------------------------------------------------------------
Total delinquent loans 100 $1,504 323 $34,517
===============================================================================
Delinquent loans to total loans 0.01% 0.29%
At December 31, 2001:
Mortgage loans:
One-to-four family 20 $1,269 222 $31,991
Multi-family 1 84 5 1,860
Commercial real estate 5 1,395 4 1,752
Construction -- -- 1 522
Consumer and other loans 102 491 104 991
- -------------------------------------------------------------------------------
Total delinquent loans 128 $3,239 336 $37,116
===============================================================================
Delinquent loans to total loans 0.03% 0.31%
Classified Assets
The following table sets forth the carrying value of our assets, exclusive of
general valuation allowances, classified as special mention, substandard or
doubtful at December 31, 2003. There were no assets classified as loss at
December 31, 2003.
Special Mention Substandard Doubtful
------------------ ------------------ -----------------
Number Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount of Loans Amount
- --------------------------------------------------------------------------------------------
Loans:
Mortgage Loans:
One-to-four family -- $ -- 140 $22,734 4 $289
Multi-family 6 6,703 14 4,918 -- --
Commercial real estate 5 9,025 5 2,629 -- --
Construction 2 1,234 -- -- -- --
Consumer and other loans 2 239 91 806 -- --
- --------------------------------------------------------------------------------------------
Total loans 15 17,201 250 31,087 4 289
Real estate owned:
One-to-four family -- -- 8 1,635 -- --
- --------------------------------------------------------------------------------------------
Total classified assets 15 $17,201 258 $32,722 4 $289
============================================================================================
62
Allowance for Losses
The following table sets forth changes in our allowances for losses on loans and
REO for the periods indicated.
At or For the Year Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Allowance for losses on loans:
Balance at beginning of year $83,546 $82,285 $79,931 $76,578 $74,403
Provision charged to operations -- 2,307 4,028 4,014 4,119
Charge-offs:
One-to-four family (194) (325) (506) (963) (1,554)
Multi-family -- (83) (3) (8) (12)
Commercial real estate -- (268) (464) -- (686)
Construction -- (281) -- -- (159)
Consumer and other loans (1,142) (1,251) (1,554) (1,678) (4,298)
- ------------------------------------------------------------------------------------------------
Total charge-offs (1,336) (2,208) (2,527) (2,649) (6,709)
- ------------------------------------------------------------------------------------------------
Recoveries:
One-to-four family 111 241 263 802 1,540
Multi-family -- 83 -- 136 270
Commercial real estate 20 291 -- 496 1,591
Construction -- -- 9 79 --
Consumer and other loans 780 547 581 475 1,364
- ------------------------------------------------------------------------------------------------
Total recoveries 911 1,162 853 1,988 4,765
- ------------------------------------------------------------------------------------------------
Net charge-offs (425) (1,046) (1,674) (661) (1,944)
- ------------------------------------------------------------------------------------------------
Balance at end of year $83,121 $83,546 $82,285 $79,931 $76,578
================================================================================================
Net charge-offs during the year to average
loans outstanding during the year 0.00% 0.01% 0.01% 0.01% 0.02%
Allowance for loan losses to total loans
at end of year 0.66 0.69 0.68 0.70 0.74
Allowance for loan losses to non-performing
loans at end of year 280.10 242.04 221.70 220.88 143.49
Allowance for losses on REO:
Balance at beginning of year $ 4 $ -- $ 3 $ 171 $ 689
Provision (recovery) recorded to operations 4 4 (64) (109) (38)
Charge-offs (8) -- (17) (113) (587)
Recoveries -- -- 78 54 107
- ------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ 4 $ -- $ 3 $ 171
================================================================================================
63
The following table sets forth our allocation of the allowance for loan losses
by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The increases in the reserves allocated to
multi-family and commercial real estate loans reflect the overall increases in
the balances of those portfolios. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available to absorb
losses which may occur within the loan category, since the total allowance is
available for losses applicable to the entire loan portfolio.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
% of Loans % of Loans % of Loans
to to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------
One-to-four family $39,614 71.13% $45,485 76.86% $49,122 83.59%
Multi-family 16,440 17.69 12,449 13.35 8,612 9.05
Commercial real estate 11,006 6.98 10,099 6.21 8,529 4.95
Construction 1,695 0.79 786 0.47 1,329 0.42
Consumer and other loans 14,366 3.41 14,727 3.11 14,693 1.99
- -------------------------------------------------------------------------------------------------------
Total allowance for loan losses $83,121 100.00% $83,546 100.00% $82,285 100.00%
=======================================================================================================
At December 31,
---------------------------------------------
2000 1999
---------------------------------------------
% of Loans % of Loans
to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------
One-to-four family $49,826 86.79% $44,556 88.07%
Multi-family 6,721 7.07 5,086 6.02
Commercial real estate 7,771 4.23 8,440 3.89
Construction 573 0.30 2,325 0.34
Consumer and other loans 15,040 1.61 16,171 1.68
- -------------------------------------------------------------------------------
Total allowance for loan losses $79,931 100.00% $76,578 100.00%
===============================================================================
Impact of Accounting Standards and Interpretations
On January 12, 2004, the FASB issued Staff Position No. 106-1 "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," which allows companies to recognize or defer
recognizing the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or Medicare Act, for annual financial statements of
fiscal years ending after December 7, 2003. The Medicare Act introduced both a
Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least "actuarially equivalent" to
the Medicare benefit. These provisions of the Medicare Act will affect
accounting measurements. We have elected to defer accounting for the effects of
the Medicare Act. The specific authoritative guidance on accounting for the
federal subsidy is pending and the issued guidance could require us to change
previously reported information. As a result, we have not yet determined the
impact of the Medicare Act on our financial condition or results of operations.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements Nos. 87, 88 and 106," or SFAS No. 132(R). SFAS No. 132(R)
requires additional disclosures to those in the original statement about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. SFAS No. 132(R)
also amends Accounting Principles Board, or APB, Opinion No. 28, "Interim
Financial Reporting," to require interim disclosure of the components of net
periodic benefit cost and, if significantly different from previously disclosed
amounts, the amounts of contributions and projected contributions to fund
pension plans and other postretirement benefit plans. SFAS No. 132(R) is
effective for financial statements for fiscal years ending after December 15,
2003, except for disclosure of estimated future benefit payments which is
effective for fiscal years ending after June 15, 2004. The interim-period
disclosures required by SFAS No. 132(R) are effective for interim periods
beginning after December 15, 2003. As the provisions of
64
SFAS No. 132(R) are disclosure related, the adoption of SFAS No. 132(R) had no
impact on our financial condition or results of operations. The revised
disclosures are provided in Note 16 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46. FIN 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties (referred to as
"variable interest entities"). When issued, FIN 46 was to be applied immediately
to variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that date.
For variable interest entities in which an enterprise held a variable interest
that it acquired before February 1, 2003, FIN 46 was to be applied in the first
fiscal year or interim period beginning after June 15, 2003, and could have been
applied prospectively with a cumulative-effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of the beginning of
the first year restated. In October 2003, the FASB issued a Staff Position which
delayed the effective date of FIN 46 for a public entity until the end of the
first interim or annual period ending after December 15, 2003, provided that the
variable interest entity was created before February 1, 2003 and the public
entity had not issued financial statements reporting that variable interest
entity in accordance with FIN 46, other than certain disclosures required by
paragraph 26 of FIN 46. In December 2003, the FASB issued FIN 46(R) which
replaced FIN 46. The transition guidance for public entities requires the
application of either FIN 46 or FIN 46(R) to all variable interest entities in
which the entity holds a variable interest no later than the end of the first
reporting period ending after December 15, 2003. However, all public entities
are required to fully implement FIN 46(R) no later than the end of the first
reporting period ending after March 15, 2004. We have chosen to apply FIN 46 as
of December 31, 2003. The adoption of the currently effective provisions of FIN
46 did not have a material impact on our financial condition or results of
operations. Effective January 1, 2004, we adopted FIN 46(R), which requires us
to deconsolidate our wholly-owned subsidiary Astoria Capital Trust I. The impact
of this deconsolidation on financial statements for periods ending after March
15, 2004 will be to increase consolidated total assets by $3.9 million,
reflecting our investment in the common securities of Astoria Capital Trust I,
and increase consolidated total borrowings by $3.9 million, reflecting the
difference between the aggregate principal amount of the junior subordinated
debentures we issued to Astoria Capital Trust I and the aggregate principal
amount of Capital Securities issued by Astoria Capital Trust I in the private
placement completed in 1999.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," or FIN 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 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 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 45 did not have a material impact on our financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and should generally be applied prospectively. The provisions of
SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with
65
their respective effective dates. In addition, the provisions of SFAS No. 149
which relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on our financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which requires
issuers of certain financial instruments, falling within the scope of SFAS No.
150, with characteristics of both liabilities and equity to be classified and
measured as liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption, SFAS No. 150 is to
be implemented by reporting the cumulative effect of a change in an accounting
principle. Restatement is not permitted. The adoption of SFAS No. 150 did not
have a material impact on our financial condition or results of operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of our
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is 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 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 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 68, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at December 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
66
activity. The major factors affecting mortgage prepayment rates are prevailing
interest rates and related mortgage refinancing opportunities. Prepayment rates
will also vary due to a number of other 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.
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 $2.18 billion of callable borrowings classified according
to their maturity dates, primarily in the more than three years to 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
$161.9 million classified according to their maturity dates, of which $141.6
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 December 31, 2003
was negative 6.83%. This compares to a one-year cumulative gap of 18.15% at
December 31, 2002, as previously reported. The December 31, 2002 Gap Table
includes callable securities classified according to their call dates. We have
determined that the callable securities remaining in our portfolio at December
31, 2003 will not likely be called and, as such, have changed our classification
of these securities to maturity dates in the December 31, 2003 Gap Table. Our
one-year cumulative gap at December 31, 2002 would have been 16.79% if callable
securities had been classified according to their maturity dates. The decrease
in our one-year cumulative gap is primarily attributable to a shift in
borrowings maturing in 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 December 31, 2003. Also contributing to the decrease in our
one-year cumulative gap is a decrease in mortgage-backed securities repayment
assumptions, which is reflective of the current coupon rates and average lives
of the securities in our portfolio at December 31, 2003.
67
At December 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) $ 4,270,775 $3,066,651 $3,312,926 $1,522,945 $12,173,297
Consumer and other loans (1) 407,897 23,103 -- -- 431,000
Federal funds sold and
repurchase agreements 65,926 -- -- -- 65,926
Mortgage-backed and other
securities available-for-sale and
FHLB stock 898,369 789,032 546,351 714,695 2,948,447
Mortgage-backed and other securities
held-to-maturity 1,503,003 1,959,651 1,175,942 1,141,750 5,780,346
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,145,970 5,838,437 5,035,219 3,379,390 21,399,016
Net unamortized purchase premiums
and deferred costs (2) 31,012 21,828 21,984 11,093 85,917
- -------------------------------------------------------------------------------------------------------------
Net interest-earning assets (3) 7,176,982 5,860,265 5,057,203 3,390,483 21,484,933
- -------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 162,882 325,763 325,763 2,144,607 2,959,015
Money market 1,049,608 19,280 19,280 144,603 1,232,771
NOW and demand deposit 42,842 85,683 85,683 1,279,202 1,493,410
Certificates of deposit 2,710,436 1,870,550 813,270 107,142 5,501,398
Borrowed funds 4,744,564 1,792,226 2,718,596 372,785 9,628,171
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,710,332 4,093,502 3,962,592 4,048,339 20,814,765
- -------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (1,533,350) 1,766,763 1,094,611 (657,856) $ 670,168
=============================================================================================================
Cumulative interest sensitivity gap $(1,533,350) $ 233,413 $1,328,024 $ 670,168
=============================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets (6.83)% 1.04% 5.91% 2.98%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 82.40% 101.82% 107.92% 103.22%
(1) Mortgage 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.
(3) Includes securities available-for-sale at amortized cost.
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 January 1, 2004 would decrease by approximately 0.54% from the base
projection. At December 31, 2002, in the up 200 basis point scenario, 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
68
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 January 1, 2004 would decrease by
approximately 3.46% 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 continued during the first nine months of
2003. During that time, we continued to reprice our interest-bearing
liabilities, although we were not able to do so to the same degree as our
interest-earning assets. Interest rates began rising during the second half of
2003 and, as a result, we experienced a significant decline in mortgage loan and
mortgage-backed securities cash flows, due to the decline in repayment activity,
which also resulted in a decrease in premium amortization. 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 the repricing of our liabilities will exceed the repricing of our assets
and the reduced refinance activity will result in reduced premium amortization,
resulting in a positive 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 change 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.
For information regarding our credit risk, see "Asset Quality," in Item 7,
"MD&A."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For our Consolidated Financial Statements, see index on page 75.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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-15(e) and 15d-15(e) under the Exchange Act,
as of December 31, 2003. Based upon their evaluation, they each found that our
disclosure controls and procedures were effective 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 and
that such information is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required disclosure.
69
There were no changes in our internal controls over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION
Information regarding directors and executive officers who are not directors of
the Registrant is presented in the tables under the heading "Board Nominees,
Directors and Executive Officers" and under the heading "Committees and Meetings
of the Board" in our definitive Proxy Statement to be utilized in connection
with our Annual Meeting of Shareholders to be held on May 19, 2004, which will
be filed with the SEC within 120 days from December 31, 2003, and is
incorporated herein by reference.
Audit Committee Financial Expert
Information regarding the audit committee of our Board of Directors, including
information regarding audit committee financial experts serving on the audit
committee, is presented under the heading "Committees and Meetings of the Board"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 19, 2004, which will be filed with the
SEC within 120 days from December 31, 2003, and is incorporated herein by
reference.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to
our directors, officers and employees, including our principal executive officer
and principal financial officer, which is available on our investor relations
website at http://ir.astoriafederal.com.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive (and director) compensation is included under
the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values,"
"Pension Plans," "Director Compensation," "Employment Agreements," "Incentive
Option Plans," that portion of the "Report of the Compensation Committee on
Executive Compensation" entitled "Long-term Incentive Compensation," and
"Compensation Committee Interlocks and Insider Participation" in our definitive
Proxy Statement to be utilized in connection with our Annual Meeting of
Shareholders to be held on May 19, 2004, which will be filed with the SEC within
120 days from December 31, 2003, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" and information
relating to compensation plans, including individual compensation arrangements,
under which equity securities of Astoria Financial Corporation are authorized
for issuance is included in our definitive Proxy Statement to be utilized in
connection with our Annual Meeting of Shareholders to be held on May 19, 2004,
which will be filed with the SEC within 120 days from December 31, 2003, and is
incorporated herein by reference.
70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is included
under the headings "Transactions with Certain Related Persons" and "Compensation
Committee Interlocks and Insider Participation" in our definitive Proxy
Statement to be utilized in connection with our Annual Meeting of Shareholders
to be held on May 19, 2004, which will be filed with the SEC within 120 days
from December 31, 2003, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is included under
the headings "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 19, 2004, which will be filed with the
SEC within 120 days from December 31, 2003, and is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
See Index to Consolidated Financial Statements on page 75.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto under Item 8, "Financial Statements
and Supplementary Data."
(b) Reports on Form 8-K filed during the last quarter of the Registrant's
fiscal year ended December 31, 2003
(1) Report on Form 8-K dated November 10, 2003 which includes under Item 9
of Form 8-K a press release dated November 5, 2003 announcing our
participation in the 2003 Financial Services Conference sponsored by
Sandler O'Neill & Partners, L.P. on November 13, 2003 and a written
presentation which was made available at the 2003 Financial Services
Conference, on our investor relations website and to interested
investors and analysts during the quarter ended December 31, 2003.
This report has been furnished but not filed pursuant to Regulation
FD.
(2) Report on Form 8-K dated October 16, 2003 which includes under Item 12
of Form 8-K a press release dated October 16, 2003 which includes
highlights of our financial results for the quarter ended September
30, 2003. This report has been furnished but not filed pursuant to
Regulation G.
(3) Report on Form 8-K dated October 15, 2003 which includes under Item 5
of Form 8-K a press release dated October 15, 2003 announcing the
retirement of a senior lending officer and the appointment of a new
senior lending officer.
71
(4) Report on Form 8-K dated October 1, 2003 which includes under Item 5
of Form 8-K a press release dated October 1, 2003 announcing the
completion of the redemption of our 12% Noncumulative Perpetual
Preferred Stock, Series B.
(c) Exhibits
See Index of Exhibits on page 114.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ George L. Engelke, Jr. Date: March 12, 2004
-----------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
NAME DATE
---- ----
/s/ George L. Engelke, Jr. March 12, 2004
-----------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
/s/ Monte N. Redman March 12, 2004
-----------------------------------------------
Monte N. Redman
Executive Vice President and Chief
Financial Officer
/s/ Gerard C. Keegan March 12, 2004
-----------------------------------------------
Gerard C. Keegan
Vice Chairman, Chief Administrative
Officer and Director
/s/ Andrew M. Burger March 12, 2004
-----------------------------------------------
Andrew M. Burger
Director
/s/ Denis J. Connors March 12, 2004
-----------------------------------------------
Denis J. Connors
Director
/s/ Thomas J. Donahue March 12, 2004
-----------------------------------------------
Thomas J. Donahue
Director
/s/ Peter C. Haeffner, Jr. March 12, 2004
-----------------------------------------------
Peter C. Haeffner, Jr.
Director
/s/ Ralph F. Palleschi March 12, 2004
-----------------------------------------------
Ralph F. Palleschi
Director
73
/s/ Lawrence W. Peters March 12, 2004
-----------------------------------------------
Lawrence W. Peters
Director
/s/ Thomas V. Powderly March 12, 2004
-----------------------------------------------
Thomas V. Powderly
Director
/s/ Leo J. Waters March 12, 2004
-----------------------------------------------
Leo J. Waters
Director
/s/ Donald D. Wenk March 12, 2004
-----------------------------------------------
Donald D. Wenk
Director
74
CONSOLIDATED FINANCIAL STATEMENTS OF
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
Consolidated Financial Statements
Independent Auditors' Report............................................. 76
Consolidated Statements of Financial Condition at
December 31, 2003 and 2002............................................ 77
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001...................................... 78
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2003, 2002 and 2001........... 79
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001...................................... 80
Notes to Consolidated Financial Statements............................... 81
75
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Astoria Financial Corporation and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Astoria Financial
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Notes 1(i) and 10 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
New York, New York
March 5, 2004
76
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31,
-------------------------
(In Thousands, Except Share Data) 2003 2002
- ----------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 173,828 $ 167,605
Federal funds sold and repurchase agreements 65,926 510,252
Available-for-sale securities:
Encumbered 1,997,953 2,096,619
Unencumbered 657,039 695,962
- ----------------------------------------------------------------------------------------------------
2,654,992 2,792,581
Held-to-maturity securities, fair value of $5,809,117
and $5,100,565, respectively:
Encumbered 5,508,864 4,059,947
Unencumbered 283,863 981,310
- ----------------------------------------------------------------------------------------------------
5,792,727 5,041,257
Federal Home Loan Bank of New York stock, at cost 213,450 247,550
Loans held-for-sale, net 23,023 62,669
Loans receivable 12,686,987 12,059,361
Allowance for loan losses (83,121) (83,546)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net 12,603,866 11,975,815
Mortgage servicing rights, net 17,952 20,411
Accrued interest receivable 77,956 88,908
Premises and equipment, net 160,089 157,297
Goodwill 185,151 185,151
Bank owned life insurance 370,310 358,898
Other assets 118,395 89,435
- ----------------------------------------------------------------------------------------------------
Total assets $22,457,665 $21,697,829
====================================================================================================
LIABILITIES:
Deposits $11,186,594 $11,067,196
Reverse repurchase agreements 7,235,000 6,285,000
Federal Home Loan Bank of New York advances 1,924,000 2,064,000
Other borrowings, net 469,171 472,180
Mortgage escrow funds 108,635 104,353
Accrued expenses and other liabilities 137,734 151,102
- ----------------------------------------------------------------------------------------------------
Total liabilities 21,061,134 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; -0- and 2,000,000 shares
issued and outstanding, respectively) -- 2,000
Common stock, $.01 par value; (200,000,000 shares authorized;
110,996,592 shares issued; and 78,670,254 and 84,805,817
shares outstanding, respectively) 1,110 1,110
Additional paid-in capital 798,583 840,186
Retained earnings 1,481,546 1,368,062
Treasury stock (32,326,338 and 26,190,775 shares, at cost, respectively) (811,993) (639,579)
Accumulated other comprehensive (loss) income (46,489) 9,800
Unallocated common stock held by ESOP (4,760,054 and 5,018,500 shares,
respectively) (26,226) (27,581)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 1,396,531 1,553,998
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,457,665 $21,697,829
====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
77
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
---------------------------------------
(In Thousands, Except Share Data) 2003 2002 2001
- -----------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 466,544 $ 626,251 $ 694,596
Multi-family, commercial real
estate and construction 203,785 162,677 124,163
Consumer and other loans 19,247 17,623 17,853
Mortgage-backed securities 337,222 377,623 462,621
Other securities 28,955 69,211 107,315
Federal funds sold and repurchase agreements 1,538 12,877 32,015
- -----------------------------------------------------------------------------------------------
Total interest income 1,057,291 1,266,262 1,438,563
- -----------------------------------------------------------------------------------------------
Interest expense:
Deposits 225,251 288,000 399,989
Borrowed funds 452,502 513,838 581,616
- -----------------------------------------------------------------------------------------------
Total interest expense 677,753 801,838 981,605
- -----------------------------------------------------------------------------------------------
Net interest income 379,538 464,424 456,958
Provision for loan losses -- 2,307 4,028
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 379,538 462,117 452,930
- -----------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 59,841 60,190 52,027
Other loan fees 7,556 7,696 6,864
Net gain on sales of securities 7,346 10,772 --
Mortgage banking income, net 10,291 (2,261) 7,515
Income from bank owned life insurance 19,978 21,398 16,848
Other 14,549 9,612 6,851
- -----------------------------------------------------------------------------------------------
Total non-interest income 119,561 107,407 90,105
- -----------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 110,349 106,704 92,823
Occupancy, equipment and systems 59,892 53,125 52,390
Federal deposit insurance premiums 1,896 1,996 1,996
Advertising 5,833 4,806 4,947
Other 27,907 29,196 26,611
- -----------------------------------------------------------------------------------------------
Total general and administrative 205,877 195,827 178,767
Extinguishment of debt -- 2,202 --
Amortization of goodwill -- -- 19,078
- -----------------------------------------------------------------------------------------------
Total non-interest expense 205,877 198,029 197,845
- -----------------------------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 293,222 371,495 345,190
Income tax expense 96,376 123,066 120,036
- -----------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 196,846 248,429 225,154
Cumulative effect of accounting change, net of tax -- -- (2,294)
- -----------------------------------------------------------------------------------------------
Net income $ $196,846 $ 248,429 $ 222,860
===============================================================================================
Basic earnings per common share:
Income before accounting change $ 2.52 $ 2.90 $ 2.43
Cumulative effect of accounting change, net of tax -- -- (0.03)
- -----------------------------------------------------------------------------------------------
Net basic earnings per common share $ 2.52 $ 2.90 $ 2.40
===============================================================================================
Diluted earnings per common share:
Income before accounting change $ 2.49 $ 2.85 $ 2.38
Cumulative effect of accounting change, net of tax -- -- (0.03)
- -----------------------------------------------------------------------------------------------
Net diluted earnings per common share $ 2.49 $ 2.85 $ 2.35
===============================================================================================
Basic weighted average common shares 76,383,304 83,514,927 90,450,157
Diluted weighted average common and
common equivalent shares 77,294,705 84,919,651 92,174,012
See accompanying Notes to Consolidated Financial Statements.
78
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
Additional
Preferred Common Paid-in
(In Thousands, Except Share Data) Total Stock Stock Capital
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $1,513,163 $ 2,000 $1,110 $806,802
Comprehensive income:
Net income 222,860 -- -- --
Other comprehensive income, net of tax:
Net unrealized gain on securities 115,091 -- -- --
Amortization of unrealized loss on securities
transferred to held-to-maturity 3,985 -- -- --
----------
Comprehensive income 341,936
----------
Common stock repurchased (10,303,600 shares) (289,087) -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (61,321) -- -- (1,304)
Exercise of stock options and related tax benefit
(1,783,236 shares issued) 29,890 -- -- 10,791
Amortization relating to allocation of ESOP stock 8,005 -- -- 6,363
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,542,586 2,000 1,110 822,652
Comprehensive income:
Net income 248,429 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities 5,340 -- -- --
Amortization of unrealized loss on securities
transferred to held-to-maturity 8,317 -- -- --
Net unrealized loss on cash flow hedge (1,871) -- -- --
Minimum pension liability adjustment (19) -- -- --
----------
Comprehensive income 260,196
----------
Common stock repurchased (7,283,400 shares) (211,103) -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (70,160) -- -- (1,304)
Exercise of stock options and related tax benefit
(1,322,473 shares issued) 22,256 -- -- 10,514
Amortization relating to allocation of ESOP stock 10,223 -- -- 8,324
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,553,998 2,000 1,110 840,186
Comprehensive income:
Net income 196,846 -- -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities (57,226) -- -- --
Amortization of unrealized loss on securities
transferred to held-to-maturity 775 -- -- --
Reclassification of net unrealized loss on
cash flow hedge 191 -- -- --
Minimum pension liability adjustment (29) -- -- --
----------
Comprehensive income 140,557
----------
Common stock repurchased (7,073,800 shares) (195,471) -- -- --
Redemption of preferred stock (54,500) (2,000) -- (52,500)
Dividends on common and preferred stock
and amortization of purchase premium (70,076) -- -- (978)
Exercise of stock options and related tax benefit
(938,237 shares issued) 14,851 -- -- 6,058
Amortization relating to allocation of ESOP stock 7,172 -- -- 5,817
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,396,531 $ -- $1,110 $798,583
==================================================================================================
Accumulated Unallocated
Other Common
Retained Treasury Comprehensive Stock Held
(In Thousands, Except Share Data) Earnings Stock (Loss) Income by ESOP
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $1,059,048 $(203,632) $(121,043) $(31,122)
Comprehensive income:
Net income 222,860 -- -- --
Other comprehensive income, net of tax:
Net unrealized gain on securities -- -- 115,091 --
Amortization of unrealized loss on securities
transferred to held-to-maturity -- -- 3,985 --
Comprehensive income
Common stock repurchased (10,303,600 shares) -- (289,087) -- --
Dividends on common and preferred stock
and amortization of purchase premium (60,017) -- -- --
Exercise of stock options and related tax benefit
(1,783,236 shares issued) (14,149) 33,248 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,642
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,207,742 (459,471) (1,967) (29,480)
Comprehensive income:
Net income 248,429 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities -- -- 5,340 --
Amortization of unrealized loss on securities
transferred to held-to-maturity -- -- 8,317 --
Net unrealized loss on cash flow hedge -- -- (1,871) --
Minimum pension liability adjustment -- -- (19) --
Comprehensive income
Common stock repurchased (7,283,400 shares) -- (211,103) -- --
Dividends on common and preferred stock
and amortization of purchase premium (68,856) -- -- --
Exercise of stock options and related tax benefit
(1,322,473 shares issued) (19,253) 30,995 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,899
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,368,062 (639,579) 9,800 (27,581)
Comprehensive income:
Net income 196,846 -- -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities -- -- (57,226) --
Amortization of unrealized loss on securities
transferred to held-to-maturity -- -- 775 --
Reclassification of net unrealized loss on
cash flow hedge -- -- 191 --
Minimum pension liability adjustment -- -- (29) --
Comprehensive income
Common stock repurchased (7,073,800 shares) -- (195,471) -- --
Redemption of preferred stock -- -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (69,098) -- -- --
Exercise of stock options and related tax benefit
(938,237 shares issued) (14,264) 23,057 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,355
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,481,546 $(811,993) $ (46,489) $(26,226)
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
79
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
---------------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 196,846 $ 248,429 $ 222,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 113,031 52,602 22,495
Net amortization (accretion) on other securities, consumer and
other loans and borrowings 981 (40,133) (57,279)
Net provision for loan and real estate losses 4 2,311 3,964
Depreciation and amortization 12,474 10,581 12,648
Net gain on sales of loans and securities (19,482) (17,417) (3,276)
Gain on sale of joint venture real estate investment (10,058) -- --
Originations of loans held-for-sale (616,804) (486,516) (409,943)
Proceeds from sales and principal repayments of loans held-for-sale 668,586 473,882 385,528
Amortization of goodwill -- -- 19,078
Cumulative effect of accounting change, net of tax -- -- 2,294
Amortization relating to allocation of ESOP stock 7,172 10,223 8,005
Decrease in accrued interest receivable 10,952 7,365 13,166
Mortgage servicing rights amortization and valuation allowance,
net of capitalized amounts 2,459 14,884 5,667
Income from bank owned life insurance, net of insurance
proceeds received (11,412) (16,147) 8,814
Decrease in other assets 12,376 15,980 9,060
Decrease in accrued expenses and other liabilities (8,929) (118,623) (20,858)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 358,196 157,421 222,223
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (5,468,504) (3,870,703) (2,923,361)
Loan purchases through third parties (1,550,100) (1,546,535) (1,438,257)
Principal payments on loans receivable 6,344,694 5,478,798 3,583,935
Purchases of mortgage-backed securities held-to-maturity (5,521,833) (4,608,574) (1,741,702)
Purchases of mortgage-backed securities available-for-sale (3,780,394) (2,235,329) (288,811)
Purchases of other securities held-to-maturity -- (9,978) --
Purchases of other securities available-for-sale (600) (21,022) (2,005)
Principal payments on mortgage-backed securities held-to-maturity 4,660,847 3,745,503 1,434,395
Principal payments on mortgage-backed securities available-for-sale 2,209,760 2,348,406 1,571,022
Proceeds from calls and maturities of other securities held-to-maturity 68,613 316,980 475,019
Proceeds from calls and maturities of other securities available-for-sale 133,280 256,211 220,431
Proceeds from sales of mortgage-backed securities available-for-sale 1,406,954 449,327 --
Proceeds from sales of other securities available-for-sale 50,056 -- --
Net redemptions of FHLB stock 34,100 2,900 34,800
Proceeds from sales of real estate owned, net 1,528 3,643 6,235
Purchases of premises and equipment, net of proceeds from sales (15,266) (18,125) (7,819)
Net proceeds from sale of joint venture real estate investment 10,140 -- --
Purchase of bank owned life insurance -- (100,000) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,416,725) 191,502 923,882
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 119,398 163,503 831,995
Net increase (decrease) in borrowings with original terms of three months
or less 810,000 500,000 (50,000)
Net proceeds from borrowings with original terms greater than three months 1,700,000 496,883 103,030
Repayments of borrowings with original terms greater than three months (1,700,000) (2,000,450) (553,122)
Net increase (decrease) in mortgage escrow funds 4,282 (12,042) (92)
Cash paid for cash flow hedging instrument -- (3,297) --
Common stock repurchased (195,471) (211,103) (289,087)
Cash dividends paid to stockholders (72,076) (70,160) (61,321)
Redemption of preferred stock (54,500) -- --
Cash received for options exercised 8,793 11,742 19,099
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 620,426 (1,124,924) 502
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (438,103) (776,001) 1,146,607
Cash and cash equivalents at beginning of year 677,857 1,453,858 307,251
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 239,754 $ 677,857 $ 1,453,858
==========================================================================================================================
Supplemental disclosures:
Cash paid during the year:
Interest $ 680,504 $ 815,627 $ 983,890
==========================================================================================================================
Income taxes $ 88,478 $ 112,652 $ 88,133
==========================================================================================================================
Additions to real estate owned $ 2,075 $ 1,971 $ 5,585
==========================================================================================================================
Securities transferred from available-for-sale
to held-to-maturity $ -- $ -- $ 2,878,767
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
80
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following significant accounting and reporting policies of Astoria Financial
Corporation and subsidiaries conform to accounting principles generally accepted
in the United States of America, or GAAP, and are used in preparing and
presenting these consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and our wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association, and its subsidiaries, or Astoria Federal; Astoria
Capital Trust I; and AF Insurance Agency, Inc. As used in this annual 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., depending on the context. All significant inter-company
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The determination of our allowance for loan
losses, the valuation of mortgage servicing rights, or MSR, and judgments
regarding goodwill and securities impairment are particularly critical because
they involve a higher degree of complexity and subjectivity and require
estimates and assumptions about highly uncertain matters. Actual results may
differ from our estimates and assumptions. Certain reclassifications have been
made to prior year amounts to conform to the current year presentation.
(b) Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold and repurchase agreements with
original maturities of three months or less. Astoria Federal is required by the
Federal Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement totaled $39.3 million at
December 31, 2003 and $37.2 million at December 31, 2002.
(c) Repurchase Agreements (Securities Purchased Under Agreements to Resell)
We purchase securities under agreements to resell (repurchase agreements). These
agreements represent short-term loans and are reflected as an asset in the
consolidated statements of financial condition. We may sell, loan or otherwise
dispose of such securities to other parties in the normal course of our
operations. The same securities are to be resold at the maturity of the
repurchase agreements.
(d) Securities
Management determines the appropriate classification of securities at the time
of acquisition. 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/loss in stockholders' equity. Debt
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. Premiums and
discounts are recognized as adjustments to interest income using the interest
method over the remaining period to contractual maturity, adjusted for estimated
prepayments when applicable. Gains and losses on the sale of all securities are
determined using the specific identification method and are reflected in
earnings when realized. For the years ended December 31, 2003, 2002 and 2001, we
did not maintain a trading portfolio. We conduct a periodic review and
evaluation of the securities portfolio to determine if the fair value of any
security has declined below its carrying value and whether such decline is other
than temporary. If such decline is deemed other than temporary, the security is
written down to a new cost basis and the resulting loss is charged to earnings.
81
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(e) Loans Held-for-Sale
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors on a servicing released or retained basis. Generally, the sale of such
loans is arranged through a master commitment on a mandatory delivery or best
efforts basis. In addition, student loans are sold to the United States Student
Loan Marketing Association generally before repayment begins during the grace
period of the loan.
Loans held-for-sale are carried at the lower of cost or estimated fair value, as
determined on an aggregate basis. Net unrealized losses, if any, are recognized
in a valuation allowance by charges to operations. Premiums and discounts and
origination fees and costs on loans held-for-sale are deferred and recognized as
a component of the gain or loss on sale. Gains and losses on sales of loans
held-for-sale are recognized on settlement dates and are determined by the
difference between the sale proceeds and the allocated cost of the loans.
(f) Loans Receivable, net
Loans receivable are carried at the unpaid principal balances, net of
unamortized premiums and discounts and deferred loan origination costs and fees,
which are recognized as yield adjustments using the interest method. We
generally amortize these amounts over the contractual life of the related loans,
adjusted for estimated prepayments when applicable.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due. 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. In
some circumstances we continue to accrue interest on loans delinquent 90 days or
more as to their maturity date but not their interest due.
The allowance for loan losses is increased by charges to earnings and decreased
by charge-offs, net of recoveries. Pursuant to our policy, loan losses are
charged-off in the period the loans, or portions thereof, are deemed
uncollectible. Our periodic evaluation of the adequacy of the allowance is based
on our past loan loss experience, trends in portfolio volume, quality, maturity
and composition, the status and amount of impaired and other non-performing and
past-due loans, known and inherent risks in the portfolio, adverse situations
that may affect a borrower's ability to repay, the estimated fair value of any
underlying collateral and current and prospective, as well as specific and
general, economic conditions.
We review certain loans for individual impairment and groups of smaller balance
loans based on homogeneous pools. Loans we individually review for impairment
are limited to multi-family mortgage loans, commercial real estate loans,
construction loans, loans modified in a troubled debt restructuring and selected
large one-to-four family mortgage loans. A loan is considered impaired when,
based upon current information and events, it is probable that we will be unable
to collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Impaired loans are principally measured
using the market price of the loan, if one exists, the estimated fair value of
the collateral, for collateral dependent loans, or the present value of expected
future cash flows. Interest income on impaired non-accrual loans is recognized
on a cash basis while interest income on all other impaired loans is recognized
on an accrual basis.
(g) Mortgage Servicing Rights, net
We recognize as separate assets the rights to service mortgage loans. The right
to service loans for others is generally obtained by either the sale of loans
with servicing retained or the open market purchase of MSR. 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.
The cost of MSR is amortized over the estimated remaining lives of the loans
serviced. MSR are carried at cost, and impairment, if any, is recognized through
a valuation allowance. Fees earned for servicing loans are reported as income
when the related mortgage loan payments are collected.
82
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We assess impairment of our MSR based on the estimated fair value of those
rights on a stratum-by-stratum basis with any impairment recognized through a
valuation allowance for each impaired stratum. We stratify our MSR by underlying
loan type (primarily fixed and adjustable) and interest rate. The estimated fair
values of each MSR stratum are obtained through independent third party
valuations through 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. Individual
allowances for each stratum are then adjusted in subsequent periods to reflect
changes in the measurement of impairment. Increases in the fair value of
impaired MSR are recognized only up to the amount of the previously recognized
valuation allowance.
(h) Premises and Equipment, net
Land is carried at cost. Buildings and improvements, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and improvements and furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the term of the related leases or
the estimated useful lives of the improved property.
(i) Goodwill
Effective January 1, 2002, we ceased recording amortization of goodwill in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets." Goodwill is presumed to have an
indefinite useful life and is not amortized, but rather tested, at least
annually, for impairment. For purposes of our goodwill impairment testing, we
have identified a single reporting unit. We use the quoted market price of our
common stock on our impairment testing date as the basis for determining the
fair value of our one reporting unit. If the fair value of our one reporting
unit exceeds its carrying amount, further evaluation is not necessary. However,
if the fair value of our one reporting unit is less than its carrying amount,
further evaluation is required to compare the implied fair value of the
reporting unit's goodwill to its carrying amount to determine if a write-down of
goodwill is required. Prior to January 1, 2002, goodwill was amortized using the
straight line method over varying periods of up to fifteen years and was
periodically evaluated for impairment in response to changes in circumstances
and events.
(j) Bank Owned Life Insurance, or BOLI
BOLI is carried at its cash surrender value and is classified as a non-interest
earning asset. Increases in the cash surrender value are recorded as
non-interest income in the consolidated statements of income and insurance
proceeds received are recorded as a reduction of the cash surrender value.
(k) Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure is
initially recorded at the lower of cost or fair value, less estimated selling
costs. Thereafter, we maintain an allowance for decreases in value which are
charged to income along with any additional expenses incurred on the property.
Fair value is estimated through current appraisals. Write-downs required at the
time of acquisition are charged to the allowance for loan losses. Real estate
owned, net, which is included in other assets, amounted to $1.6 million at
December 31, 2003 and $1.1 million at December 31, 2002.
(l) Reverse Repurchase Agreements (Securities Sold Under Agreements to
Repurchase)
We enter into sales of securities under agreements to repurchase with selected
dealers and banks. Such agreements are accounted for as secured financing
transactions since we maintain effective control over the transferred securities
and the transfer meets the other criteria for such accounting. Obligations to
repurchase securities sold are reflected as a liability in our consolidated
statements of financial condition. The securities underlying the agreements are
delivered to a custodial account for the benefit of the dealer or bank with whom
each transaction is executed. The dealers or banks, who may sell, loan or
otherwise dispose of such securities to other parties in the normal course of
their operations, agree to resell us the same securities at the maturities of
the agreements. We retain the right of substitution of collateral throughout the
terms of the agreements. The securities underlying the agreements are classified
as encumbered securities in our consolidated statements of financial condition.
83
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(m) Derivative Instruments
As part of our asset/liability management program, we utilize, from
time-to-time, interest rate caps, floors, locks or swaps to reduce our
sensitivity to interest rate fluctuations. These agreements are derivative
instruments which are recorded as either assets or liabilities in the
consolidated statements of financial condition at fair value. Changes in the
fair values of derivatives are reported in our results of operations or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in those fair values or cash flows that are attributable to the hedged
risk, both at inception of the hedge and on an ongoing basis.
Derivatives that qualify for hedge accounting treatment are designated as either
a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (a cash flow hedge). For fair value hedges,
changes in the fair values of the derivative instruments and the assets or
liabilities being hedged are recognized in our results of operations. For cash
flow hedges, changes in the fair values of the derivative instruments are
reported in other comprehensive income. The gains and losses on derivative
instruments that are reported in other comprehensive income are reflected in the
results of operations in the periods in which the results of operations are
impacted by the variability of the cash flows of the hedged item. We establish,
at the inception of the hedge, the method we will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge (the amount by which hedge gains
or losses differ from the corresponding losses or gains on the hedged item). The
ineffective portion of any hedge is recognized in our results of operations.
We also have derivative instruments with no hedging designations. Changes in the
fair values of these derivatives that do not qualify for hedge accounting
treatment are recognized as income or expense in our results of operations. We
do not use derivatives for trading purposes.
Net interest income is increased or decreased by amounts receivable or payable
with respect to our derivatives which qualify for hedge accounting treatment.
Other non-interest expense is increased or decreased by amortization and the
changes in fair value of our derivatives which do not qualify for hedge
accounting treatment.
(n) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date. Tax benefits attributable to stock
option exercises are credited to additional paid-in capital.
(o) Earnings Per Common Share, or EPS
Basic EPS is computed by dividing net income less preferred dividends by the
weighted-average common shares outstanding during the year. The weighted-average
common shares outstanding includes the average number of shares of common stock
outstanding less the weighted average number of unallocated shares held by the
Employee Stock Ownership Plan, or ESOP.
Diluted EPS is computed using the same method as basic EPS, but reflects the
potential dilution that would occur if stock options were exercised and
converted into common stock. The dilutive effect of unexercised stock options is
calculated using the treasury stock method. When applying the treasury stock
method, our average stock price is utilized, and we add to the proceeds of
assumed option exercises the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
(p) Employee Benefits
Astoria Federal has a qualified, non-contributory defined benefit pension plan,
or the Pension Plan, covering employees meeting specified eligibility criteria.
Astoria Federal's policy is to fund pension costs in accordance with the minimum
funding requirement. Contributions are intended to provide not only for benefits
attributed to service
84
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
to date, but also for those expected to be earned in the future. In addition,
Astoria Federal has non-qualified and unfunded supplemental retirement plans
covering certain officers and directors.
We also sponsor a defined benefit health care plan that provides for
postretirement medical and dental coverage to select individuals. The costs of
postretirement benefits are accrued during an employee's active working career.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or Medicare Act, was signed into law. The Medicare
Act introduced both a Medicare prescription-drug benefit and a federal subsidy
to sponsors of retiree health care plans that provide a benefit at least
"actuarially equivalent" to the Medicare benefit. These provisions of the
Medicare Act will affect accounting measurements. On January 12, 2004, the
Financial Accounting Standards Board, or FASB, issued Staff Position No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which allows companies to
recognize or defer recognizing the effects of the Medicare Act in annual
financial statements for fiscal years ending after December 7, 2003. We have
elected to defer accounting for the effects of the Medicare Act in our 2003
consolidated financial statements. Any measures of the accumulated
postretirement benefit obligation or net periodic postretirement benefit cost do
not reflect the effects of the Medicare Act. The specific authoritative guidance
on accounting for the federal subsidy is pending and, when issued, could require
us to change previously reported information.
We record compensation expense related to the ESOP at an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the reporting period plus cash contributions made to participant
accounts. For EPS disclosures, ESOP shares that have been committed to be
released are considered outstanding. ESOP shares that have not been committed to
be released are excluded from outstanding shares on a weighted average basis for
EPS calculations. The difference between the fair value of shares for the period
and the cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in capital.
(q) 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 have an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and EPS if we had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
For the Year Ended December 31,
--------------------------------
(In Thousands, Except Per Share Data) 2003 2002 2001
- -------------------------------------------------------------------------------
Net income:
As reported $196,846 $248,429 $222,860
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects 5,417 4,338 3,797
-------- -------- --------
Pro forma $191,429 $244,091 $219,063
======== ======== ========
Basic earnings per common share:
As reported $ 2.52 $ 2.90 $ 2.40
======== ======== ========
Pro forma $ 2.45 $ 2.85 $ 2.36
======== ======== ========
Diluted earnings per common share:
As reported $ 2.49 $ 2.85 $ 2.35
======== ======== ========
Pro forma $ 2.41 $ 2.80 $ 2.31
======== ======== ========
85
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(r) Segment Reporting
As a community-oriented financial institution, substantially all of our
operations involve the delivery of loan and deposit products to customers. We
make operating decisions and assess performance based on an ongoing review of
these community banking operations, which constitute our only operating segment
for financial reporting purposes.
(2) Repurchase Agreements
Repurchase agreements averaged $132.6 million during the year ended December 31,
2003 and $183.5 million during the year ended December 31, 2002. The maximum
amount of such agreements outstanding at any month end was $272.3 million during
the year ended December 31, 2003 and $279.9 million during the year ended
December 31, 2002. As of December 31, 2003, three repurchase agreements totaling
$65.9 million were outstanding. As of December 31, 2002, three repurchase
agreements totaling $279.9 million were outstanding. The fair value of the
securities held under these agreements was $68.4 million as of December 31, 2003
and $286.8 million as of December 31, 2002. None of the securities held under
these agreements were sold or repledged during the years ended December 31, 2003
and 2002.
(3) Securities
The amortized cost and estimated fair value of securities available-for-sale and
held-to-maturity at December 31, 2003 and 2002 are as follows:
At December 31, 2003
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 161,199 $ 5,575 $ (50) $ 166,724
REMICs and CMOs:
Agency issuance (1) 2,297,884 610 (70,643) 2,227,851
Non-agency issuance 109,669 170 (6,099) 103,740
- -----------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,568,752 6,355 (76,792) 2,498,315
- -----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 1,738 36 (7) 1,767
FNMA and FHLMC preferred stock 140,015 96 (8,750) 131,361
Corporate debt and other securities 21,991 1,562 (4) 23,549
- -----------------------------------------------------------------------------------------------
Total other securities 163,744 1,694 (8,761) 156,677
- -----------------------------------------------------------------------------------------------
Total securities available-for-sale $2,732,496 $ 8,049 $(85,553) $2,654,992
===============================================================================================
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 14,345 $ 984 $ -- $ 15,329
REMICs and CMOs:
Agency issuance (1) 4,958,633 30,955 (15,272) 4,974,316
Non-agency issuance 772,728 4,436 (5,143) 772,021
- -----------------------------------------------------------------------------------------------
Total mortgage-backed securities 5,745,706 36,375 (20,415) 5,761,666
- -----------------------------------------------------------------------------------------------
Other securities:
Obligations of states and political
subdivisions 37,038 -- -- 37,038
Corporate debt securities 9,983 430 -- 10,413
- -----------------------------------------------------------------------------------------------
Total other securities 47,021 430 -- 47,451
- -----------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,792,727 $36,805 $(20,415) $5,809,117
===============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
86
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2002
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 241,146 $ 8,369 $ (56) $ 249,459
REMICs and CMOs:
Agency issuance (1) 608,076 8,561 (85) 616,552
Non-agency issuance 1,581,475 7,001 (854) 1,587,622
- -----------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,430,697 23,931 (995) 2,453,633
- -----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 132,011 1,437 -- 133,448
FNMA and FHLMC preferred stock 140,015 667 (4,000) 136,682
Corporate debt and other securities 67,854 1,492 (528) 68,818
- -----------------------------------------------------------------------------------------------
Total other securities 339,880 3,596 (4,528) 338,948
- -----------------------------------------------------------------------------------------------
Total securities available-for-sale $2,770,577 $27,527 $(5,523) $2,792,581
===============================================================================================
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 24,534 $ 1,656 $ -- $ 26,190
REMICs and CMOs:
Agency issuance (1) 3,595,244 51,348 (569) 3,646,023
Non-agency issuance 1,306,113 8,619 (1,383) 1,313,349
- -----------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,925,891 61,623 (1,952) 4,985,562
- -----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 65,776 242 -- 66,018
Obligations of states and political
subdivisions 39,611 -- -- 39,611
Corporate debt securities 9,979 -- (605) 9,374
- -----------------------------------------------------------------------------------------------
Total other securities 115,366 242 (605) 115,003
- -----------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,041,257 $61,865 $(2,557) $5,100,565
===============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
87
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The table below sets forth the estimated fair value of securities with gross
unrealized losses at December 31, 2003, segregated between securities that have
been in a continuous unrealized loss position for less than twelve months and
those that have been in a continuous unrealized loss position for twelve months
or longer.
Less Than Twelve Months Twelve Months or Longer Total
----------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- -----------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates $ 1,437 $ (10) $2,264 $(40) $ 3,701 $ (50)
REMICs and CMOs:
Agency issuance 2,101,805 (70,643) -- -- 2,101,805 (70,643)
Non-agency issuance 93,059 (6,095) 655 (4) 93,714 (6,099)
Other securities:
Obligations of the U.S. Government
and agencies 593 (7) -- -- 593 (7)
FNMA and FHLMC preferred stock 91,250 (8,750) -- -- 91,250 (8,750)
Corporate debt and other securities -- -- 550 (4) 550 (4)
- -----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
available-for-sale $2,288,144 $(85,505) $3,469 $(48) $2,291,613 $(85,553)
=======================================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
Agency issuance $1,523,519 $(15,272) $ -- $ -- $1,523,519 $(15,272)
Non-agency issuance 447,004 (5,143) -- -- 447,004 (5,143)
- -----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
held-to-maturity $1,970,523 $(20,415) $ -- $ -- $1,970,523 $(20,415)
=======================================================================================================================
At December 31, 2003, we had 120 securities which had an unrealized loss. Of the
securities in an unrealized loss position at December 31, 2003, 87.3%, based on
estimated fair value, are obligations of U.S. Government sponsored agencies. The
cause of the temporary impairment is directly related to the change in interest
rates. In general, as interest rates rise, the fair value of fixed rate
securities will decrease; as interest rates fall, the fair value of fixed rate
securities will increase. At December 31, 2003, substantially all of the
securities in an unrealized loss position had a fixed interest rate. We
generally view changes in fair value caused by changes in interest rates as
temporary. To date, the duration of the impairment of our securities is short.
The impairments are deemed temporary based on the direct relationship of the
decline in fair value to movements in interest rates, the life of the
investments and the high credit quality.
During the year ended December 31, 2003, proceeds from sales of securities from
the available-for-sale portfolio were $1.46 billion and gross realized gains
were $14.6 million and gross realized losses were $7.3 million. During the year
ended December 31, 2002, proceeds from sales of securities from the
available-for-sale portfolio were $449.3 million and gross realized gains were
$10.8 million. There were no sales of securities from the available-for-sale
portfolio during the year ended December 31, 2001.
The amortized cost and estimated fair value of debt securities at December 31,
2003, by contractual maturity, excluding mortgage-backed securities, are shown
on page 89. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties. In addition, issuers of certain securities have the right to call
obligations with or without prepayment penalties. As of December 31, 2003, the
amortized cost of the callable securities in our portfolio totaled $161.9
million, of which $141.6 million are callable within one year and at various
times thereafter.
88
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2003
---------------------
Estimated
Amortized Fair
(In Thousands) Cost Value
- --------------------------------------------------------------------------------
Available-for-sale:
Due in one year or less $ 500 $ 506
Due after one year through five years 1,738 1,767
Due after five years through ten years 500 493
Due after ten years 20,891 22,450
- --------------------------------------------------------------------------------
Total available-for-sale $23,629 $25,216
================================================================================
Held-to-maturity:
Due after one year through five years $ 9,983 $10,413
Due after five years through ten years 754 754
Due after ten years 36,284 36,284
- --------------------------------------------------------------------------------
Total held-to-maturity $47,021 $47,451
================================================================================
The balance of accrued interest receivable for mortgage-backed securities
totaled $30.7 million at December 31, 2003 and $34.1 million at December 31,
2002. The balance of accrued interest receivable for other securities totaled
$656,000 at December 31, 2003 and $1.4 million at December 31, 2002.
(4) Loans Receivable, net
Loans receivable, net, are summarized as follows:
At December 31,
-------------------------
(In Thousands) 2003 2002
- -------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 8,971,048 $ 9,209,360
Multi-family 2,230,414 1,599,985
Commercial real estate 880,296 744,623
Construction 99,046 56,475
- -------------------------------------------------------------------------------
12,180,804 11,610,443
Net deferred loan origination costs 2,315 2,983
Net unamortized premiums 65,653 66,734
- -------------------------------------------------------------------------------
Total mortgage loans 12,248,772 11,680,160
- -------------------------------------------------------------------------------
Consumer and other loans:
Home equity 386,846 323,494
Other 43,300 49,144
- -------------------------------------------------------------------------------
430,146 372,638
Net deferred loan origination costs 7,433 6,033
Net unamortized premiums 636 530
- -------------------------------------------------------------------------------
Total consumer and other loans 438,215 379,201
- -------------------------------------------------------------------------------
Total loans 12,686,987 12,059,361
Allowance for loan losses (83,121) (83,546)
- -------------------------------------------------------------------------------
Loans receivable, net $12,603,866 $11,975,815
===============================================================================
Accrued interest receivable on all loans totaled $46.6 million at December 31,
2003 and $53.4 million at December 31, 2002.
Included in loans receivable were non-accrual loans totaling $29.1 million at
December 31, 2003 and $33.5 million at December 31, 2002. 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 $1.9 million for the
year ended December 31, 2003 and $2.3 million for each of the years ended
December 31, 2002 and 2001. This compares to actual payments recorded as
interest income, with respect to such loans, of $1.2 million for the year ended
December 31, 2003, $1.6 million for the year ended December 31, 2002, and $1.8
million for the year ended December 31, 2001. Loans delinquent 90 days or more
and still accruing interest totaled $563,000 at December 31, 2003 and $1.0
million at December 31, 2002. These loans are delinquent 90 days or more as to
their maturity date but not their interest due.
89
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes information regarding our impaired mortgage
loans:
At December 31, 2003
-----------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------------
One-to-four family $ 3,796 $ (198) $ 3,598
Multi-family, commercial real estate
and construction 7,794 (1,157) 6,637
- --------------------------------------------------------------------------------
Total impaired mortgage loans $11,590 $(1,355) $10,235
================================================================================
At December 31, 2002
-----------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------------
One-to-four family $ 5,680 $ (220) $ 5,460
Multi-family, commercial real estate
and construction 10,882 (1,380) 9,502
- --------------------------------------------------------------------------------
Total impaired mortgage loans $16,562 $(1,600) $14,962
================================================================================
Our average recorded investment in impaired loans was $15.4 million for the year
ended December 31, 2003, $15.7 million for the year ended December 31, 2002 and
$17.2 million for the year ended December 31, 2001. Interest income recognized
on impaired loans, which was not materially different from cash-basis interest
income, amounted to $597,000 for the year ended December 31, 2003, $1.3 million
for the year ended December 31, 2002 and $1.1 million for the year ended
December 31, 2001.
(5) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Balance at beginning of year $83,546 $82,285 $79,931
Provision charged to operations -- 2,307 4,028
Charge-offs (net of recoveries of $911,
$1,162 and $853, respectively) (425) (1,046) (1,674)
- --------------------------------------------------------------------------------
Balance at end of year $83,121 $83,546 $82,285
================================================================================
(6) Mortgage Servicing Rights
We service mortgage loans for investors with aggregate unpaid principal balances
of $1.90 billion at December 31, 2003 and $2.67 billion at December 31, 2002,
which are not reflected in the accompanying consolidated statements of financial
condition.
MSR activity is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Amortized cost at beginning of year $35,093 $39,196 $43,532
Additions 7,225 6,090 5,202
Amortization (12,766) (10,193) (9,538)
- --------------------------------------------------------------------------------
Amortized cost at end of year 29,552 35,093 39,196
Valuation allowance (11,600) (14,682) (3,901)
- --------------------------------------------------------------------------------
MSR, net $17,952 $20,411 $35,295
================================================================================
At December 31, 2003, our MSR, net, had an estimated fair value of $18.0 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.34%, a weighted average constant
90
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
prepayment rate on mortgages of 15.82% and a weighted average life of 4.5 years.
At December 31, 2002, our MSR, net, had an estimated fair value of $20.4 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.62%, a weighted average constant prepayment rate on
mortgages of 23.11% and a weighted average life of 3.5 years. As of December 31,
2003, estimated future MSR amortization through 2008, based on the prepayment
assumptions utilized in the December 31, 2003 MSR valuation, is as follows: $6.7
million for 2004, $5.3 million for 2005, $4.0 million for 2006, $3.0 million for
2007 and $2.3 million for 2008. Actual results will vary depending upon the
level of repayments on the loans currently serviced.
Mortgage banking income, net, is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Loan servicing fees $ 7,851 $ 12,068 $15,108
Net gain on sales of loans 12,124 6,645 3,276
Amortization of MSR (12,766) (10,193) (9,538)
Recovery of (provision for) valuation
allowance on MSR 3,082 (10,781) (1,331)
- --------------------------------------------------------------------------------
Total mortgage banking income, net $ 10,291 $ (2,261) $ 7,515
================================================================================
(7) Deposits
Deposits are summarized as follows:
At December 31,
---------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------
Weighted Weighted
Average Percent Average Percent
(Dollars in Thousands) Rate Balance of Total Rate Balance of Total
- ---------------------------------------------------------------------------------------------------
Core deposits:
Savings 0.40% $ 2,959,015 26.45% 0.50% $ 2,832,291 25.59%
Money market 0.55 1,232,771 11.02 1.00 1,698,552 15.35
NOW 0.10 914,423 8.17 0.25 805,255 7.28
Non-interest bearing NOW
and demand deposit -- 578,987 5.18 -- 578,060 5.22
----------- ------ ----------- ------
Total core deposits 5,685,196 50.82 5,914,158 53.44
Certificates of deposit 3.55 5,501,398 49.18 3.95 5,153,038 46.56
- ---------------------------------------------------------------------------------------------------
Total deposits 1.92% $11,186,594 100.00% 2.14% $11,067,196 100.00%
===================================================================================================
The aggregate amount of certificates of deposit with balances equal to or
greater than $100,000 was $1.06 billion at December 31, 2003 and $870.8 million
at December 31, 2002.
Certificates of deposit at December 31, 2003 have scheduled maturities as
follows:
Weighted Percent
Average of
Year Rate Balance Total
- --------------------------------------------------------------------------------
(In Thousands)
2004 2.70% $2,710,436 49.27%
2005 4.52 898,575 16.33
2006 4.18 971,975 17.67
2007 4.49 693,783 12.61
2008 3.67 119,487 2.17
2009 and thereafter 4.99 107,142 1.95
- --------------------------------------------------------------------------------
Total certificates of deposit 3.55% $5,501,398 100.00%
================================================================================
91
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Interest expense on deposits is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------
Savings $ 13,198 $ 29,096 $ 46,283
Money market 9,934 32,512 65,484
Interest-bearing NOW 1,526 3,176 5,097
Certificates of deposit 200,593 223,216 283,125
- --------------------------------------------------------------------
Total interest expense on deposits $225,251 $288,000 $399,989
====================================================================
(8) Borrowed Funds
Borrowed funds are summarized as follows:
At December 31,
---------------------------------------------
2003 2002
---------------------------------------------
Weighted Weighted
Average Average
(Dollars in Thousands) Amount Rate Amount Rate
- -----------------------------------------------------------------------------
Reverse repurchase agreements $7,235,000 4.62% $6,285,000 5.39%
FHLB-NY advances 1,924,000 2.32 2,064,000 4.42
Other borrowings, net 469,171 7.21 472,180 7.22
- -----------------------------------------------------------------------------
Total borrowed funds, net $9,628,171 4.29% $8,821,180 5.26%
=============================================================================
Reverse Repurchase Agreements
At December 31, 2003 and 2002, all of the outstanding reverse repurchase
agreements had original contractual maturities between one and ten years and
were primarily secured by mortgage-backed securities or U.S. Government agency
securities. Reverse repurchase agreements with the Federal Home Loan Bank of New
York, or FHLB-NY, may also be secured by certain qualifying mortgage loans
pursuant to a blanket collateral agreement with the FHLB-NY. The following is a
summary of information relating to reverse repurchase agreements:
At December 31,
-----------------------
(In Thousands) 2003 2002
- ------------------------------------------------------------------------------------
Amortized cost of collateral (including accrued interest):
Mortgage-backed securities $7,624,752 $6,003,205
Obligations of the U.S. Government and agencies -- 190,892
Mortgage loans 151,268 442,288
Fair value of collateral (including accrued interest):
Mortgage-backed securities 7,573,095 6,065,980
Obligations of the U.S. Government and agencies -- 192,429
Mortgage loans 155,377 463,337
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------
Average balance during the year $6,642,945 $6,840,342 $7,586,370
Maximum balance at any month end during the year 7,235,000 7,285,000 7,785,000
Balance outstanding at end of the year 7,235,000 6,285,000 7,385,000
Weighted average interest rate during the year 5.01% 5.47% 5.57%
Weighted average interest rate at end of the year 4.62 5.39 5.56
In December 2002, we prepaid a $100.0 million reverse repurchase agreement which
had a fixed interest rate of 5.82%. We incurred a $2.2 million prepayment
penalty which is classified as a component of non-interest expense on our
consolidated statement of income.
92
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Reverse repurchase agreements at December 31, 2003 have contractual maturities
as follows:
Year Amount
- ----------------------
(In Thousands)
2004 $3,155,000
2005 500,000
2006 1,000,000
2007 450,000
2008 2,130,000
- ----------------------
Total $7,235,000
======================
Of the $3.16 billion of reverse repurchase agreements maturing in 2004, $1.45
billion are due in less than 30 days, $1.10 billion are due in 30 to 90 days and
$605.0 million are due after 90 days. At December 31, 2003, $2.59 billion of
reverse repurchase agreements are callable in 2004 and at various times
thereafter, of which $2.18 billion mature after December 31, 2004.
FHLB-NY Advances
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are
secured by all of our stock in the FHLB-NY, certain qualifying mortgage loans
and mortgage-backed and other securities not otherwise pledged in an amount at
least equal to 110% of the advances outstanding. The following is a summary of
information relating to FHLB-NY advances:
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------
Average balance during the year $2,574,091 $1,853,534 $1,893,967
Maximum balance at any month end during the year 3,517,000 2,364,000 2,064,000
Balance outstanding at end of the year 1,924,000 2,064,000 1,914,000
Weighted average interest rate during the year 3.30% 5.54% 5.99%
Weighted average interest rate at end of the year 2.32 4.42 6.10
FHLB-NY advances at December 31, 2003 have contractual maturities as follows:
Year Amount
- ----------------------
(In Thousands)
2004 $1,570,000
2005 250,000
2006 4,000
2007 100,000
- ----------------------
Total $1,924,000
======================
Of the $1.57 billion of FHLB-NY advances maturing in 2004, $1.31 billion are due
in less than 30 days, and $260.0 million are due in 30 to 90 days.
At December 31, 2003, we had available a 12-month commitment for overnight and
one month lines of credit with the FHLB-NY totaling $100.0 million. Both lines
of credit are generally priced at the federal funds rate plus 10.0 basis points
and reprice daily.
Other Borrowings, net
During the quarter ended December 31, 2002, we issued $250.0 million of senior
unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes,
which are designated as our 5.75% Senior Notes due 2012, Series B, are
registered with the Securities and Exchange Commission, or SEC. We may redeem
all or part of the notes at any time at a "make-whole" redemption price,
together with accrued interest to the redemption date. The carrying amount of
the 5.75% senior unsecured notes, net of deferred costs, was $246.8 million at
December 31, 2003 and $246.5 million at December 31, 2002.
93
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On July 3, 2001, we issued $100.0 million of senior unsecured notes. The notes,
which were issued in a private placement, mature in 2008, bear a fixed interest
rate of 7.67%, were placed with a limited number of institutional investors and
are not registered with the SEC. The notes require annual principal payments of
$20.0 million per year beginning in 2004. The carrying amount of the 7.67%
senior unsecured notes, net of deferred costs, was $99.4 million at December 31,
2003 and $99.2 million at December 31, 2002.
On October 28, 1999, our wholly-owned finance subsidiary, Astoria Capital Trust
I, issued $125.0 million aggregate liquidation amount of 9.75% Capital
Securities due November 1, 2029, Series A, referred to as the Series A Capital
Securities. Effective April 26, 2000, $120.0 million aggregate liquidation
amount of the Series A Capital Securities were exchanged for a like amount of
9.75% Capital Securities due November 1, 2029, Series B, also issued by Astoria
Capital Trust I, referred to as the Series B Capital Securities. The Series A
Capital Securities and Series B Capital Securities have substantially identical
terms except that the Series B Capital Securities have been registered with the
SEC. Together they are referred to as the Capital Securities. Astoria Financial
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Astoria Capital Trust I under the trust agreement.
The Capital Securities are prepayable, in whole or in part, at our option on or
after November 1, 2009 at declining premiums to November 1, 2019, after which
the Capital Securities are prepayable at par value.
In November 2002, we entered into two interest rate swap agreements, designated
as fair value hedges, that had the effect of converting the Capital Securities
from a 9.75% fixed rate instrument into a variable rate, LIBOR-based instrument.
The carrying amount of the Capital Securities has been adjusted to fair value to
satisfy hedge accounting requirements. See Note 11 for additional information on
the interest rate swap agreements. The carrying amount of the Capital
Securities, net of deferred costs and including fair value hedge adjustments,
was $123.0 million at December 31, 2003 and $126.4 million at December 31, 2002.
Effective January 1, 2004, we adopted revised FASB Interpretation No. 46, or FIN
46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51," which requires us to deconsolidate our wholly-owned subsidiary Astoria
Capital Trust I. The impact of this deconsolidation on financial statements for
periods ending after March 15, 2004 will be to increase consolidated total
assets by $3.9 million, reflecting our investment in the common securities of
Astoria Capital Trust I, and increase consolidated total borrowings by $3.9
million, reflecting the difference between the aggregate principal amount of the
junior subordinated debentures we issued to Astoria Capital Trust I and the
aggregate principal amount of Capital Securities issued by Astoria Capital Trust
I in the private placement completed in 1999. Additionally, we will redesignate
the two interest rate swap agreements as fair value hedges of the debt Astoria
Financial Corporation issued to Astoria Capital Trust I.
Other borrowings at December 31, 2003 have contractual maturities as follows:
Year Amount
- ------------------------------------
(In Thousands)
2004 $ 20,000
2005 20,000
2006 20,000
2007 20,000
2008 20,000
2009 and thereafter 375,000
- ------------------------------------
Total $475,000
====================================
Interest expense on borrowed funds is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Reverse repurchase agreements $337,057 $379,377 $428,435
FHLB-NY advances 85,629 103,232 114,014
Other borrowings 29,816 31,229 39,167
- --------------------------------------------------------------------------------
Total interest expense on borrowed funds $452,502 $513,838 $581,616
================================================================================
94
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(9) Stockholders' Equity
On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of 12%
Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred Stock,
at a redemption price of $27.25 per share, plus $1.00 per share in accrued and
unpaid dividends, for an aggregate redemption price of $28.25 per share. Accrued
and unpaid dividends covered the period from June 1, 2003 through September 30,
2003. These shares were issued in 1997 in connection with the acquisition of The
Greater New York Savings Bank, or The Greater. The Series B Preferred Stock had
a par value of $1.00 per share and a liquidation preference of $25.00 per share.
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 2003, we
repurchased 7,073,800 shares of our common stock at an aggregate cost of $195.5
million. In total, as of December 31, 2003, 7,391,800 shares of our common
stock, at an aggregate cost of $203.9 million, have been repurchased under the
ninth stock repurchase plan.
In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared
a dividend of one preferred share purchase right, or Right, for each outstanding
share of our common stock. Each Right, initially, will entitle stockholders to
buy a one one-hundredth interest in a share of a new series of our preferred
stock at an exercise price of $100.00 upon the occurrence of certain events
described in the Rights Plan. We have reserved 1,225,000 shares of our Series A
Preferred Stock for the Rights Plan.
We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant
to the Plan, which became effective on December 1, 1995, 300,000 shares of
authorized and unissued shares are reserved for use by the Plan, should the need
arise. To date, all shares required by the Plan have been acquired in open
market purchases.
At the time of its conversion from a federally-chartered mutual savings and loan
association to a federally-chartered capital stock savings and loan association,
Astoria Federal established a liquidation account with a balance equal to the
retained earnings reflected in its June 30, 1993 statement of financial
condition. As part of the acquisitions of Long Island Bancorp, Inc., or LIB, The
Greater, and Fidelity New York, FSB, Astoria Federal established liquidation
accounts equal to the account balances previously maintained by these acquired
institutions for eligible account holders. These liquidation accounts are
reduced to the extent that eligible account holders reduce their qualifying
deposits. In the unlikely event of a complete liquidation of Astoria Federal,
each eligible account holder will be entitled to receive a distribution from the
liquidation accounts in an amount proportionate to the current adjusted
qualifying balances for accounts then held. Astoria Federal is not permitted to
declare or pay dividends on its capital stock or repurchase any of its
outstanding stock if it would cause Astoria Federal's stockholders' equity to be
reduced below the amounts required for the liquidation accounts or applicable
regulatory capital requirements.
(10) Goodwill
Effective January 1, 2002, we ceased recording goodwill amortization which had
amounted to approximately $19.1 million annually, or approximately $0.21 per
diluted common share based on diluted weighted average common and common
equivalent shares outstanding for the year ended December 31, 2001. On September
30, 2003 we performed our annual goodwill impairment test and determined the
fair value of our one reporting unit to be in excess of its carrying value.
Accordingly, as of our annual impairment test date, there was no indication of
goodwill impairment. There has been no indication of goodwill impairment since
our adoption of SFAS No. 142. No events have occurred and no circumstances have
changed since our annual impairment test date that would more likely than not
reduce the fair value of our reporting unit below its carrying amount.
95
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table reconciles reported net income and earnings per share to net
income and earnings per share excluding the amortization of goodwill.
For the Year Ended December 31,
-------------------------------
(In Thousands, Except Per Share Data) 2003 2002 2001
- --------------------------------------------------------------------------------
Net income:
Reported net income $196,846 $248,429 $222,860
Add back: goodwill amortization -- -- 19,078
- --------------------------------------------------------------------------------
Adjusted net income $196,846 $248,429 $241,938
- --------------------------------------------------------------------------------
Basic earnings per common share:
Reported net income $ 2.52 $ 2.90 $ 2.40
Goodwill amortization -- -- 0.21
- --------------------------------------------------------------------------------
Adjusted net income $ 2.52 $ 2.90 $ 2.61
================================================================================
Diluted earnings per common share:
Reported net income $ 2.49 $ 2.85 $ 2.35
Goodwill amortization -- -- 0.21
- --------------------------------------------------------------------------------
Adjusted net income $ 2.49 $ 2.85 $ 2.56
================================================================================
(11) Derivative Instruments
As further discussed below, we use a variety of derivative instruments in
connection with our overall interest rate risk management strategy. We are
exposed to credit risk in the event of non-performance by counterparties to
derivative instruments. In the event of default by a counterparty, we would be
subject to an economic loss that corresponds to the cost to replace the
agreement. We control the credit risk associated with our derivative instruments
through dealing only with counterparties with the highest credit ratings,
establishing counterparty exposure limits and monitoring procedures.
Fair Value Hedges
In 2002, we entered into two interest swap agreements designated and accounted
for as fair value hedges aggregating $125.0 million (notional amount) to
effectively convert our $125.0 million Capital Securities from a fixed to a
variable rate instrument to protect the fair value of our Capital Securities due
to changes in interest rates. Under these agreements, we receive a fixed
interest rate of 9.75% and pay a floating interest rate which is tied to the
three-month LIBOR plus 400 basis points. The maturity dates, call features and
other critical terms of these derivative instruments match the terms of the
Capital Securities and as such, at inception and going forward, we assume no
ineffectiveness in accounting for these hedges. As a result, no net gains or
losses have been recognized in earnings with respect to these hedges. A $621,000
liability was recorded at December 31, 2003 and a $3.0 million asset was
recorded at December 31, 2002 which represent the fair value of the interest
rate swap agreements as of those dates. A corresponding adjustment was made to
the carrying amount of the Capital Securities to recognize the change in their
fair value. See Note 8 for additional information regarding our Capital
Securities.
Cash Flow Hedges
In September of 2002, in connection with our issuance of the 5.75% senior
unsecured notes, we entered into an interest rate lock agreement designated and
accounted for as a cash flow hedge of a forecasted transaction to fix the U.S.
treasury benchmark component of the eventual pricing on the notes. The 5.75%
senior unsecured notes were priced based on the prevailing applicable treasury
rate plus a spread, which were determined at the time the offering was
finalized. The critical terms of the agreement were negotiated to match the
terms of the forecasted transaction and as such, at inception and through the
date the note pricing was finalized, we assumed no ineffectiveness. Changes in
the fair value of the agreement were recorded in accumulated other comprehensive
loss/income. The agreement was settled at the same time as the notes and the
unrealized loss, net of taxes, which is included in accumulated other
comprehensive loss/income, is being reclassified into interest expense as a
yield adjustment in the same periods in which the related interest on the 5.75%
senior unsecured notes affects earnings. The unrealized loss, net of taxes, in
accumulated other comprehensive loss/income totaled $1.7 million at December 31,
2003 and $1.9 million at December 31, 2002. The unrealized loss, net of tax, to
be reclassified to our results of operations during 2004 totals $191,000. See
Note 8 for additional information regarding our 5.75% senior unsecured notes.
96
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Free-Standing Derivative Instruments
In 2002 and 2001 we purchased interest rate cap agreements to provide a global
hedge against rising interest rates and subsequent increases in our cost of
funds. In an interest rate cap agreement, we receive the excess of a designated
market interest rate (three-month LIBOR) over a specified strike rate, as
applied to the specified notional amount, in exchange for the payment of a
premium to a counterparty. The interest rate cap agreements, which did not
qualify for hedge accounting treatment, are included in other assets at their
fair values. Changes in the fair values of the agreements are included in
non-interest expense. The agreements have various maturity dates from July 2004
to January 2005. The following is a summary of information relating to the
interest rate cap agreements:
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Notional amount $300,000 $300,000 $250,000
Estimated fair value -- 95 3,394
Non-interest expense (income) 95 3,824 (597)
Weighted average cap rate 5.25% 5.25% 5.20%
In connection with our mortgage banking activities, we had certain free-standing
derivative instruments at December 31, 2003 and 2002. We had commitments to fund
loans held-for-sale and commitments to sell loans which are considered
derivative instruments under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The fair values of these derivative
instruments are immaterial.
Upon adoption of SFAS No. 133 and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133," on January 1, 2001, we held interest rate swaps, which we
entered into in 1998, with a notional amount of $450.0 million hedging the fair
value of medium term notes which totaled $450.0 million. As a result of the
implementation of SFAS No. 133 and SFAS No. 138, we recognized a $2.3 million
charge, net of taxes, in January 2001 as a cumulative effect of a change in
accounting principle. The medium term notes matured in 2001 and 2002 and the
interest rate swaps were terminated.
(12) Commitments and Contingencies
Lease Commitments
At December 31, 2003, we were obligated through 2035 under various
non-cancelable operating leases on buildings and land used for office space and
banking purposes. These operating leases contain escalation clauses which
provide for increased rental expense, based primarily on increases in real
estate taxes and cost-of-living indices. Rent expense under the operating leases
totaled $7.2 million for the year ended December 31, 2003, $5.6 million for the
year ended December 31, 2002 and $5.3 million for the year ended December 31,
2001.
The minimum rental payments due under the terms of the non-cancelable operating
leases as of December 31, 2003, which have not been reduced by minimum sublease
rentals of $34.0 million due in the future under non-cancelable subleases, are
summarized below:
Year Amount
- ------------------------------------
(In Thousands)
2004 $ 6,684
2005 6,678
2006 6,515
2007 6,205
2008 5,783
2009 and thereafter 44,113
- ------------------------------------
$75,978
====================================
97
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Outstanding Commitments
We had outstanding commitments as follows:
At December 31,
-------------------
(In Thousands) 2003 2002
- --------------------------------------------------------------------------------
Mortgage loans - commitments to extend credit $520,743 $675,879
Mortgage loans - commitments to purchase 51,664 68,813
Home equity loans - unused lines of credit 268,555 226,334
Consumer and commercial loans - unused lines of credit 67,085 110,602
Commitments to sell loans 48,568 125,538
Commitments to purchase securities 99,969 504,016
Forward borrowing commitments 500,000 --
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate creditworthiness on a
case-by-case basis. Our maximum exposure to credit risk is represented by the
contractual amount of the instruments. Forward borrowing commitments represent
commitments to enter into borrowings at predetermined amounts, interest rates
and maturity and settlement dates.
Assets Sold with Recourse
We are obligated under various recourse provisions associated with certain first
mortgage loans we sold. The principal balance of loans sold with recourse
amounted to $640.7 million at December 31, 2003 and $561.7 million at December
31, 2002. We do not believe that our recourse obligations subject us to risk of
material loss.
We have two collateralized repurchase obligations due to the sale of certain
long-term fixed rate municipal revenue bonds and Federal Housing Administration
project loans to investment trust funds for proceeds that approximated par
value. The trust funds have put options that require us to repurchase the
securities or loans for specified amounts prior to maturity under certain
specified circumstances, as defined in the agreements. The outstanding option
balance on the two agreements totaled $46.3 million at December 31, 2003 and
$48.2 million at December 31, 2002. Various agency mortgage-backed securities,
with an amortized cost of $67.3 million and a fair value of $69.4 million at
December 31, 2003, have been pledged as collateral.
Guarantees
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN
45, 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 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.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$4.4 million at December 31, 2003 and $474,000 at December 31, 2002. The fair
value of these obligations is immaterial at December 31, 2003 and 2002.
Litigation
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
98
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
actions or proceedings will have a material adverse effect on our financial
condition, results of operations 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.
(13) Income Taxes
Income tax expense attributable to income before cumulative effect of accounting
change is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------
Current
Federal $93,383 $104,401 $104,710
State and local 5,107 6,273 5,278
- ----------------------------------------------------------------------------------
Total current 98,490 110,674 109,988
- ----------------------------------------------------------------------------------
Deferred
Federal (547) 11,126 7,833
State and local (1,567) 1,266 2,215
- ----------------------------------------------------------------------------------
Total deferred (2,114) 12,392 10,048
- ----------------------------------------------------------------------------------
Total income tax expense attributable to income
before cumulative effect of accounting change $96,376 $123,066 $120,036
==================================================================================
Total income tax expense differed from the amounts computed by applying the
federal income tax rate to income before cumulative effect of accounting change
as a result of the following:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Expected income tax expense at statutory federal rate $102,628 $130,023 $120,820
State and local taxes, net of federal tax benefit 2,301 4,901 4,870
Amortization of goodwill -- -- 6,677
Tax exempt income (7,889) (8,451) (6,897)
Reversal of deferred tax valuation allowance (3,396) -- (6,141)
Other, net 2,732 (3,407) 707
- ---------------------------------------------------------------------------------------
Total income tax expense attributable to income
before cumulative effect of accounting change $ 96,376 $123,066 $120,036
=======================================================================================
99
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
At December 31,
--------------------
(In Thousands) 2003 2002
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 4,698 $ 12,318
Allowances and tax reserves 21,296 21,699
Compensation and benefits 10,468 13,253
Tax credits 3,129 3,129
Mark-to-market - IRC Section 475 1,865 2,567
Net unrealized loss on securities available-for-sale 32,470 --
Accrued acquisition related expenses -- 841
Other 3,722 3,915
- --------------------------------------------------------------------------------
Total gross deferred tax assets 77,648 57,722
Valuation allowance -- (3,396)
- --------------------------------------------------------------------------------
Deferred tax assets 77,648 54,326
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Book premiums in excess of tax (6,090) (7,727)
Net unrealized gains on securities available-for-sale -- (8,493)
Mortgage loans (16,535) (25,956)
Premises and equipment (6,686) (5,145)
Basis difference in home equity investment -- (1,465)
Mortgage servicing rights (894) (1,022)
Other -- (70)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (30,205) (49,878)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 47,443 $ 4,448
================================================================================
We believe that future results of operations will be sufficient to enable us to
recognize our net deferred tax assets. The reduction in the valuation allowance
for deferred tax assets of $3.4 million in 2003 relates to the increased
probability of the recognition of certain deferred tax assets resulting from the
closure of previous New York City and New York State tax periods. At December
31, 2003, we had alternative minimum tax credit carryforwards for federal tax
purposes of approximately $3.1 million. Federal income tax net operating loss
carryforwards of approximately $13.4 million will expire in 2012.
Astoria Federal's retained earnings at December 31, 2003 and 2002 include base
year bad debt reserves, which amounted to approximately $159.1 million, for
which no federal income tax liability has been recognized. This represents the
balance of the bad debt reserves created for tax purposes as of December 31,
1987. These amounts are subject to recapture in the unlikely event that Astoria
Federal (1) makes distributions in excess of current and accumulated earnings
and profits, as calculated for federal income tax purposes, (2) redeems its
stock, or (3) liquidates.
100
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(14) Earnings Per Common Share
The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31,
---------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3)
- -------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $196,846 $196,846 $248,429 $248,429 $225,154 $225,154
Preferred dividends declared (4,500) (4,500) (6,000) (6,000) (6,000) (6,000)
- -------------------------------------------------------------------------------------------------------
192,346 192,346 242,429 242,429 219,154 219,154
Cumulative effect of accounting
change, net of tax -- -- -- -- (2,294) (2,294)
- -------------------------------------------------------------------------------------------------------
Net income available to common
shareholders $192,346 $192,346 $242,429 $242,429 $216,860 $216,860
=======================================================================================================
Total weighted average basic
common shares outstanding 76,383 76,383 83,515 83,515 90,450 90,450
Effect of dilutive securities:
Options -- 912 -- 1,405 -- 1,724
- -------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 76,383 77,295 83,515 84,920 90,450 92,174
=======================================================================================================
Earnings per common share:
Income before cumulative effect
of accounting change $ 2.52 $ 2.49 $ 2.90 $ 2.85 $ 2.43 $ 2.38
Cumulative effect of accounting
change, net of tax -- -- -- -- (0.03) (0.03)
- -------------------------------------------------------------------------------------------------------
Net earnings per common share $ 2.52 $ 2.49 $ 2.90 $ 2.85 $ 2.40 $ 2.35
=======================================================================================================
(1) Options to purchase 1,000,800 shares of common stock at prices between
$29.88 per share and $36.60 per share were outstanding as of December 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 year ended December 31, 2003.
(2) Options to purchase 30,000 shares of common stock at $29.88 per share were
outstanding as of December 31, 2002, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2002.
(3) Options to purchase 514,304 shares of common stock at prices between $28.31
per share and $29.88 per share were outstanding as of December 31, 2001,
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 year ended December 31, 2001.
101
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(15) Comprehensive Income
The components of accumulated other comprehensive (loss) income at December 31,
2003 and 2002 and the changes during the year ended December 31, 2003 are as
follows:
At Current At
December 31, Period December 31,
(In Thousands) 2002 Change 2003
- ---------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities available-for-sale $ 12,465 $(57,226) $(44,761)
Net unrealized loss on securities transferred to held-to-maturity (775) 775 --
Net unrealized loss on cash flow hedge (1,871) 191 (1,680)
Minimum pension liability adjustment (19) (29) (48)
- ---------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ 9,800 $(56,289) $(46,489)
===============================================================================================================
The components of other comprehensive (loss) income, other than net income, are
as follows:
Before Tax Tax After Tax
(In Thousands) Amount Benefit (Expense) Amount
- -------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003
Net unrealized losses on securities available-for-sale:
Net unrealized holding losses on securities arising during the year $(91,405) $ 39,111 $(52,294)
Reclassification adjustment for net gains included in net income (7,346) 2,414 (4,932)
------------------------------------------
(98,751) 41,525 (57,226)
Amortization of net unrealized loss on securities transferred to
held-to-maturity 1,337 (562) 775
Reclassification adjustment for losses included in net income
from net unrealized loss on cash flow hedge 330 (139) 191
Minimum pension liability adjustment (50) 21 (29)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive loss $(97,134) $ 40,845 $(56,289)
===================================================================================================================
For the Year Ended December 31, 2002
Net unrealized gains on securities available-for-sale:
Net unrealized holding gains on securities arising during the year $ 20,002 $ (7,459) $ 12,543
Reclassification adjustment for gains included in net income (10,772) 3,569 (7,203)
------------------------------------------
9,230 (3,890) 5,340
Amortization of net unrealized loss on securities transferred to
held-to-maturity 14,350 (6,033) 8,317
Net unrealized loss on cash flow hedge:
Unrealized loss arising during the year (3,297) 1,386 (1,911)
Reclassification adjustment for losses included in net income 69 (29) 40
------------------------------------------
(3,228) 1,357 (1,871)
Minimum pension liability adjustment (32) 13 (19)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 20,320 $ (8,553) $ 11,767
===================================================================================================================
For the Year Ended December 31, 2001
Net unrealized holding gains on securities arising during the year $ 198,905 $(83,814) $115,091
Amortization of net unrealized loss on securities transferred
to held-to-maturity 6,875 (2,890) 3,985
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 205,780 $(86,704) $119,076
===================================================================================================================
102
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(16) Benefit Plans
Pension Plans and Other Postretirement Benefits
The following tables set forth information regarding our defined benefit pension
plans and other postretirement benefit plan.
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
At or For the Year Ended At or For The Year Ended
December 31, December 31,
------------------------ ------------------------
(In Thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------- ------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $145,136 $132,879 $ 15,520 $ 13,446
Service cost 2,700 2,142 360 305
Interest cost 9,570 9,263 995 1,031
Amendments -- (185) -- --
Actuarial loss 16,774 9,969 1064 2,146
Benefits paid (8,686) (8,932) (1,553) (1,408)
- -------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 165,494 145,136 16,386 15,520
- -------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 128,893 152,554 -- --
Actual return on plan assets 29,128 (15,576) -- --
Employer contribution 609 847 1,553 1,408
Benefits paid (8,686) (8,932) (1,553) (1,408)
- -------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 149,944 128,893 -- --
- -------------------------------------------------------------------------------------------------------------
Funded status (15,550) (16,243) (16,386) (15,520)
Unrecognized net actuarial loss (gain) 38,585 44,349 (2,526) (3,742)
Unrecognized prior service cost 855 1,015 165 205
Unrecognized transition asset (35) (139) -- --
- -------------------------------------------------------------------------------------------------------------
Net amount recognized $ 23,855 $ 28,982 $(18,747) $(19,057)
=============================================================================================================
Amounts recognized in the consolidated
statements of financial condition consist of:
Prepaid benefit cost $ 38,981 $ 43,003 $ -- $ --
Accrued benefit liability (15,330) (14,248) (18,747) (19,057)
Intangible asset 122 195 -- --
Accumulated other comprehensive loss (pre-tax basis) 82 32 -- --
- -------------------------------------------------------------------------------------------------------------
Net amount recognized $ 23,855 $ 28,982 $(18,747) $(19,057)
=============================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was
$149.5 million at December 31, 2003 and $132.8 million at December 31, 2002. The
measurement dates for our defined benefit pension plans and other postretirement
benefit plan were December 31.
Assumptions used to determine
the benefit obligation:
Rate of
Discount Rate Compensation Increase
------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Pension Benefit Plans:
Astoria Federal Pension Plan 6.00% 6.75% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 6.00 6.75 N/A N/A
103
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The components of net periodic cost (benefit) are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------- -------------------------------
For the Year Ended December 31, For the Year Ended December 31,
------------------------------- -------------------------------
(In Thousands) 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------ -------------------------------
Service cost $ 2,700 $ 2,142 $ 1,925 $ 360 $ 305 $ 187
Interest cost 9,570 9,263 8,979 995 1,031 895
Expected return on plan assets (9,956) (11,866) (13,331) -- -- --
Amortization of prior service cost (benefit) 160 161 (403) 40 41 41
Recognized net actuarial loss (gain) 3,368 46 (367) (152) (219) (437)
Amortization of transition asset (104) (104) (104) -- -- --
- ----------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 5,738 $ (358) $ (3,301) $1,243 $1,158 $ 686
================================================================================================================
Assumptions used to determine
the net periodic cost (benefit):
Expected Return Rate of
Discount Rate on Plan Assets Compensation Increase
------------- --------------- ---------------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ----- ---- ----
Pension Benefit Plans:
Astoria Federal Pension Plan 6.75% 7.25% 8.00% 8.00% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 N/A N/A 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 N/A N/A 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 6.75 7.25 N/A N/A N/A N/A
To determine the expected return on plan assets, we consider the long-term
historical return information on plan assets, the mix of investments that
comprise plan assets and the historical returns on indices comparable to the
fund classes in which the plan invests.
The assumed health care cost trend rates are as follows:
At December 31,
---------------
2003 2002
- ---------------------------------------------------------------
Health care cost trend rate assumed for next
year 8.00% 8.50%
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend
rate 2009 2009
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One Percentage One Percentage
(In Thousands) Point Increase Point Decrease
- --------------------------------------------------------------------------------------
Effect on total service and interest cost components $ 149 $ (122)
Effect on the postretirement benefit obligation 1,278 (1,049)
104
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Included in the tables of Pension Benefits on page 103 and 104 are the Astoria
Federal Excess Benefit and Supplemental Benefit Plans, Astoria Federal
Directors' Retirement Plan, The Greater Directors' Retirement Plan and the LIB
Directors' Retirement Plan, which are unfunded plans. The projected benefit
obligation and accumulated benefit obligation for these plans are as follows:
At December 31,
-----------------
(In Thousands) 2003 2002
- --------------------------------------------------------------------------------
Projected benefit obligation $17,884 $16,324
Accumulated benefit obligation 12,907 11,776
The following table sets forth the asset allocations, by asset category, for the
Astoria Federal Pension Plan:
Plan Assets
At December 31,
---------------
2003 2002
- -------------------------------------------------------------------------------
Asset Category:
Equity securities 12.96% 11.16%
Other (1) 87.04 88.84
- -------------------------------------------------------------------------------
Total 100.00% 100.00%
===============================================================================
(1) Primarily comprised of investments in various insurance company pooled
separate accounts and trust company trust funds.
The overall strategy of the Astoria Federal Pension Plan Investment Policy is to
have a diverse portfolio that reasonably spans established risk/return levels,
preserves liquidity and achieves the rate of return specified in the actuarial
valuation. The strategy allows for a moderate risk approach in order to achieve
greater long-term asset growth. The asset mix within the various insurance
company pooled separate accounts and trust company trust funds can vary but
should not be more than 80% in equity securities, 50% in debt securities, 25% in
liquidity funds, and 15% in Astoria Financial Corporation common stock. The
Astoria Federal Pension Plan will not acquire Astoria Financial Corporation
common stock to the extent that, after the acquisition, such common stock would
represent more than 10% of total plan assets. Within equity securities, the mix
is further clarified to have ranges not to exceed 10% in any one company, 30% in
any one industry, 50% in funds that mirror the S&P 500, 50% in large cap equity
securities, 20% in mid-cap equity securities, 20% in small-cap equity
securities, and 10% in international equities.
Equity securities include Astoria Financial Corporation common stock with a fair
value of $19.2 million, or 12.8% of total plan assets, at December 31, 2003 and
$14.0 million, or 10.9% of total plan assets, at December 31, 2002.
We expect to contribute $648,000 to our unfunded defined benefit pension plans
and $1.5 million to our other postretirement benefit plan to cover expected
benefit payments in 2004.
Incentive Savings Plan
Astoria Federal maintains a 401(k) incentive savings plan, or the 401(k) Plan,
which provides for contributions by both Astoria Federal and its participating
employees. Under the 401(k) Plan, which is a qualified, defined contribution
pension plan, participants may contribute up to 15% of their pre-tax base
salary, generally not to exceed $12,000 for the calendar year ended December 31,
2003. Matching contributions, if any, may be made at the discretion of Astoria
Federal. No such contributions were made for 2003, 2002 and 2001. Participants
vest immediately in their own contributions and after a period of five years for
Astoria Federal contributions.
105
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Employee Stock Ownership Plan
Astoria Federal maintains an ESOP for its eligible employees, which is also a
defined contribution pension plan. To fund the purchase of the ESOP shares, the
ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%,
mature on December 31, 2029 and are collateralized by our common stock purchased
with the loan proceeds. Astoria Federal makes scheduled discretionary
contributions to fund debt service. Astoria Federal's contributions, prior to
2010, may be reduced by dividends paid on unallocated shares and investment
earnings realized on such dividends. Dividends paid on unallocated shares, which
reduced Astoria Federal's contribution to the ESOP, totaled $4.3 million for the
year ended December 31, 2003 and $4.1 million for the year ended December 31,
2002. The ESOP loans had an aggregate outstanding principal balance of $34.7
million at December 31, 2003 and $35.7 million at December 31, 2002.
Shares purchased by the ESOP are held in trust for allocation among participants
as the loans are repaid. Pursuant to the loan agreements, the number of shares
released annually is based upon a specified percentage of aggregate eligible
payroll for our covered employees. Shares allocated to participants totaled
258,438 for the year ended December 31, 2003, 345,518 for the year ended
December 31, 2002 and 279,546 for the year ended December 31, 2001. As of
December 31, 2003, 4,760,054 shares which had a fair value of $177.1 million
remain unallocated. In addition to shares allocated, Astoria Federal makes an
annual cash contribution to participant accounts. This cash contribution totaled
$1.6 million for the year ended December 31, 2003, $1.4 million for the year
ended December 31, 2002 and $1.3 million for the year ended December 31, 2001,
and will total not less than $1.2 million each year through 2009. After 2009, an
annual cash contribution equal to all dividends paid on unallocated shares
remaining will be made through the maturity or repayment of the loans.
We recorded compensation expense relating to the ESOP of $8.8 million for the
year ended December 31, 2003, $11.7 million for the year ended December 31, 2002
and $9.3 million for the year ended December 31, 2001, which was equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the year of allocation, plus the cash contribution made to
participant accounts.
(17) Stock Option Plans
In 2003, we adopted the 2003 Stock Option Plan for Officers and Employees of
Astoria Financial Corporation, or the 2003 Employee Option Plan. In 1999, we
adopted the 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, or the 1999 Directors' Option Plan. As a result of the adoption of
these option plans, all previous employee and director option plans were frozen
and no further option grants were made pursuant to those plans. The number of
shares reserved for issuance under the 2003 Employee Option Plan was 3,250,000
and the number of shares reserved for issuance under the 1999 Directors' Option
Plan was 350,000. At December 31, 2003, there were 2,445,200 remaining shares
reserved for issuance of future grants under the 1999 Directors Option Plan and
the 2003 Employee Option Plan. Remaining shares reserved for issuance of future
grants under the 1999 Directors Option Plan and the 1999 Stock Option Plan for
Officers and Employees of Astoria Financial Corporation were 520,400 shares at
December 31, 2002 and 1,949,500 shares at December 31, 2001.
Options granted under the 2003 Employee Option Plan have a maximum term of ten
years and vest three years after the grant date. Under option plans involving
grants to employees, in the event the optionee terminates his/her employment due
to death, disability, retirement or in the event we experience a change in
control, or a threatened change in control, as defined and specified in such
plans, all options granted immediately vest and are exercisable. Under option
plans involving grants to outside directors, all options granted have a maximum
term of ten years and are exercisable immediately on their grant date, except
options granted under the 1993 Stock Option Plan for Outside Directors, which
vested over three years. Options granted under all plans were granted in tandem
with limited stock appreciation rights exercisable only in the event we
experience a change in control, as defined by the plans.
106
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Activity in our option plans is summarized as follows:
For the Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ---------------------------------------------------------------------------------------------------------
Outstanding at beginning of year: 6,841,884 $21.48 6,893,950 $17.59 7,657,202 $14.95
Granted 1,019,800 36.15 1,429,100 27.03 1,094,700 25.21
Forfeited (5,460) (26.34) (2,800) (24.84) (58,890) (21.36)
Expired -- -- (151,802) (6.91) (116) (19.19)
Exercised (959,229) (9.90) (1,326,564) (8.94) (1,798,946) (10.86)
--------- ---------- ----------
Outstanding at end of year 6,896,995 25.25 6,841,884 21.48 6,893,950 17.59
========= ========== ==========
Options exercisable at end of year 2,671,595 20.44 2,451,284 17.65 3,314,250 12.70
The following table summarizes information about our stock options outstanding
at December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price
- ------------------------------------------------------------------------------------------------
$ 5.00 to $18.00 1,221,431 4.54 years $14.52 1,221,431 $14.52
18.38 to 24.84 1,686,140 5.98 23.96 689,140 22.67
25.16 to 25.44 1,117,700 7.22 25.25 148,400 25.24
26.24 to 27.00 1,385,100 8.40 27.00 96,800 27.00
27.29 to 36.60 1,486,624 8.06 33.91 515,824 28.86
--------- ---------
$ 5.00 to $36.60 6,896,995 6.86 25.25 2,671,595 20.44
========= =========
The following table summarizes the per share weighted-average fair value of
stock options granted. The per share weighted-average fair value of options was
calculated to determine the effect on net income and EPS if we had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation. See Note 1(q) for an illustration of the effect on net income and
EPS of the provisions of SFAS No. 123.
For the Year Ended December 31,
------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
Granted Fair Value Granted Fair Value Granted Fair Value
- --------------------------------------------------------------------------------------------
Employees 975,800 1,385,100 1,042,700
Outside directors 44,000 44,000 52,000
--------- --------- ---------
1,019,800 $9.09 1,429,100 $5.85 1,094,700 $6.48
========= ===== ========= ===== ========= =====
The per share weighted-average fair value of option grants was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
For the Year Ended December 31,
---------------------------------------
2003 2002 2001
---------------------------------------
Dividend yield 2.43% 2.94% 2.35%
Expected stock price volatility 28.81 26.21 26.06
Risk-free interest rate based
upon equivalent-term U.S.
Treasury rates 3.16 3.29 4.45
Expected option lives 5.96 years 5.97 years 5.96 years
The per share weighted-average fair value of options was calculated using the
above assumptions, based on our judgments regarding future option exercise
experience and market conditions. These assumptions are subjective in nature,
involve uncertainties and, therefore, cannot be determined with precision. The
Black-Scholes option pricing
107
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
model also contains certain inherent limitations when applied to options which
are not immediately exercisable and are not traded on public markets.
(18) Regulatory Matters
Federal law requires that savings associations, such as Astoria Federal,
maintain minimum capital requirements. These capital standards are required to
be no less stringent than standards applicable to national banks. At December
31, 2003, Astoria Federal was in compliance with all regulatory capital
requirements.
The following table sets forth the regulatory capital calculations for Astoria
Federal.
At December 31, 2003
-------------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- --------------------------------------------------------------------------------------
Tangible $334,495 1.50% $1,643,540 7.37% $1,309,045 5.87%
Leverage 891,986 4.00 1,643,540 7.37 751,554 3.37
Risk-based 897,770 8.00 1,726,661 15.39 828,891 7.39
At December 31, 2002
-------------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- --------------------------------------------------------------------------------------
Tangible $318,529 1.50% $1,536,305 7.23% $1,217,776 5.73%
Leverage 849,412 4.00 1,536,305 7.23 686,893 3.23
Risk-based 839,271 8.00 1,619,851 15.44 780,580 7.44
Astoria Federal's Tier I risked-based capital ratio was 14.65% at December 31,
2003 and 14.64% at December 31, 2002.
The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The regulators adopted rules which require them
to take action against undercapitalized institutions, based upon the five
categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose total risk-based capital ratio is 10% or greater, Tier
1 risk-based capital ratio is 6% or greater, leverage capital ratio is 5% or
greater and is not subject to any written agreement, order, capital directive or
prompt corrective action directive issued by the Federal Deposit Insurance
Corporation shall be considered a "well capitalized" institution. As of December
31, 2003 and 2002, Astoria Federal was a "well capitalized" institution.
(19) Fair Value of Financial Instruments
Estimated fair values of certain types of financial instruments are most
commonly derived from quoted market prices available in formal trading
marketplaces. In many cases, financial instruments we hold are not bought or
sold in formal trading marketplaces. Accordingly, in cases where quoted market
prices are not available, fair values are derived or estimated based on a
variety of valuation techniques. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument. These estimates do not reflect any possible tax ramifications,
estimated transaction costs, or any premium or discount that could result from
offering for sale at one time our entire holdings of a particular financial
instrument. Because no market exists for a certain portion of our financial
instruments, fair value estimates are based on judgments regarding future loss
experience, current economic conditions, risk characteristics, and other such
factors. These estimates are subjective in nature, involve uncertainties and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. For these reasons and others, the estimated
fair value disclosures presented herein do not represent our entire underlying
value. As such, readers are cautioned in using this information for purposes of
evaluating our financial condition and/or value either alone or in comparison
with any other company.
108
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the carrying amounts and estimated fair values of
our financial instruments.
At December 31,
-----------------------------------------------------
2003 2002
-----------------------------------------------------
Carrying Estimated Carrying Estimated
(In Thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------
Financial Assets:
Federal funds sold and
repurchase agreements $ 65,926 $ 65,926 $ 510,252 $ 510,252
Securities available-for-sale 2,654,992 2,654,992 2,792,581 2,792,581
Securities held-to-maturity 5,792,727 5,809,117 5,041,257 5,100,565
FHLB-NY stock 213,450 213,450 247,550 247,550
Loans held-for-sale 23,023 23,517 62,669 63,870
Loans receivable, net 12,603,866 12,947,778 11,975,815 12,548,717
MSR, net 17,952 17,981 20,411 20,413
Interest rate caps -- -- 95 95
Interest rate swaps -- -- 2,998 2,998
Financial Liabilities:
Deposits 11,186,594 11,341,683 11,067,196 11,279,584
Borrowed funds, net 9,628,171 10,052,553 8,821,180 9,466,988
Interest rate swaps 621 621 -- --
Methods and assumptions used to estimate fair values are as follows:
Federal funds sold and repurchase agreements
The carrying amounts of federal funds sold and repurchase agreements approximate
fair values since all mature in one month or less.
Securities available-for-sale and held-to-maturity
Fair values for securities are based on published or securities dealers'
estimated market values.
FHLB-NY stock
The carrying amount of FHLB-NY stock equals cost. The fair value of FHLB-NY
stock approximates the carrying amount.
Loans held-for-sale
Fair values of loans held-for-sale were estimated based on current secondary
market prices for loans with similar terms.
Loans receivable, net
Fair values of loans are calculated by discounting the expected future cash
flows of pools of loans with similar characteristics. The loans are first
segregated by type, such as one-to-four family, multi-family, commercial real
estate, construction and consumer and other, and then further segregated into
fixed and adjustable rate and seasoned and nonseasoned categories. Expected
future cash flows are then projected based on contractual cash flows, adjusted
for prepayments. Prepayment estimates are based on a variety of factors
including our experience with respect to each loan category, the effect of
current economic and lending conditions and regional statistics for each loan
category, if available. The discount rates used are based on market rates for
new loans of similar type and purpose, adjusted, when necessary, for factors
such as servicing cost, credit risk and term.
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While we have attempted to use
assumptions and estimates which are the most reflective of the loan portfolio
and the current market, a greater degree of subjectivity is inherent in
determining these fair values than those fair values obtained from formal
trading marketplaces.
109
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
MSR, net
The fair value of MSR is obtained through independent third party valuations
through 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.
Interest rate caps and swaps
Fair values for interest rate caps and swaps are based on securities dealers'
estimated market values.
Deposits
The fair values of deposits with no stated maturity, such as savings accounts,
NOW accounts, money market accounts and demand deposits, are equal to the amount
payable on demand. The fair values of certificates of deposit are based on
discounted contractual cash flows using rates which approximate the rates we
offer for deposits of similar remaining maturities.
Borrowed funds, net
Fair value estimates are based on securities dealers' estimated market values,
when available, or discounted contractual cash flows using rates which
approximate the rates offered for borrowings of similar remaining maturities.
Outstanding commitments
Outstanding commitments include (1) commitments to extend credit and unadvanced
lines of credit for which fair values were estimated based on an analysis of the
interest rates and fees currently charged to enter into similar transactions,
considering the remaining terms of the commitments and the creditworthiness of
the potential borrowers, (2) commitments to sell residential mortgage loans for
which fair values were estimated based on current secondary market prices for
commitments with similar terms and (3) commitments to purchase securities and
forward borrowing commitments for which fair values were based on securities
dealers' estimated market values. Due to the short-term nature of our
outstanding commitments, the fair values of these commitments are immaterial to
our financial condition.
(20) Condensed Parent Company Only Financial Statements
The following condensed parent company only financial statements reflect our
investments in our wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc. using the equity method of accounting:
Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31,
-----------------------
(In Thousands) 2003 2002
- --------------------------------------------------------------------------------
Assets:
Cash $ -- $ 3
Federal funds sold and repurchase agreements 65,926 279,867
Other securities available-for-sale 139 143
ESOP loans receivable 34,720 35,662
Accrued interest receivable 9 22
Other assets 1,741 3,506
Investment in Astoria Federal 1,796,233 1,742,031
Investment in Astoria Capital Trust I 3,929 3,929
Investment in AF Insurance Agency, Inc. 1,885 1,210
- --------------------------------------------------------------------------------
Total assets $1,904,582 $2,066,373
================================================================================
Liabilities and stockholders' equity:
Other borrowings $ 473,037 $ 476,046
Other liabilities 6,118 3,980
Dividends payable -- 2,000
Amounts due to subsidiaries 28,896 30,349
Stockholders' equity 1,396,531 1,553,998
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,904,582 $2,066,373
================================================================================
110
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Astoria Financial Corporation - Condensed Statements of Income
For the Year Ended December 31,
-------------------------------
(In Thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------
Interest income:
Federal funds sold, repurchase
agreements and other securities $ 1,500 $ 2,990 $ 2,837
ESOP loans receivable 2,140 2,226 2,292
- ---------------------------------------------------------------------------------------------
Total interest income 3,640 5,216 5,129
Interest expense on borrowed funds 30,193 22,644 18,861
- ---------------------------------------------------------------------------------------------
Net interest expense 26,553 17,428 13,732
- ---------------------------------------------------------------------------------------------
Non-interest income (1,074) 1,330 --
Cash dividends from subsidiaries 120,377 60,377 502,935
- ---------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 1,736 1,521 1,380
Other 2,323 1,721 1,554
- ---------------------------------------------------------------------------------------------
Total non-interest expense 4,059 3,242 2,934
- ---------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed (overdistributed) earnings of subsidiaries 88,691 41,037 486,269
Income tax benefit 12,970 7,885 6,757
- ---------------------------------------------------------------------------------------------
Income before equity in undistributed (overdistributed)
earnings of subsidiaries 101,661 48,922 493,026
- ---------------------------------------------------------------------------------------------
Equity in undistributed (overdistributed) earnings
of subsidiaries (1) 95,185 199,507 (270,166)
- ---------------------------------------------------------------------------------------------
Net income $196,846 $248,429 $ 222,860
=============================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended
December 31, 2001 represents dividends paid to us in excess of our
subsidiaries' current year earnings.
111
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Astoria Financial Corporation - Condensed Statements of Cash Flows
For the Year Ended December 31,
---------------------------------
(In Thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 196,846 $ 248,429 $ 222,860
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (undistributed) overdistributed earnings of
subsidiaries (95,185) (199,507) 270,166
Decrease (increase) in accrued interest receivable 13 62 (57)
Amortization of premiums and deferred costs 1,070 512 589
(Increase) decrease in other assets net of other liabilities
and amounts due subsidiaries (82) 7,654 5,777
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 102,662 57,150 499,335
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal payments on ESOP loans receivable 942 1,514 1,022
Proceeds from maturities of securities available-for sale -- -- 500
- ------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 942 1,514 1,522
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings with original terms greater
than three months -- 246,433 99,030
Repayments of borrowings with original terms greater
than three months -- -- (40,000)
Cash paid for cash flow hedging instrument -- (3,297) --
Common stock repurchased (195,471) (211,103) (289,087)
Redemption of preferred stock (54,500) -- --
Cash received for options exercised 8,793 11,742 19,099
Cash dividends paid to stockholders (76,370) (74,258) (64,752)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (317,548) (30,483) (275,710)
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (213,944) 28,181 225,147
Cash and cash equivalents at beginning of the year 279,870 251,689 26,542
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 65,926 $ 279,870 $ 251,689
======================================================================================================
112
Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S (Unaudited)
For the Year Ended December 31, 2003
-----------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
Interest income $282,566 $269,233 $247,255 $258,237
Interest expense 173,558 172,982 167,623 163,590
- -----------------------------------------------------------------------------------------------
Net interest income 109,008 96,251 79,632 94,647
Provision for loan losses -- -- -- --
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 109,008 96,251 79,632 94,647
Non-interest income 25,895 31,543 33,880 28,243
- -----------------------------------------------------------------------------------------------
Total income 134,903 127,794 113,512 122,890
- -----------------------------------------------------------------------------------------------
General and administrative expense 51,966 51,840 51,408 50,663
- -----------------------------------------------------------------------------------------------
Income before income tax expense 82,937 75,954 62,104 72,227
Income tax expense 26,540 25,065 20,503 24,268
- -----------------------------------------------------------------------------------------------
Net income $ 56,397 $ 50,889 $ 41,601 $ 47,959
===============================================================================================
Basic earnings per common share $ 0.69 $ 0.64 $ 0.53 $ 0.65
Diluted earnings per common share $ 0.69 $ 0.64 $ 0.53 $ 0.63
For the Year Ended December 31, 2002
-----------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
Interest income $330,890 $326,275 $313,380 $295,717
Interest expense 215,963 203,906 197,256 184,713
- -----------------------------------------------------------------------------------------------
Net interest income 114,927 122,369 116,124 111,004
Provision for loan losses 1,004 1,002 301 --
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 113,923 121,367 115,823 111,004
Non-interest income 26,960 24,328 25,212 30,907
- -----------------------------------------------------------------------------------------------
Total income 140,883 145,695 141,035 141,911
- -----------------------------------------------------------------------------------------------
General and administrative expense 48,129 50,275 48,582 48,841
Extinguishment of debt -- -- -- 2,202
- -----------------------------------------------------------------------------------------------
Income before income tax expense 92,754 95,420 92,453 90,868
Income tax expense 31,536 31,489 30,237 29,804
- -----------------------------------------------------------------------------------------------
Net income $ 61,218 $ 63,931 $ 62,216 $ 61,064
===============================================================================================
Basic earnings per common share $ 0.70 $ 0.74 $ 0.73 $ 0.73
Diluted earnings per common share $ 0.69 $ 0.73 $ 0.72 $ 0.73
113
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit
- ----------- -------------------------
2.1 Agreement and Plan of Merger dated as of the 2nd day of April 1998 by
and between Astoria Financial Corporation and Long Island Bancorp,
Inc., as amended. (1)
3.1 Certificate of Incorporation of Astoria Financial Corporation, as
amended effective as of June 3, 1998. (2)
3.2 Bylaws of Astoria Financial Corporation. (3)
4.1 Astoria Financial Corporation Specimen Stock Certificate. (*)
4.2 Federal Stock Charter of Astoria Federal Savings and Loan Association.
(4)
4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended.
(4)
4.4 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock. (5)
4.5 Amended Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock. (6)
4.6 Rights Agreement between Astoria Financial Corporation and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, dated as of July 17,
1996, as amended. (5)
4.7 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by and
between Astoria Financial Corporation and ChaseMellon Shareholder
Services L.L.C. (1)
4.8 Amendment No. 2 to Rights Agreement, dated as of September 15, 1999 by
and between Astoria Financial Corporation and ChaseMellon Shareholder
Services L.L.C., as Rights Agent. (7)
4.9 Form of Rights Certificate. (5)
4.10 Indenture, dated as of October 28, 1999, between Astoria Financial
Corporation and Wilmington Trust Company, as Debenture Trustee,
including as Exhibit A thereto the Form of Certificate of Exchange
Junior Subordinated Debentures. (9)
4.11 Form of Certificate of Junior Subordinated Debenture. (9)
4.12 Form of Certificate of Exchange Junior Subordinated Debenture. (9)
4.13 Amended and Restated Declaration of Trust of Astoria Capital Trust I,
dated as of October 28, 1999. (9)
114
Exhibit No. Identification of Exhibit
- ----------- -------------------------
4.14 Common Securities Guarantee Agreement of Astoria Financial
Corporation, dated as of October 28, 1999. (9)
4.15 Form of Certificate Evidencing Common Securities of Astoria Capital
Trust I. (9)
4.16 Form of Exchange Capital Security Certificate for Astoria Capital
Trust I. (9)
4.17 Series A Capital Securities Guarantee Agreement of Astoria Financial
Corporation, dated as of October 28, 1999. (9)
4.18 Form of Series B Capital Securities Guarantee Agreement of Astoria
Financial Corporation. (9)
4.19 Form of Capital Security Certificate of Astoria Capital Trust I. (9)
4.20 Indenture between Astoria Financial Corporation and Wilmington Trust
Company, as Debenture Trustee, dated as of October 16, 2002, relating
to the Senior Notes due 2012. (10)
4.21 Form of 5.75% Senior Note due 2012, Series B. (10)
4.22 Astoria Financial Corporation Automatic Dividend Reinvestment and
Stock Purchase Plan. (11)
10.1 Agreement dated as of December 28, 2000 by and between Astoria Federal
Savings and Loan Association, Astoria Financial Corporation, the
Astoria Federal Savings and Loan Association Employee Stock Ownership
Plan Trust and The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust. (4)
10.2 Amended and Restated Loan Agreement by and between Astoria Federal
Savings and Loan Association Employee Stock Ownership Plan Trust and
Astoria Financial Corporation made and entered into as of January 1,
2000. (4)
10.3 Promissory Note of Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust dated January 1, 2000. (4)
10.4 Pledge Agreement made as of January 1, 2000 by and between Astoria
Federal Savings and Loan Association Employee Stock Ownership Plan
Trust and Astoria Financial Corporation. (4)
10.5 Amended and Restated Loan Agreement by and between The Long Island
Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria
Financial Corporation made and entered into as of January 1, 2000. (4)
10.6 Promissory Note of The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust dated January 1, 2000. (4)
115
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.7 Pledge Agreement made as of January 1, 2000 by and between The Long
Island Savings Bank FSB Employee Stock Ownership Plan Trust and
Astoria Financial Corporation. (4)
Exhibits 10.8 through 10.46 are management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Form
10-K pursuant to Item 15(c) of this report.
10.8 Astoria Federal Savings and Loan Association and Astoria Financial
Corporation Directors' Retirement Plan, as amended and restated
effective February 21, 1996. (*)
10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement
Benefit Plan, as amended. (3)
10.10 Astoria Financial Corporation Death Benefit Plan for Outside
Directors. (*)
10.11 Deferred Compensation Plan for Directors of Astoria Financial
Corporation. (*)
10.12 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as
amended. (8)
10.13 Astoria Financial Corporation 1993 Stock Option Plan For Outside
Directors, as amended. (8)
10.14 1996 Stock Option Plan for Officers and Employees of Astoria Financial
Corporation, as amended. (8)
10.15 1996 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, as amended. (8)
10.16 1999 Stock Option Plan for Officers and Employees of Astoria Financial
Corporation. (12)
10.17 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation. (12)
10.18 Amendment to Section 4.5 of the 1999 Stock Option Plan for Outside
Directors of Astoria Financial Corporation. (4)
10.19 2003 Stock Option Plan for Officers and Employees of Astoria Financial
Corporation. (13)
10.20 Astoria Federal Savings and Loan Association Annual Incentive Plan for
Select Executives. (3)
10.21 Astoria Financial Corporation Executive Officer Annual Incentive Plan.
(12)
10.22 Astoria Financial Corporation Amended and Restated Employment
Agreement with George L. Engelke, Jr., dated as of January 1, 2000.
(14)
116
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.23 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with George L. Engelke, Jr., dated as of
January 1, 2000. (14)
10.24 Astoria Financial Corporation Amended and Restated Employment
Agreement with Gerard C. Keegan, dated as of January 1, 2000. (14)
10.25 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Gerard C. Keegan, dated as of January 1,
2000. (14)
10.26 Employment Termination and Release Agreement by and among John J.
Conefry, Jr., Astoria Federal Savings and Loan Association and Astoria
Financial Corporation. (4)
10.27 Astoria Financial Corporation Amended and Restated Employment
Agreement with Arnold K. Greenberg dated as of January 1, 2000. (14)
10.28 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Arnold K. Greenberg, dated as of January 1,
2000. (14)
10.29 Astoria Financial Corporation Employment Agreement with Gary T.
McCann, dated as of December 1, 2003. (*)
10.30 Astoria Federal Savings and Loan Association Employment Agreement with
Gary T. McCann, dated as of December 1, 2003. (*)
10.31 Astoria Financial Corporation Amended and Restated Employment
Agreement with Monte N. Redman dated as of January 1, 2000. (14)
10.32 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Monte N. Redman, dated as of January 1,
2000. (14)
10.33 Astoria Financial Corporation Amended and Restated Employment
Agreement with Alan P. Eggleston dated as of January 1, 2000. (14)
10.34 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Alan P. Eggleston, dated as of January 1,
2000. (14)
10.35 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Josie Callari. (14)
10.36 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Robert J. DeStefano. (14)
117
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.37 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Frank E. Fusco. (14)
10.38 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Robert T. Volk. (14)
10.39 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Ira M. Yourman. (14)
10.40 Change of Control Severance Agreement, dated as of December 20, 2000,
by and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Harold R. Leistmann. (4)
10.41 Change of Control Severance Agreement, dated as of December 20, 2000,
by and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Brian T. Edwards. (4)
10.42 Retirement Medical and Dental Benefit Policy for Senior Officers. (8)
10.43 Form of Option Conversion Agreement by and between Astoria Financial
Corporation and Former Officer or Director of Long Island Bancorp,
Inc. dated September 30, 1998. (15)
10.44 Option Conversion Certificates of Robert J. Conway, Leo J. Waters and
Donald D. Wenk. (3)
10.45 Trust Agreement, dated as of January 31, 1995 between Astoria
Financial Corporation and State Street Bank and Trust Company. (*)
10.46 Option Conversion Agreement by and between Astoria Financial
Corporation and Gerard C. Keegan. (8)
12.1 Statement regarding computation of ratios. (*)
21.1 Subsidiaries of Astoria Financial Corporation. (*)
23 Consent of Independent Auditors. (*)
31.1 Certifications of Chief Executive Officer. (*)
31.2 Certifications of Chief Financial Officer. (*)
32.1 Written Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Pursuant to SEC rules, this exhibit will not be deemed filed for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section. (*)
118
Exhibit No. Identification of Exhibit
- ----------- -------------------------
32.2 Written Statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Pursuant to SEC rules, this exhibit will not be deemed filed for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section. (*)
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on
May 19, 2004, which will be filed with the SEC within 120 days from
December 31, 2003, is incorporated herein by reference.
- ----------
* Filed herewith. Copies of exhibits will be provided to shareholders upon
written request to Astoria Financial Corporation, Investor Relations
Department, One Astoria Federal Plaza, Lake Success, New York 11042 at a
charge of $0.10 per page. Copies are also available at no charge through
the SEC website at www.sec.gov/edgar/searchedgar/webusers.htm.
(1) Incorporated by reference to Astoria Financial Corporation's Current Report
on Form 8-K/A, dated April 2, 1998, filed with the Securities and Exchange
Commission on April 10, 1998 (File Number 000-22228), as amended by the
First Amendment, incorporated by reference to the Registrant's Current
Report on Form 8-K, dated May 29, 1998 (File Number 000-22228) and the
Second Amendment, incorporated by reference to the Registrant's Current
Report on Form 8-K, dated July 10, 1998 (File Number 000-22228).
(2) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with the
Securities and Exchange Commission on September 10, 1998 (File Number
000-22228).
(3) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 24, 1999 (File Number
000-22228).
(4) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 26, 2001 (File Number
000-22228).
(5) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form 8-K/A dated July 17, 1996, filed with the Securities and
Exchange Commission on July 23, 1996.
(6) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, filed with the
Securities and Exchange Commission on March 26, 2002 (File Number
000-22228).
(7) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed with
the Securities and Exchange Commission on November 12, 1999 (File Number
000-22228).
119
(8) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 25, 1998 (File Number
000-22228).
(9) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on February 18, 2000.
(10) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on December 6, 2002.
(11) Incorporated by reference to Form 424B3 Prospectus Supplement, filed with
the Securities and Exchange Commission on February 1, 2000.
(12) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 8, 1999 (File Number 000-22228).
(13) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 8, 2003 (File Number 001-11967).
(14) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 24, 2000 (File Number
000-22228).
(15) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form S-8, dated September 30, 1998, filed with the Securities
and Exchange Commission on September 30, 1998.
120
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................ 'SS'