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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
(Address of principal executive offices) (Zip Code)
(516) 327-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, October 31, 2004
- ----------------------- ----------------------------------------------
.01 Par Value 74,425,184
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at September 30, 2004
and December 31, 2003 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2004 and September 30, 2003 3
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 2004 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and September 30, 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4. Controls and Procedures 45
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 47
Item 6. Exhibits 47
Signatures 47
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
At At
(In Thousands, Except Share Data) September 30, 2004 December 31, 2003
- -------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 127,517 $ 173,828
Federal funds sold and repurchase agreements 126,535 65,926
Available-for-sale securities:
Encumbered 1,960,689 1,997,953
Unencumbered 497,495 657,039
- -------------------------------------------------------------------------------------------------------
2,458,184 2,654,992
Held-to-maturity securities, fair value of $6,242,312 and
$5,809,117, respectively:
Encumbered 5,148,046 5,508,864
Unencumbered 1,086,715 283,863
- -------------------------------------------------------------------------------------------------------
6,234,761 5,792,727
Federal Home Loan Bank of New York stock, at cost 144,950 213,450
Loans held-for-sale, net 17,132 23,023
Loans receivable:
Mortgage loans, net 12,308,297 12,248,772
Consumer and other loans, net 495,841 438,215
- -------------------------------------------------------------------------------------------------------
12,804,138 12,686,987
Allowance for loan losses (82,803) (83,121)
- -------------------------------------------------------------------------------------------------------
Loans receivable, net 12,721,335 12,603,866
Mortgage servicing rights, net 17,375 17,952
Accrued interest receivable 80,319 77,956
Premises and equipment, net 157,427 160,089
Goodwill 185,151 185,151
Bank owned life insurance 374,706 370,310
Other assets 129,471 122,324
- -------------------------------------------------------------------------------------------------------
Total assets $22,774,863 $22,461,594
=======================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,962,260 $ 2,959,015
Money market 1,018,371 1,232,771
NOW and demand deposit 1,533,928 1,493,410
Certificates of deposit 6,655,310 5,501,398
- -------------------------------------------------------------------------------------------------------
Total deposits 12,169,869 11,186,594
Reverse repurchase agreements 6,884,592 7,235,000
Federal Home Loan Bank of New York advances 1,577,000 1,924,000
Other borrowings, net 458,384 473,037
Mortgage escrow funds 149,271 108,635
Accrued expenses and other liabilities 149,737 137,797
- -------------------------------------------------------------------------------------------------------
Total liabilities 21,388,853 21,065,063
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 and -0- shares
issued and outstanding) -- --
Common stock, $.01 par value; (200,000,000 shares authorized;
110,996,592 shares issued; and 74,960,208 and 78,670,254
shares outstanding, respectively) 1,110 1,110
Additional paid-in capital 810,170 798,583
Retained earnings 1,591,452 1,481,546
Treasury stock (36,036,384 and 32,326,338 shares, at cost,
respectively) (957,154) (811,993)
Accumulated other comprehensive loss (34,510) (46,489)
Unallocated common stock held by ESOP (4,559,470 and 4,760,054
shares, respectively) (25,058) (26,226)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,386,010 1,396,531
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,774,863 $22,461,594
=======================================================================================================
See accompanying Notes to Consolidated Financial Statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
(In Thousands, Except Share Data) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 105,299 $ 110,340 $ 320,854 $ 355,135
Multi-family, commercial real estate and construction 56,617 53,419 164,882 149,084
Consumer and other loans 5,385 4,736 15,073 14,468
Mortgage-backed securities 92,677 71,276 264,430 253,537
Other securities 3,777 7,265 11,797 25,394
Federal funds sold and repurchase agreements 325 219 701 1,436
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 264,080 247,255 777,737 799,054
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 62,116 55,176 173,248 170,606
Borrowed funds 80,106 112,447 254,802 343,557
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 142,222 167,623 428,050 514,163
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 121,858 79,632 349,687 284,891
Provision for loan losses -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 121,858 79,632 349,687 284,891
- ---------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 15,316 15,086 43,619 45,678
Other loan fees 1,186 2,001 3,636 5,868
Net gain on sales of securities 2,279 4,500 4,651 14,665
Mortgage banking (loss) income, net (1,229) 5,954 3,904 6,014
Income from bank owned life insurance 4,208 4,929 12,886 15,177
Other 2,276 1,410 5,345 3,916
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,036 33,880 74,041 91,318
- ---------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 30,500 27,211 91,546 83,579
Occupancy, equipment and systems 15,943 15,094 48,434 44,868
Federal deposit insurance premiums 439 480 1,329 1,440
Advertising 1,652 1,501 5,062 4,743
Other 10,634 7,122 25,200 20,584
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 59,168 51,408 171,571 155,214
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 86,726 62,104 252,157 220,995
Income tax expense 28,619 20,503 83,136 72,108
- ---------------------------------------------------------------------------------------------------------------------
Net income 58,107 41,601 169,021 148,887
Preferred dividends declared -- (1,500) -- (4,500)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 58,107 $ 40,101 $ 169,021 $ 144,387
=====================================================================================================================
Basic earnings per common share $ 0.81 $ 0.53 $ 2.32 $ 1.87
=====================================================================================================================
Diluted earnings per common share $ 0.80 $ 0.53 $ 2.28 $ 1.85
=====================================================================================================================
Dividends per common share $ 0.25 $ 0.22 $ 0.75 $ 0.64
=====================================================================================================================
Basic weighted average common shares 71,381,938 75,376,835 72,745,430 77,079,828
Diluted weighted average common and common equivalent shares 72,485,580 76,352,144 73,980,086 77,854,686
See accompanying Notes to Consolidated Financial Statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2004
Unallocated
Accumulated Common
Additional Other Stock
Common Paid-in Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Total Stock Capital Earnings Stock Loss by ESOP
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,396,531 $1,110 $798,583 $1,481,546 $(811,993) $(46,489) $(26,226)
Comprehensive income:
Net income 169,021 -- -- 169,021 -- -- --
Other comprehensive income, net
of tax:
Net unrealized gain on securities 11,836 -- -- -- -- 11,836 --
Reclassification of net
unrealized loss on cash
flow hedge 143 -- -- -- -- 143 --
----------
Comprehensive income 181,000
----------
Common stock repurchased
(4,550,000 shares) (166,569) -- -- -- (166,569) -- --
Dividends on common stock ($0.75
per share) (54,610) -- -- (54,610) -- -- --
Exercise of stock options and
related tax benefit (839,954
shares issued) 21,939 -- 5,036 (4,505) 21,408 -- --
Amortization relating to allocation
of ESOP stock 7,719 -- 6,551 -- -- -- 1,168
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 $1,386,010 $1,110 $810,170 $1,591,452 $(957,154) $(34,510) $(25,058)
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
--------------------------
(In Thousands) 2004 2003
- ------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 169,021 $ 148,887
Adjustments to reconcile net income to net cash provided
by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 26,678 93,594
Net amortization on other securities, consumer and
other loans and borrowings 3,046 89
Net provision for real estate losses -- 4
Depreciation and amortization 10,024 9,237
Net gain on sales of loans and securities (7,488) (24,945)
Originations of loans held-for-sale (251,602) (543,574)
Proceeds from sales and principal payments of loans
held-for-sale 260,330 560,088
Amortization relating to allocation of ESOP stock 7,719 5,666
(Increase) decrease in accrued interest receivable (2,363) 8,053
Mortgage servicing rights amortization and valuation
allowance adjustments, net of capitalized amounts 577 4,470
Income from bank owned life insurance, net of
insurance proceeds received (4,396) (6,610)
(Increase) decrease in other assets (11,506) 17,736
Increase in accrued expenses and other liabilities 17,597 19,909
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 217,637 292,604
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (2,379,456) (4,376,136)
Loan purchases through third parties (746,388) (1,144,437)
Principal payments on loans receivable 2,985,557 5,229,628
Purchases of mortgage-backed securities
held-to-maturity (1,978,887) (4,119,277)
Purchases of mortgage-backed securities
available-for-sale (497,741) (3,680,394)
Purchases of other securities available-for-sale (508) (600)
Principal payments on mortgage-backed securities
held-to-maturity 1,524,586 4,151,290
Principal payments on mortgage-backed securities
available-for-sale 548,452 1,939,498
Proceeds from calls and maturities of other
securities held-to-maturity 5,044 68,264
Proceeds from calls and maturities of other
securities available-for-sale 355 132,736
Proceeds from sales of mortgage-backed securities
available-for-sale 147,497 829,680
Proceeds from sales of other securities
available-for-sale 22,692 50,057
Net redemptions of FHLB-NY stock 68,500 17,100
Proceeds from sales of real estate owned, net 2,093 1,502
Purchases of premises and equipment, net of proceeds
from sales (7,362) (10,533)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (305,566) (911,622)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 983,275 145,691
Net increase in borrowings with original terms of
three months or less 212,592 350,000
Proceeds from borrowings with original terms greater
than three months 2,400,000 800,000
Repayments of borrowings with original terms greater
than three months (3,330,000) (900,000)
Net increase in mortgage escrow funds 40,636 34,223
Common stock repurchased (166,569) (157,367)
Cash dividends paid to stockholders (54,610) (53,802)
Cash received for stock options exercised 16,903 6,767
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 102,227 225,512
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,298 (393,506)
Cash and cash equivalents at beginning of period 239,754 677,857
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,052 $ 284,351
==========================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 438,473 $ 513,472
==========================================================================================
Income taxes $ 67,579 $ 71,942
==========================================================================================
Additions to real estate owned $ 836 $ 986
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal, and AF Insurance Agency, Inc. As used in this quarterly report, "we,"
"us" and "our" refer to Astoria Financial Corporation and its consolidated
subsidiaries, including Astoria Federal and AF Insurance Agency, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
In addition to Astoria Federal and AF Insurance Agency, Inc., we have another
subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria
Financial Corporation for financial reporting purposes as a result of our
adoption of the Financial Accounting Standards Board, or FASB, revised
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," or FIN 46(R), effective January 1, 2004. 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, and common securities and using the proceeds to acquire
Junior Subordinated Debentures issued by us. The Junior Subordinated Debentures
total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029
and are the sole assets of Astoria Capital Trust I. The Junior Subordinated
Debentures 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
Junior Subordinated Debentures are prepayable at par value. Astoria Financial
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Astoria Capital Trust I. See Note 6 for further
discussion of the impact of our adoption of FIN 46(R).
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of September 30, 2004 and
December 31, 2003, our results of operations for the three and nine months ended
September 30, 2004 and 2003, changes in our stockholders' equity for the nine
months ended September 30, 2004 and our cash flows for the nine months ended
September 30, 2004 and 2003. In preparing the consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities for the consolidated statements of financial
condition as of September 30, 2004 and December 31, 2003, and amounts of
revenues and expenses in the consolidated statements of income for the three and
nine months ended September 30, 2004 and 2003. The results of operations for the
three and nine months ended September 30, 2004 are not necessarily indicative of
the results of operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission, or SEC.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2003 audited consolidated financial statements and related notes
included in our 2003 Annual Report on Form 10-K.
6
2. Earnings Per Share, or EPS
The following table is a reconciliation of basic and diluted EPS.
For the Three Months Ended September 30,
----------------------------------------
2004 2003
----------------- -----------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS
- -------------------------------------------------------------------------------------
Net income $58,107 $58,107 $41,601 $41,601
Preferred dividends declared -- -- (1,500) (1,500)
- -------------------------------------------------------------------------------------
Net income available to common shareholders $58,107 $58,107 $40,101 $40,101
=====================================================================================
Total weighted average basic
common shares outstanding 71,382 71,382 75,377 75,377
Effect of dilutive securities:
Options -- 1,104 -- 975
- -------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 71,382 72,486 75,377 76,352
=====================================================================================
Net earnings per common share $ 0.81 $ 0.80 $ 0.53 $ 0.53
=====================================================================================
For the Nine Months Ended September 30,
-----------------------------------------
2004 2003
------------------- -------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (2)
- ---------------------------------------------------------------------------------------
Net income $169,021 $169,021 $148,887 $148,887
Preferred dividends declared -- -- (4,500) (4,500)
- ---------------------------------------------------------------------------------------
Net income available to common shareholders $169,021 $169,021 $144,387 $144,387
=======================================================================================
Total weighted average basic
common shares outstanding 72,745 72,745 77,080 77,080
Effect of dilutive securities:
Options -- 1,235 -- 775
- ---------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 72,745 73,980 77,080 77,855
=======================================================================================
Net earnings per common share $ 2.32 $ 2.28 $ 1.87 $ 1.85
=======================================================================================
(1) Options to purchase 999,200 shares of common stock at prices between $36.25
per share and $36.60 per share were outstanding as of September 30, 2004,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the three months ended September 30, 2004.
(2) Options to purchase 532,384 shares of common stock at prices between $27.29
per share and $29.88 per share were outstanding as of September 30, 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 nine months ended September 30, 2003.
3. Mortgage Servicing Rights, or MSR
MSR are carried at amortized cost, and impairment, if any, is recognized through
a valuation allowance. MSR, at amortized cost, totaled $27.1 million at
September 30, 2004 and $29.6 million at December 31, 2003. The valuation
allowance totaled $9.7 million at September 30, 2004 and $11.6 million at
December 31, 2003. The cost of MSR is amortized over the estimated remaining
lives of the loans serviced. MSR amortization totaled $1.4 million for the three
months ended September 30, 2004 and $3.0 million for the three months ended
September 30,
7
2003. MSR amortization totaled $5.2 million for the nine months ended September
30, 2004 and $10.6 million for the nine months ended September 30, 2003. As of
September 30, 2004, estimated future MSR amortization through 2009, based on the
prepayment assumptions utilized in the September 30, 2004 MSR valuation, is as
follows: $1.4 million for the remainder of 2004, $5.4 million for 2005, $4.3
million for 2006, $3.4 million for 2007, $2.6 million for 2008 and $2.1 million
for 2009. Actual results will vary depending upon the level of repayments on the
loans currently serviced.
4. Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and EPS if we had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
(In Thousands, Except Per Share Data) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Net income:
As reported $58,107 $41,601 $169,021 $148,887
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,171 1,231 3,885 3,844
------- ------- -------- --------
Pro forma $56,936 $40,370 $165,136 $145,043
======= ======= ======== ========
Basic earnings per common share:
As reported $ 0.81 $ 0.53 $ 2.32 $ 1.87
======= ======= ======== ========
Pro forma $ 0.80 $ 0.52 $ 2.27 $ 1.82
======= ======= ======== ========
Diluted earnings per common share:
As reported $ 0.80 $ 0.53 $ 2.28 $ 1.85
======= ======= ======== ========
Pro forma $ 0.78 $ 0.51 $ 2.23 $ 1.81
======= ======= ======== ========
8
5. Pension Plans and Other Postretirement Benefits
The following table sets forth information regarding the components of net
periodic cost for our defined benefit pension plans and other postretirement
benefit plan.
Other Postretirement
Pension Benefits Benefits
-------------------------- --------------------------
For the Three Months Ended For the Three Months Ended
September 30, September 30,
-------------------------- --------------------------
(In Thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Service cost $ 834 $ 590 $128 $ 97
Interest cost 2,458 2,094 272 269
Expected return on plan assets (2,912) (2,177) -- --
Amortization of prior service cost 40 35 10 11
Recognized net actuarial loss (gain) 647 736 -- (41)
Amortization of transition asset (9) (23) -- --
- ----------------------------------------------------------------------------------------------
Net periodic cost $ 1,058 $ 1,255 $410 $336
==============================================================================================
Other Postretirement
Pension Benefits Benefits
------------------------- -------------------------
For the Nine Months Ended For the Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(In Thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------
Service cost $ 2,431 $ 1,770 $ 384 $ 291
Interest cost 7,327 6,282 815 807
Expected return on plan assets (8,736) (6,531) -- --
Amortization of prior service cost 120 105 31 33
Recognized net actuarial loss (gain) 1,894 2,208 -- (123)
Amortization of transition asset (26) (69) -- --
- --------------------------------------------------------------------------------------------
Net periodic cost $ 3,010 $ 3,765 $1,230 $1,008
============================================================================================
6. Impact of Accounting Standards and Interpretations
On September 30, 2004, the FASB issued Staff Position No. EITF Issue 03-1-1,
"Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
which delays the effective date for the measurement and recognition guidance
contained in Emerging Issues Task Force, or EITF, Issue No. 03-1. EITF Issue No.
03-1 provides guidance for evaluating whether an investment is
other-than-temporarily impaired and was originally effective for
other-than-temporary impairment evaluations made in reporting periods beginning
after June 15, 2004. The delay in the effective date for the measurement and
recognition guidance contained in paragraphs 10 through 20 of EITF Issue No.
03-1 does not suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The disclosure
guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. The
delay will be superseded concurrent with the final issuance of Staff Position
No. EITF Issue 03-1-a, which is expected to provide implementation guidance on
matters such as impairment evaluations for declines in fair value caused by
increases in interest rates and/or sector spreads. We do not expect the final
issuance of Staff Position No. EITF Issue 03-1-a to have a material impact on
our financial condition or results of operations.
On May 19, 2004, the FASB issued Staff Position No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," which is effective for the first interim or
annual period beginning after June 15, 2004. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or 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
9
benefit. Staff Position No. 106-2 requires employers who conclude their plans
were "actuarially equivalent" at December 8, 2003 and the Medicare Act's effects
are a "significant event" to account for the federal subsidy either on a
retroactive basis to January 1, 2004 or prospectively from the date of adoption
of Staff Position No. 106-2. If the Medicare Act's effects are not a
"significant event," they are not accounted for until the plan's next
measurement date following the adoption of Staff Position No. 106-2. If an
employer is not able to determine whether the plan is actuarially equivalent at
the date of adoption of Staff Position No. 106-2, it should monitor the plan and
assess actuarial equivalency as new information becomes available. In any case,
there are various new disclosure requirements associated with the adoption of
Staff Position No. 106-2. While we have determined our plan to be actuarially
equivalent, the Medicare Act's effects are not a significant event and,
therefore, will not be accounted for until the plan's next measurement date
which is December 31, 2004.
In December 2003, the FASB issued FIN 46(R). All public entities were required
to fully implement FIN 46(R) no later than the end of the first reporting period
ending after March 15, 2004. Effective January 1, 2004, we implemented FIN
46(R), which required us to deconsolidate our subsidiary Astoria Capital Trust
I. The impact of this deconsolidation on our financial statements is 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 redesignated two interest rate swap agreements as fair value
hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust
I. All prior period financial statements included herein have been restated to
reflect the deconsolidation.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. These statements may be identified by
the use of the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "outlook," "plan," "potential," "predict," "project," "should,"
"will," "would" and similar terms and phrases, including references to
assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors 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;
10
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.
Executive Summary
The following overview should be read in conjunction with our Management's
Discussion and Analysis of Financial Condition and Results of Operations, or
MD&A, in its entirety.
Astoria Financial Corporation is a Delaware corporation organized as the unitary
savings and loan association holding company of Astoria Federal and our primary
business is the operation of Astoria Federal. Astoria Federal's principal
business is attracting retail deposits from the general public and investing
those deposits, together with funds generated from operations, principal
repayments on loans and securities and borrowed funds, primarily in one-to-four
family mortgage loans, mortgage-backed securities, multi-family mortgage loans
and commercial real estate loans. 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.
As a premier Long Island 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. Additionally, we continue to
provide returns to shareholders through dividends and stock repurchases. We have
been successful in achieving this goal over the past several years and that
trend has continued into 2004.
During the nine months ended September 30, 2004, the national and local real
estate markets remained strong and continued to support new and existing home
sales. The increase in U.S. Treasury yields during the second half of 2003
resulted in a decrease in refinance activity and related cash flows during the
fourth quarter of 2003 which continued into 2004. During the first six months of
2004, interest rates throughout the U.S. Treasury yield curve increased. The
Federal Open Market Committee, or FOMC, raised short-term interest rates three
times (a total of 75 basis points) since the end of June 2004. While short-term
U.S. Treasury yields have shown somewhat similar increases in the 2004 third
quarter, medium- and long-term U.S. Treasury yields have decreased since June
30, 2004, resulting in a significant flattening of the
11
U.S. Treasury yield curve. During 2004, there has been interest rate volatility
within individual quarters which has resulted in volatility in cash flows and
refinance activity during 2004, although not to the magnitude which we had
experienced in 2003.
Total deposits increased during the nine months ended September 30, 2004. This
increase was primarily attributable to an increase in certificates of deposit as
a result of the success of our marketing campaigns which have focused on
attracting medium- and long-term certificates of deposit as part of our interest
rate risk management strategy to extend liabilities as well as to enable us to
reduce borrowings. We continue to experience intense competition for deposits,
particularly money market and checking accounts, from certain local competitors
who have offered these accounts at premium rates. We have not offered premium
rates on these accounts because we do not consider it a cost effective strategy.
Our total loan portfolio increased slightly during the nine months ended
September 30, 2004. This increase was primarily 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, and home
equity lines of credit. Partially offsetting the increase in our multi-family
and commercial real estate loan portfolio and home equity lines of credit was a
decrease in our one-to-four family mortgage loan portfolio where repayments
continued to outpace originations. Our total non-performing assets declined from
December 31, 2003 to September 30, 2004.
Our securities portfolio increased slightly from December 31, 2003 as we
continued to purchase mortgage-backed securities to effectively redeploy our
securities and excess mortgage cash flows, as well as a portion of the cash
flows from deposit growth. The majority of the deposit growth was utilized to
reduce our overall borrowings during the nine months ended September 30, 2004.
Net income for the three and nine months ended September 30, 2004 increased
compared to the three and nine months ended September 30, 2003. The increases in
net income were primarily due to increases in net interest income, partially
offset by decreases in non-interest income and increases in non-interest
expense. The increases in net interest income were primarily attributable to
decreases in interest expense on borrowings related to the refinancing of higher
cost borrowings which matured throughout 2003 and the first quarter of 2004 at
substantially lower rates. Interest income increased for the three months ended
September 30, 2004, compared to the same period in 2003, as a result of the
decrease in net premium amortization on our mortgage loan and mortgage-backed
securities portfolios, partially offset by the impact of reinvesting the
extraordinarily high levels of cash flows from repayments in these portfolios in
2003 in lower yielding assets as a result of the low interest rate environment.
Interest income decreased for the nine months ended September 30, 2004 compared
to the same period in 2003 as a result of the reinvestment of cash flows from
the mortgage loan and mortgage-backed securities portfolios in lower yielding
assets, partially offset by the decrease in net premium amortization on these
portfolios. The decreases in non-interest income relate primarily to decreases
in net gain on sales of securities and mortgage banking income, net. The
increases in non-interest expense relate primarily to increases in compensation
and benefits expense, occupancy, equipment and systems expense and other
expense.
In the current environment of low long-term interest rates, purchase mortgage
activity continues to remain strong. Accordingly, with continued mortgage loan
origination activity, we should
12
experience good "core business" balance sheet and net interest income growth.
However, the continued flattening of the U.S. Treasury yield curve will temper
near-term margin expansion. We expect to remain focused on building our core
businesses, with particular emphasis on growing our deposits and increasing our
one-to-four family, multi-family and commercial real estate loan portfolios.
Available Information
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the SEC.
Such reports are also available on the SEC's website at www.sec.gov.
Critical Accounting Policies
Note 1 to our audited consolidated financial statements for the year ended
December 31, 2003 included in our 2003 Annual Report on Form 10-K, as
supplemented by our Quarterly Reports on Form 10-Q for the quarters ended March
31, 2004 and June 30, 2004 and this report, contains a summary of our
significant accounting policies. Various elements of our accounting policies, by
their nature, are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments. Our policies with respect to the
methodologies used to determine the allowance for loan losses, the valuation of
MSR and judgments regarding goodwill and securities impairment are our most
critical accounting policies because they are important to the presentation of
our financial condition and results of operations, involve a higher degree of
complexity and require management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters. The
use of different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition. These critical
accounting policies and their application are reviewed quarterly with the Audit
Committee of our Board of Directors. The following description of these policies
should be read in conjunction with the corresponding section of our 2003 Annual
Report on Form 10-K.
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 SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance.
13
Individual loan loss reviews are completed quarterly for all classified loans.
Individual loan loss reviews are generally completed annually for multi-family,
commercial real estate and construction loans which exceed $2.5 million,
commercial business loans which exceed $200,000 at origination, one-to-four
family loans which exceed $1.0 million at origination and debt restructurings.
In addition, we generally review annually at least fifty percent of the
outstanding balances of multi-family, commercial real estate and construction
loans to single borrowers with concentrations in excess of $2.5 million.
The primary considerations in establishing specific valuation allowances are the
appraised value of a loan's underlying collateral and the loan's payment
history. Other current and anticipated economic conditions on which our specific
valuation allowance relies are the impact that national and/or local economic
and business conditions may have on borrowers, the impact that local real estate
markets may have on collateral values and the level and direction of interest
rates and their combined effect on real estate values and the ability of
borrowers to service debt. We also review all regulatory notices, bulletins and
memoranda with the purpose of identifying upcoming changes in regulatory
conditions which may impact our calculation of specific valuation allowances.
The Office of Thrift Supervision, or OTS, periodically reviews our specific
reserve methodology during regulatory examinations and any comments regarding
changes to reserves are considered by management in determining specific
allowances.
Pursuant to our policy, loan losses are charged-off in the period the loans, or
portions thereof, are deemed uncollectible. The determination of the loans on
which full collectibility is not reasonably assured, the estimates of the fair
value of the underlying collateral and the assessments of economic and
regulatory conditions are subject to assumptions and judgments by management.
Specific valuation allowances could differ materially as a result of changes in
these assumptions and judgments.
General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with our lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. The determination of the adequacy of the valuation
allowance takes into consideration a variety of factors. We segment our loan
portfolio into like categories by composition and size and perform analyses
against each category. These include historical loss experience and delinquency
levels and trends. We analyze our historical loan loss experience by category
(loan type) over 5, 10, and 12-year periods. Losses within each loan category
are stress tested by applying the highest level of charge-offs and the lowest
amount of recoveries as a percentage of the average portfolio balance during
those respective time horizons. The resulting allowance percentages are used as
an integral part of our judgment in developing estimated loss percentages to
apply to the portfolio. 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
14
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 and specific valuation allowances. Our analysis indicated that our
estimate of losses inherent in our one-to-four family, multi-family and
commercial real estate loan portfolios exceeded our actual charge-off history.
We believe that the general decline in medium- to long-term U.S. Treasury yields
beginning in 2000, coupled with the FOMC's series of interest rate cuts during
2001 and 2002, substantially improved the ability of borrowers to service debt
and was the predominant factor that caused our actual charge-off experience
between June 1, 2000 and June 30, 2002 to be less than had been estimated.
Similar to the industry in general, our historical charge-off experience was
higher prior to the dramatic decline in market rates. The significant
considerations for not lowering coverage percentages prior to the third quarter
of 2002 were: (1) the 2000-2002 economic downturn; (2) the unseasoned nature of
the portfolio; and (3) the lack of migration analysis for the loans folded into
the portfolio in connection with acquisitions completed in late 1997 and 1998.
While we have not changed our methodology for determining our general valuation
allowance as a result of the 2002 analysis, we have placed a greater emphasis on
charge-off experience in determining the way the allowance for loan losses is
distributed across the loan portfolio. As a result, in the third quarter of
2002, we adjusted our allowance coverage percentages for our portfolio segments.
Historically, multi-family, commercial real estate and construction 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. The change in our portfolio composition over the past
several years has not had a significant impact on our overall allowance for loan
losses since (1) the growth in our multi-family, commercial real estate and
construction loan portfolios was offset by a decline in our one-to-four family
portfolio and (2) we adjusted our allowance coverage percentages for our
portfolio segments as a result of the 2002 analysis. We will continue to
evaluate our charge-off experience in our multi-family, commercial real estate
and construction loan portfolios in determining whether any further adjustments
to the allowance coverage percentages are warranted.
Our loss experience in 2004 has been consistent with our experience over the
past two years and, as a result, our 2004 analyses did not result in any change
in our methodology for determining our general and specific valuation allowances
or our emphasis on the factors that we consider in establishing such allowances.
Accordingly, such analyses did not indicate that changes in our allowance
coverage percentages were required. Our allowance for loan losses to total loans
was 0.65% at September 30, 2004 and 0.66% at December 31, 2003. We believe our
current allowance for loan losses is adequate to reflect the risks inherent in
our loan portfolio.
As indicated above, actual results could differ from our estimates 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.
15
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses" and "Asset Quality" in this document and Part II,
Item 7, "MD&A," in our 2003 Annual Report on Form 10-K.
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.
Impairment exists if the carrying value of MSR exceeds the estimated fair value.
The estimated fair value of MSR is obtained through independent third party
valuations.
At September 30, 2004, our MSR, net, had an estimated fair value of $17.4
million and were valued based on expected future cash flows considering a
weighted average discount rate of 9.09%, a weighted average constant prepayment
rate on mortgages of 14.42% and a weighted average life of 5.0 years. 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. The decrease in
the weighted average constant prepayment rate from December 31, 2003 to
September 30, 2004 reflects the increase in interest rates from December 31,
2003 to September 30, 2004 and the projected decrease in future prepayments as
of September 30, 2004.
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. Assuming an
increase in interest rates of 100 basis points at September 30, 2004, the
estimated fair value of our MSR would have been $6.6 million greater. Assuming a
decrease in interest rates of 100 basis points at September 30, 2004, the
estimated fair value of our MSR would have been $7.0 million lower.
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 value of goodwill exceeds its implied fair value. As of September 30,
2004, 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.
On September 30, 2004 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 $1.27 billion, 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.
16
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. The fair values of our
securities, which are primarily fixed rate mortgage-backed securities at
September 30, 2004, are based on published or securities dealers' market values
and are affected by changes in interest rates. 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 September 30, 2004, we had 129
securities each of which had an amortized cost in excess of estimated fair
value. These securities had an estimated fair value totaling $4.60 billion and
had an unrealized loss totaling $87.3 million. At September 30, 2004, $1.09
billion of these securities, having an unrealized loss of $53.0 million, have
been in a continuous unrealized loss position for more than twelve months. We
determined the cause of all unrealized losses at September 30, 2004 to be
interest rate related, and, as such, have deemed the unrealized losses as
temporary. There were no securities write downs during the nine months ended
September 30, 2004. As previously discussed, further guidance on interest rate
related declines in fair value may be forthcoming pending the final issuance of
Staff Position No. EITF Issue 03-1-a. See Note 6, "Impact of Accounting
Standards and Interpretations," in Part I, Item 1, "Financial Statements
(Unaudited)."
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. The most significant
liquidity challenge we face is the variability in cash flows as a result of
mortgage refinance activity. Principal payments on loans and mortgage-backed
securities and proceeds from calls and maturities of other securities totaled
$5.06 billion for the nine months ended September 30, 2004 and $11.52 billion
for the nine months ended September 30, 2003. The decrease in loan and security
repayments was primarily the result of the decreased level of mortgage loan
refinance activity we experienced in 2004. The decreased level of mortgage loan
refinance activity is primarily the result of an increase in interest rates
during the second half of 2003 and the first nine months of 2004. Medium- and
long-term U.S. Treasury yields increased 103 basis points on average from June
30, 2003 to September 30, 2004. While the overall trend of rising interest rates
has reduced the level of refinance activity and related cash flows from what we
experienced during the first nine months of 2003, there has been significant
volatility in rates throughout 2004 which has resulted in varying cash flows and
refinance activity.
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 $217.6 million during the nine months ended September 30, 2004 and
$292.6 million during the nine months ended September 30, 2003. Deposits
increased $983.3 million during the nine months ended September 30, 2004 and
$145.7 million during the nine months ended September 30, 2003. The net
increases in deposits for the nine months ended September 30, 2004 and 2003
reflect our continued emphasis on attracting customer deposits through
competitive rates, extensive product offerings and quality service. As
previously discussed, the net increase in deposits for the nine months ended
September 30, 2004 is primarily attributable to an increase in certificates of
deposit as a result of the success of our marketing campaigns which have focused
on attracting medium- and long-term certificates of deposit. During the nine
months ended September 30, 2004, $2.94 billion of certificates of
17
deposit, with a weighted average rate of 2.21% and a weighted average maturity
at inception of fourteen months, matured and $3.93 billion of certificates of
deposit were issued or repriced, with a weighted average rate of 2.62% and a
weighted average maturity at inception of twenty months. In addition, despite
continued intense local competition for checking accounts, we have been
successful in growing our total NOW and demand deposit account balances during
the nine months ended September 30, 2004, primarily our business checking
deposits, due in large part to our concerted sales and marketing efforts,
including our PEAK sales process. Net borrowings decreased $712.1 million during
the nine months ended September 30, 2004 and increased $252.7 million during the
nine months ended September 30, 2003. The decrease in net borrowings during the
nine months ended September 30, 2004 reflects the repayment of certain high cost
borrowings as they matured. During the nine months ended September 30, 2004,
$3.33 billion in medium-term borrowings with a weighted average rate of 5.11%
matured, of which $2.40 billion were extended through new medium-term borrowings
with a weighted average rate of 2.71% and a weighted average original term of
3.3 years. All other borrowings that matured during the nine months ended
September 30, 2004 were either repaid or rolled over into short-term borrowings.
The increase in net borrowings during the nine months ended September 30, 2003
was primarily the result of additional medium-term borrowings entered into
during the first quarter 2003, during the low interest rate environment, to fund
asset growth in excess of deposit growth. The use of medium-term borrowings
helps protect against the impact on interest expense of future interest rate
increases.
Our primary use of funds is for the origination and purchase of mortgage loans.
Gross mortgage loans originated and purchased during the nine months ended
September 30, 2004 totaled $3.12 billion, of which $2.38 billion were
originations and $739.3 million were purchases. This compares to gross mortgage
loans originated and purchased during the nine months ended September 30, 2003
totaling $5.81 billion, of which $4.68 billion were originations and $1.13
billion were purchases. Total mortgage loans originated during the nine months
ended September 30, 2004 and 2003 include originations of loans held-for-sale
totaling $249.0 million and $540.8 million, respectively. The decrease in loan
originations and purchases for the nine months ended September 30, 2004 compared
to the nine months ended September 30, 2003 reflects the previously discussed
reduction in the level of mortgage refinance activity during 2004. Purchases of
mortgage-backed securities totaled $2.48 billion during the nine months ended
September 30, 2004 and $7.80 billion during the nine months ended September 30,
2003. The decrease in mortgage-backed securities purchases during the nine
months ended September 30, 2004 also reflects the decrease in cash flows
resulting from the reduction in refinance activity noted above.
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 $254.1 million at September 30, 2004, compared to $239.8 million
at December 31, 2003. Borrowings maturing over the next twelve months total
$2.40 billion, including $875.0 million of medium-term borrowings. We have the
flexibility to either repay or rollover these borrowings as they mature. In
addition, we have $2.38 billion in certificates of deposit maturing over the
next twelve months. We expect to retain or replace a significant portion of such
deposits based on our competitive pricing and historical experience.
18
The following table details our borrowing and certificate of deposit maturities
and their weighted average rates as of September 30, 2004:
Borrowings Certificates of Deposit
----------------- -----------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- ------------------------------------------------------------- -----------------
Contractual Maturity:
Fourth quarter 2004 (1) $1,523 1.91% $ -- --%
Fourth quarter 2004 105 5.98 818 3.14
First quarter 2005 300 3.26 835 3.48
Second quarter 2005 200 7.23 448 3.12
Third quarter 2005 270 3.01 282 2.37
------ ------
Total maturing in next twelve months 2,398 2.82 2,383 3.16
Thirteen to twenty-four months 1,324 2.56 2,300 3.39
Twenty-five to thirty-six months 1,720 2.95 979 4.28
Thirty-seven to forty-eight months (2) 2,700 4.83 559 3.86
Forty-nine to sixty months 400 3.17 281 4.13
Over five years 378 7.11 153 5.08
------ ------
Total $8,920 3.61 $6,655 3.55
====== ======
(1) Overnight and other short-term borrowings.
(2) Includes $2.18 billion of borrowings which are callable by the counterparty
within the next twelve months.
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 through our wholly-owned subsidiary, Astoria Capital
Trust I, and senior debt. Holding company debt obligations are included in other
borrowings. 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. We continue to receive periodic capital distributions from
Astoria Federal, consistent with applicable laws and regulations.
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. Astoria Financial Corporation paid interest on its
debt obligations totaling $21.1 million during the nine months ended September
30, 2004. Our payment of dividends and repurchases of our common stock totaled
$221.2 million during the nine months ended September 30, 2004. 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.
During the nine months ended September 30, 2004, Astoria Federal paid dividends
to Astoria Financial Corporation totaling $300.0 million.
Stockholders' equity decreased to $1.39 billion at September 30, 2004, from
$1.40 billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $166.6 million and dividends declared of
$54.6 million. These decreases were partially offset by net income of $169.0
million, the effect of stock options exercised and related tax benefit of $21.9
million, a decrease in accumulated other comprehensive loss, net of tax, of
$12.0 million, which was primarily due to the net increase in the fair value of
our securities available-for-sale, and the amortization of the allocated portion
of shares held by the employee stock ownership plan, or ESOP, of $7.7 million.
19
On September 1, 2004, we paid a quarterly cash dividend of $0.25 per share on
shares of our common stock outstanding as of the close of business on August 16,
2004 totaling $17.8 million. On October 20, 2004, we declared a quarterly cash
dividend of $0.25 per share on shares of our common stock payable on December 1,
2004 to stockholders of record as of the close of business on November 15, 2004.
During the quarter ended September 30, 2004, we completed our ninth stock
repurchase plan, which was approved by our Board of Directors on October 16,
2002. This plan authorized 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. On
May 19, 2004, our Board of Directors approved our tenth stock repurchase plan
authorizing the purchase, at management's discretion, of 8,000,000 shares, or
approximately 10% of our common stock then outstanding, over a two year period
in open-market or privately negotiated transactions. Stock repurchases under our
tenth stock repurchase plan commenced immediately following the completion of
the ninth stock repurchase plan on July 9, 2004. Under these plans, during the
nine months ended September 30, 2004, we repurchased 4,550,000 shares of our
common stock at an aggregate cost of $166.6 million, of which 1,941,800 shares
were acquired pursuant to our tenth stock repurchase plan. For further
information on our common stock repurchases, see Part II, Item 2, "Unregistered
Sales of Equity Securities and Use of Proceeds."
At September 30, 2004, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.85%, leverage
capital ratio of 6.85% and total risk-based capital ratio of 14.16%. 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 in order 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. Such instruments primarily
include lending commitments and derivative instruments.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Derivative instruments may 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.
Additionally, in connection with our mortgage banking activities, we have
commitments to fund loans held-for-sale and commitments to sell loans which are
considered derivative instruments. Commitments to sell loans totaled $57.5
million at September 30, 2004. The fair values of our mortgage banking
derivative instruments are immaterial to our financial condition and results of
operations. We also have contractual obligations related to operating lease
commitments.
20
The following table details our contractual obligations as of September 30,
2004.
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 $7,397,384 $ 875,000 $3,044,000 $3,100,000 $378,384
Commitments to originate and purchase loans (1) 637,136 637,136 -- -- --
Commitments to fund unused lines of credit (2) 384,936 384,936 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total $8,419,456 $1,897,072 $3,044,000 $3,100,000 $378,384
====================================================================================================================
(1) Commitments to originate and purchase loans include commitments to
originate loans held-for-sale.
(2) Unused lines of credit relate primarily to home equity lines of credit.
In addition to the contractual obligations previously discussed, we have
contingent liabilities related to assets sold with recourse and standby letters
of credit. The principal balance of loans sold with recourse amounted to $587.4
million at September 30, 2004. The carrying amount of our liability for loans
sold with recourse totaled $276,000 at September 30, 2004. We estimate the
liability for loans sold with recourse based on an analysis of our loss
experience related to similar loans sold with recourse. 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.
The outstanding option balance on the two agreements totaled $36.8 million at
September 30, 2004. Outstanding standby letters of credit totaled $5.0 million
at September 30, 2004.
For further information regarding our off-balance sheet arrangements and
contractual obligations, see Part II, Item 7, "MD&A," in our 2003 Annual Report
on Form 10-K.
21
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at September 30, 2004 and
December 31, 2003.
At September 30, 2004 At December 31, 2003
-----------------------------------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- -----------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,685,893 68.24% $ 8,971,048 71.13%
Multi-family 2,493,543 19.59 2,230,414 17.69
Commercial real estate 951,598 7.48 880,296 6.98
Construction 111,320 0.87 99,046 0.79
- -----------------------------------------------------------------------------------
Total mortgage loans 12,242,354 96.18 12,180,804 96.59
- -----------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 444,844 3.49 386,846 3.07
Commercial 21,413 0.17 21,937 0.17
Lines of Credit, Overdraft 12,103 0.10 12,963 0.10
Other 7,981 0.06 8,400 0.07
- -----------------------------------------------------------------------------------
Total consumer and other loans 486,341 3.82 430,146 3.41
- -----------------------------------------------------------------------------------
Total loans (gross) 12,728,695 100.00% 12,610,950 100.00%
Net unamortized premiums and
deferred loan costs 75,443 76,037
- -----------------------------------------------------------------------------------
Total loans 12,804,138 12,686,987
Allowance for loan losses (82,803) (83,121)
- -----------------------------------------------------------------------------------
Total loans, net $12,721,335 $12,603,866
===================================================================================
22
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed and other securities available-for-sale and held-to-maturity at
September 30, 2004 and December 31, 2003.
At September 30, 2004 At December 31, 2003
-------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 130,821 $ 134,956 $ 161,199 $ 166,724
REMICs and CMOs:
Agency issuance (1) 2,157,060 2,114,502 2,297,884 2,227,851
Non-agency issuance 84,435 80,495 109,669 103,740
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,372,316 2,329,953 2,568,752 2,498,315
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 1,988 1,995 1,738 1,767
FNMA and FHLMC preferred stock 140,015 124,793 140,015 131,361
Corporate debt and other securities 1,445 1,443 21,991 23,549
- ----------------------------------------------------------------------------------------------
Total other securities 143,448 128,231 163,744 156,677
- ----------------------------------------------------------------------------------------------
Total securities available-for-sale $2,515,764 $2,458,184 $2,732,496 $2,654,992
==============================================================================================
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 10,256 $ 10,897 $ 14,345 $ 15,329
REMICs and CMOs:
Agency issuance (1) 5,659,545 5,663,757 4,958,633 4,974,316
Non-agency issuance 522,980 525,136 772,728 772,021
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 6,192,781 6,199,790 5,745,706 5,761,666
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of states and
political subdivisions 31,993 31,993 37,038 37,038
Corporate debt securities 9,987 10,529 9,983 10,413
- ----------------------------------------------------------------------------------------------
Total other securities 41,980 42,522 47,021 47,451
- ----------------------------------------------------------------------------------------------
Total securities held-to-maturity $6,234,761 $6,242,312 $5,792,727 $5,809,117
==============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
23
Comparison of Financial Condition as of September 30, 2004 and December 31, 2003
and Operating Results for the Three and Nine Months Ended September 30, 2004 and
2003
Financial Condition
Total assets increased $313.3 million to $22.77 billion at September 30, 2004,
from $22.46 billion at December 31, 2003. The primary reasons for the increase
in total assets were the increases in loans receivable and mortgage-backed
securities.
Mortgage loans increased $59.5 million to $12.31 billion at September 30, 2004,
from $12.25 billion at December 31, 2003. This increase was primarily due to
increases in our multi-family and commercial real estate mortgage loan
portfolios, partially offset by a decrease in our one-to-four family mortgage
loan portfolio. Gross mortgage loans originated and purchased during the nine
months ended September 30, 2004 totaled $3.12 billion, of which $2.38 billion
were originations and $739.3 million were purchases. This compares to gross
mortgage loans originated and purchased during the nine months ended September
30, 2003 totaling $5.81 billion, of which $4.68 billion were originations and
$1.13 billion were purchases. Total mortgage loans originated during the nine
months ended September 30, 2004 and 2003 include originations of loans
held-for-sale totaling $249.0 million and $540.8 million, respectively. Mortgage
loan repayments decreased to $2.80 billion for the nine months ended September
30, 2004, from $5.06 billion for the nine months ended September 30, 2003. The
decreases in the levels of mortgage loan originations, purchases and repayments
reflect the decline in refinance activity previously discussed.
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 68.2% of our total loan portfolio at
September 30, 2004, decreased $285.2 million to $8.69 billion at September 30,
2004, from $8.97 billion at December 31, 2003. Although we have experienced a
decline in refinance activity, repayments have continued to outpace originations
and purchases in our one-to-four family mortgage loan portfolio for the nine
months ended September 30, 2004.
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 mortgage loan
originations. Our multi-family mortgage loan portfolio increased $263.1 million
to $2.49 billion at September 30, 2004, from $2.23 billion at December 31, 2003.
Our commercial real estate loan portfolio increased $71.3 million to $951.6
million at September 30, 2004, from $880.3 million at December 31, 2003.
Multi-family and commercial real estate loan originations totaled $863.8 million
for the nine months ended September 30, 2004 and $1.21 billion for the nine
months ended September 30, 2003. 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 and the average
loan-to-value ratio, based on current principal balance and original appraised
value, continues to be less than 65%. Prepayment activity within our
multi-family and commercial real estate loan portfolio is generally 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 portfolio of consumer and other loans increased $57.6 million to $495.8
million at September 30, 2004, from $438.2 million at December 31, 2003. This
increase is primarily in
24
home equity lines of credit as a result of the continued strong housing market
and the low interest rate environment.
Mortgage-backed securities increased $278.7 million to $8.52 billion at
September 30, 2004, from $8.24 billion at December 31, 2003. This increase was
primarily the result of purchases of fixed rate real estate mortgage investment
conduit, or REMIC, and collateralized mortgage obligation, or CMO,
mortgage-backed securities of $2.48 billion and a decrease of $28.1 million in
the net unrealized loss on our available-for-sale portfolio, partially offset by
principal payments received of $2.07 billion and sales of $145.2 million. We
continue to purchase mortgage-backed securities to effectively redeploy our
securities and excess mortgage cash flows in addition to cash flows from deposit
growth.
Federal Home Loan Bank of New York, or FHLB-NY, stock decreased $68.5 million to
$145.0 million primarily due to a reduction in FHLB-NY borrowings. Other
securities decreased $33.5 million to $170.2 million at September 30, 2004, from
$203.7 million at December 31, 2003, primarily due to sales of $20.3 million and
an increase of $8.2 million in the net unrealized loss on our available-for-sale
portfolio.
Deposits increased $983.3 million to $12.17 billion at September 30, 2004, from
$11.19 billion at December 31, 2003. The increase in deposits was primarily due
to an increase of $1.16 billion in certificates of deposit to $6.66 billion at
September 30, 2004 and an increase of $40.5 million in NOW and demand deposit
accounts to $1.53 billion at September 30, 2004, partially offset by a decrease
of $214.4 million in our money market accounts to $1.02 billion at September 30,
2004. The increase in our certificates of deposit was primarily the result of
the success of our marketing campaigns which have focused on attracting medium-
and long-term certificates of deposit as part of our interest rate risk
management strategy to extend liabilities as well as to enable us to reduce
borrowings, as previously discussed. The decrease in our money market accounts
is attributable to continued intense competition for these accounts. Certain
local competitors have continued to offer premium rates for money market and
checking accounts. We have not offered premium rates on these accounts because
we do not consider it a cost effective strategy. However, despite continued
intense competition for checking accounts, we have been successful in increasing
our total NOW and demand deposit account balances during the nine months ended
September 30, 2004, primarily our business checking deposits, due in large part
to our concerted sales and marketing efforts, including our PEAK sales process.
Reverse repurchase agreements decreased $350.4 million to $6.88 billion at
September 30, 2004, from $7.24 billion at December 31, 2003. FHLB-NY advances
decreased $347.0 million to $1.58 billion at September 30, 2004, from $1.92
billion at December 31, 2003. The decrease in borrowings reflects the repayment
of certain high cost borrowings that matured. As previously discussed, during
the nine months ended September 30, 2004, $3.33 billion in medium-term
borrowings matured, of which $2.40 billion were extended through new medium-term
borrowings and the remainder were either repaid or rolled over into short-term
borrowings.
Stockholders' equity decreased to $1.39 billion at September 30, 2004, from
$1.40 billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $166.6 million and dividends declared of
$54.6 million. These decreases were partially offset by net income of $169.0
million, the effect of stock options exercised and related tax benefit of $21.9
million, a decrease in accumulated other comprehensive loss, net
25
of tax, of $12.0 million, which was primarily due to the net increase in the
fair value of our securities available-for-sale, and the amortization of the
allocated portion of shares held by the ESOP of $7.7 million.
Results of Operations
General
Net income for the three months ended September 30, 2004 increased $16.5 million
to $58.1 million, from $41.6 million for the three months ended September 30,
2003. Diluted earnings per common share totaled $0.80 per share for the three
months ended September 30, 2004 and $0.53 per share for the three months ended
September 30, 2003. Return on average assets increased to 1.02% for the three
months ended September 30, 2004, from 0.74% for the three months ended September
30, 2003. Return on average stockholders' equity increased to 16.82% for the
three months ended September 30, 2004, from 11.35% for the three months ended
September 30, 2003. Return on average tangible stockholders' equity, which
represents average stockholders' equity less average goodwill, increased to
19.42% for the three months ended September 30, 2004, from 12.99% for the three
months ended September 30, 2003.
Net income for the nine months ended September 30, 2004 increased $20.1 million
to $169.0 million, from $148.9 million for the nine months ended September 30,
2003. Diluted earnings per common share totaled $2.28 per share for the nine
months ended September 30, 2004 and $1.85 per share for the nine months ended
September 30, 2003. Return on average assets increased to 1.00% for the nine
months ended September 30, 2004, from 0.88% for the nine months ended September
30, 2003. Return on average stockholders' equity increased to 16.15% for the
nine months ended September 30, 2004, from 13.13% for the nine months ended
September 30, 2003. Return on average tangible stockholders' equity increased to
18.62% for the nine months ended September 30, 2004, from 14.96% for the nine
months ended September 30, 2003. The increases in the returns on average assets
for the three and nine months ended September 30, 2004 are primarily due to the
increases in net income. The increases in the returns on average stockholders'
equity and average tangible stockholders' equity for the three and nine months
ended September 30, 2004 are due to the increases in net income, coupled with
the decreases in the average balances of stockholders' equity for the three and
nine months ended September 30, 2004 compared to the three and nine months ended
September 30, 2003.
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 3,
"Quantitative and Qualitative Disclosures About Market Risk," for further
discussion of the potential impact of changes in interest rates on our results
of operations.
For the three months ended September 30, 2004, net interest income increased
$42.3 million to $121.9 million, from $79.6 million for the three months ended
September 30, 2003. The net interest margin increased to 2.25% for the three
months ended September 30, 2004, from 1.52% for the three months ended September
30, 2003. The increases in net interest income
26
and the net interest margin for the three months ended September 30, 2004 were
primarily the result of a decrease in interest expense, coupled with an increase
in interest income. The decrease in interest expense was attributable to a
decrease in our cost of funds, which is primarily due to the repayment and
refinancing of various higher cost borrowings. The increase in interest income
was primarily due to the increase in the average balance of interest-earning
assets, primarily in our multi-family, commercial real estate and construction
loans and mortgage-backed securities, coupled with an increase in the yield on
interest-earning assets primarily as a result of a reduction in net premium
amortization on mortgage-backed securities and mortgage loans. Net premium
amortization on our mortgage-backed securities and mortgage loan portfolios
decreased $29.0 million to $5.7 million for the three months ended September 30,
2004, from $34.7 million for the three months ended September 30, 2003,
primarily due to the reduction in repayment levels during 2004, as well as the
reduced amount of unamortized net premium remaining in our mortgage-backed
securities portfolio. The benefit from the reduction in net premium amortization
was partially offset by a reduction in coupon rates resulting from the
extraordinarily high levels of repayments on our mortgage-backed securities and
one-to-four family mortgage loan portfolios, primarily during the first nine
months of 2003, which were reinvested in assets at lower rates.
The average balance of net interest-earning assets increased $372.0 million to
$662.5 million for the three months ended September 30, 2004, from $290.5
million for the three months ended September 30, 2003. The increase in the
average balance of net interest-earning assets was the result of an increase of
$741.7 million in the average balance of total interest-earning assets to $21.70
billion for the three months ended September 30, 2004, from $20.96 billion for
the three months ended September 30, 2003, partially offset by an increase of
$369.7 million in the average balance of total interest-bearing liabilities to
$21.04 billion for the three months ended September 30, 2004, from $20.67
billion for the three months ended September 30, 2003. Also contributing to the
increase in the average balance of net interest-earning assets was the decrease
in non-interest-earning assets primarily as a result of the reduction in the
monthly mortgage-backed securities principal payments receivable due to the
reduction in the mortgage-backed securities cash flow. The net interest rate
spread increased to 2.17% for the three months ended September 30, 2004, from
1.48% for the three months ended September 30, 2003, primarily due to a decrease
in the average cost of interest-bearing liabilities, coupled with an increase in
the average yield on interest-earning assets. The average cost of
interest-bearing liabilities decreased to 2.70% for the three months ended
September 30, 2004, from 3.24% for the three months ended September 30, 2003.
The average yield on interest-earning assets increased to 4.87% for the three
months ended September 30, 2004, from 4.72% for the three months ended September
30, 2003.
For the nine months ended September 30, 2004, net interest income increased
$64.8 million to $349.7 million, from $284.9 million for the nine months ended
September 30, 2003. The net interest margin increased to 2.17% for the nine
months ended September 30, 2004, from 1.79% for the nine months ended September
30, 2003. The increase in net interest income and the net interest margin for
the nine months ended September 30, 2004 were primarily the result of a decrease
in interest expense, partially offset by a decrease in interest income. The
decrease in interest expense was attributable to a decrease in our cost of
funds, which is primarily due to the repayment and refinancing of various higher
cost borrowings. The decrease in interest income was primarily due to the
decrease in the yield on interest-earning assets as a result of the
extraordinarily high level of mortgage loan and mortgage-backed securities
repayments we experienced throughout 2003 resulting in reinvestment in assets at
lower rates. Partially offsetting the negative impact of the reinvestment in
assets at lower rates
27
was an increase in the average balance of total interest-earning assets and a
reduction in net premium amortization on mortgage-backed securities and mortgage
loans. Net premium amortization on our mortgage-backed securities and mortgage
loan portfolios decreased $66.9 million to $26.7 million for the nine months
ended September 30, 2004, from $93.6 million for the nine months ended September
30, 2003.
The average balance of net interest-earning assets increased $276.7 million to
$637.6 million for the nine months ended September 30, 2004, from $360.9 million
for the nine months ended September 30, 2003. The increase in the average
balance of net interest-earning assets was primarily the result of an increase
of $283.9 million in the average balance of total interest-earning assets to
$21.46 billion for the nine months ended September 30, 2004, from $21.17 billion
for the nine months ended September 30, 2003, slightly offset by an increase in
the average balance of total interest-bearing liabilities to $20.82 billion for
the nine months ended September 30, 2004, from $20.81 billion for the nine
months ended September 30, 2003. Also contributing to the increase in the
average balance of net interest-earning assets was the decrease in
non-interest-earning assets previously discussed. The net interest rate spread
increased to 2.09% for the nine months ended September 30, 2004, from 1.74% for
the nine months ended September 30, 2003, primarily due to a decrease in the
average cost of interest-bearing liabilities, partially offset by a decrease in
the average yield on interest-earning assets. The average cost of
interest-bearing liabilities decreased to 2.74% for the nine months ended
September 30, 2004, from 3.29% for the nine months ended September 30, 2003. The
average yield on interest-earning assets decreased to 4.83% for the nine months
ended September 30, 2004, from 5.03% for the nine months ended September 30,
2003.
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 tables set forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the three and
nine months ended September 30, 2004 and 2003. 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.
28
For the Three Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,717,579 $105,299 4.83% $ 8,944,114 $110,340 4.93%
Multi-family, commercial
real estate and construction 3,490,790 56,617 6.49 2,857,110 53,419 7.48
Consumer and other loans (1) 487,294 5,385 4.42 413,519 4,736 4.58
----------- -------- ----------- --------
Total loans 12,695,663 167,301 5.27 12,214,743 168,495 5.52
Mortgage-backed securities (2) 8,578,352 92,677 4.32 8,179,267 71,276 3.49
Other securities (2) (3) 335,381 3,777 4.50 477,432 7,265 6.09
Federal funds sold and
repurchase agreements 94,472 325 1.38 90,642 219 0.97
----------- -------- ----------- --------
Total interest-earning assets 21,703,868 264,080 4.87 20,962,084 247,255 4.72
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 837,763 1,297,335
----------- -----------
Total assets $22,726,782 $22,444,570
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,990,457 3,017 0.40 $ 2,940,389 3,127 0.43
Money market 1,058,120 1,473 0.56 1,348,441 1,986 0.59
NOW and demand deposit 1,545,845 233 0.06 1,529,299 292 0.08
Certificates of deposit 6,449,625 57,393 3.56 5,425,815 49,771 3.67
----------- -------- ----------- --------
Total deposits 12,044,047 62,116 2.06 11,243,944 55,176 1.96
Borrowed funds 8,997,278 80,106 3.56 9,427,655 112,447 4.77
----------- -------- ----------- --------
Total interest-bearing liabilities 21,041,325 142,222 2.70 20,671,599 167,623 3.24
-------- --------
Non-interest-bearing liabilities 303,582 306,355
----------- -----------
Total liabilities 21,344,907 20,977,954
Stockholders' equity 1,381,875 1,466,616
----------- -----------
Total liabilities and stockholders'
equity $22,726,782 $22,444,570
=========== ===========
Net interest income/net interest
rate spread (4) $121,858 2.17% $ 79,632 1.48%
======== ==== ======== ====
Net interest-earning assets/net
interest margin (5) $ 662,543 2.25% $ 290,485 1.52%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.03x 1.01x
=========== ===========
- ----------
(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 FHLB-NY 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.
29
For the Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,872,991 $320,854 4.82% $ 8,994,985 $355,135 5.26%
Multi-family, commercial
real estate and construction 3,365,136 164,882 6.53 2,634,045 149,084 7.55
Consumer and other loans (1) 468,116 15,073 4.29 403,689 14,468 4.78
----------- -------- ----------- --------
Total loans 12,706,243 500,809 5.26 12,032,719 518,687 5.75
Mortgage-backed securities (2) 8,297,090 264,430 4.25 8,423,400 253,537 4.01
Other securities (2) (3) 370,374 11,797 4.25 550,399 25,394 6.15
Federal funds sold and
repurchase agreements 84,662 701 1.10 167,965 1,436 1.14
----------- -------- ----------- --------
Total interest-earning assets 21,458,369 777,737 4.83 21,174,483 799,054 5.03
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 874,952 1,266,594
----------- -----------
Total assets $22,518,472 $22,626,228
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,984,602 8,950 0.40 $ 2,897,358 10,243 0.47
Money market 1,121,802 4,591 0.55 1,450,089 8,198 0.75
NOW and demand deposit 1,523,215 684 0.06 1,469,279 1,304 0.12
Certificates of deposit 6,038,738 159,023 3.51 5,389,094 150,861 3.73
----------- -------- ----------- --------
Total deposits 11,668,357 173,248 1.98 11,205,820 170,606 2.03
Borrowed funds 9,152,391 254,802 3.71 9,607,802 343,557 4.77
----------- -------- ----------- --------
Total interest-bearing liabilities 20,820,748 428,050 2.74 20,813,622 514,163 3.29
-------- --------
Non-interest-bearing liabilities 302,456 300,859
----------- -----------
Total liabilities 21,123,204 21,114,481
Stockholders' equity 1,395,268 1,511,747
----------- -----------
Total liabilities and stockholders'
equity $22,518,472 $22,626,228
=========== ===========
Net interest income/net interest
rate spread (4) $349,687 2.09% $284,891 1.74%
======== ==== ======== ====
Net interest-earning assets/net
interest margin (5) $ 637,621 2.17% $ 360,861 1.79%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.03x 1.02x
=========== ===========
- ----------
(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 FHLB-NY 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.
30
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Three Months Ended September 30, 2004 Nine Months Ended September 30, 2004
Compared to Compared to
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
----------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
----------------------------------------------------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $(2,799) $ (2,242) $ (5,041) $ (4,783) $(29,498) $(34,281)
Multi-family, commercial
real estate and construction 10,860 (7,662) 3,198 37,732 (21,934) 15,798
Consumer and other loans 819 (170) 649 2,175 (1,570) 605
Mortgage-backed securities 3,643 17,758 21,401 (3,893) 14,786 10,893
Other securities (1,858) (1,630) (3,488) (6,993) (6,604) (13,597)
Federal funds sold and repurchase
agreements 9 97 106 (687) (48) (735)
- --------------------------------------------------------------------------------------------------------------------
Total 10,674 6,151 16,825 23,551 (44,868) (21,317)
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 65 (175) (110) 295 (1,588) (1,293)
Money market (415) (98) (513) (1,656) (1,951) (3,607)
NOW and demand deposit 4 (63) (59) 48 (668) (620)
Certificates of deposit 9,152 (1,530) 7,622 17,422 (9,260) 8,162
Borrowed funds (4,932) (27,409) (32,341) (15,603) (73,152) (88,755)
- --------------------------------------------------------------------------------------------------------------------
Total 3,874 (29,275) (25,401) 506 (86,619) (86,113)
- --------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 6,800 $ 35,426 $ 42,226 $ 23,045 $ 41,751 $ 64,796
====================================================================================================================
Interest Income
Interest income for the three months ended September 30, 2004 increased $16.8
million to $264.1 million, from $247.3 million for the three months ended
September 30, 2003. This increase was primarily the result of an increase of
$741.7 million in the average balance of interest-earning assets to $21.70
billion for the three months ended September 30, 2004, from $20.96 billion for
the three months ended September 30, 2003, coupled with an increase in the
average yield on interest-earning assets to 4.87% for the three months ended
September 30, 2004, from 4.72% for the three months ended September 30, 2003.
The increase in the average balance of interest-earning assets was primarily due
to the increases in the average balances of multi-family, commercial real estate
and construction loans, mortgage-backed securities and consumer and other loans,
partially offset by decreases in the average balances of one-to-four family
mortgage loans and other securities. The increase in the average yield on
interest-earning assets was due to an increase in the average yield on
mortgage-backed securities, partially offset by decreases in the average yields
on substantially all other asset categories. The increase in the average yield
on mortgage-backed securities was primarily the result of the significant
decrease in net premium amortization as a result of the reduction in refinance
activity in 2004, as well as
31
the reduced amount of unamortized net premium remaining in our portfolio. The
benefit from the reduction in net premium amortization was partially offset by a
reduction in coupon rates on our mortgage-backed securities and one-to-four
family mortgage loan portfolios, as previously discussed, coupled with the
significant growth in the multi-family, commercial real estate and construction
loan portfolio in a relatively low interest rate environment.
Interest income on one-to-four family mortgage loans decreased $5.0 million to
$105.3 million for the three months ended September 30, 2004, from $110.3
million for the three months ended September 30, 2003, which was primarily the
result of a decrease of $226.5 million in the average balance of such loans,
coupled with a decrease in the average yield to 4.83% for the three months ended
September 30, 2004, from 4.93% for the three months ended September 30, 2003.
The decrease in the average balance of one-to-four family mortgage loans is the
result of repayments outpacing originations and purchases of one-to-four family
mortgage loans. The decrease in the average yield on one-to-four family mortgage
loans reflects the impact of the low interest rate environment as higher rate
loans were repaid and replaced with lower yielding new originations and
purchases throughout most of 2003 and 2004. However, the yield has been
positively impacted by a reduction in mortgage loan premium amortization as a
result of the decreased refinance activity during 2004 as compared to 2003.
Interest income on multi-family, commercial real estate and construction loans
increased $3.2 million to $56.6 million for the three months ended September 30,
2004, from $53.4 million for the three months ended September 30, 2003, which
was primarily the result of an increase of $633.7 million in the average balance
of such loans, partially offset by a decrease in the average yield to 6.49% for
the three months ended September 30, 2004, from 7.48% for the three months ended
September 30, 2003. The increase in the average balance of multi-family,
commercial real estate and construction loans reflects our continued emphasis on
originations of such loans, coupled with the fact that repayment activity within
this portfolio is generally 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
significant growth in this portfolio in the relatively low interest rate
environment, coupled with a $1.6 million decrease in prepayment penalties in the
2004 third quarter compared to the 2003 third quarter.
Interest income on mortgage-backed securities increased $21.4 million to $92.7
million for the three months ended September 30, 2004, from $71.3 million for
the three months ended September 30, 2003. This increase was primarily the
result of an increase in the average yield to 4.32% for the three months ended
September 30, 2004, from 3.49% for the three months ended September 30, 2003,
coupled with an increase of $399.1 million in the average balance of the
portfolio. The increase in the average yield on mortgage-backed securities
reflects the reduction in net premium amortization during 2004, partially offset
by the impact of the substantial turnover we experienced in this portfolio
during 2003 as higher yielding securities paid off and were replaced with lower
yielding securities. Net premium amortization on mortgage-backed securities
decreased to $876,000 for the three months ended September 30, 2004, from $22.6
million for the three months ended September 30, 2003. At September 30, 2004,
our securities portfolio is comprised primarily of fixed rate REMIC and CMO
mortgage-backed securities. The amortized cost of our fixed rate REMICs and CMOs
totaled $8.41 billion at September 30, 2004. Included in this total is $1.66
billion of securities which have a remaining gross premium of $14.7 million, a
weighted average current coupon of 4.96%, a weighted average collateral coupon
of 6.02% and a weighted average life of 2.4 years. The remaining $6.75 billion
of these securities have a remaining gross discount of $25.8 million, a weighted
average current coupon of 4.20%, a weighted average collateral coupon of 5.76%
and a weighted average life of 3.5 years. Included in the totals for discount
securities are $769.7 million of securities at par. The
32
increase in the average balance of mortgage-backed securities reflects the
purchases of mortgage-backed securities to effectively redeploy our securities
and excess mortgage cash flows in addition to cash flows from deposit growth.
Interest income on other securities decreased $3.5 million to $3.8 million for
the three months ended September 30, 2004, from $7.3 million for the three
months ended September 30, 2003. This decrease resulted from a decrease of
$142.1 million in the average balance of this portfolio, coupled with a decrease
in the average yield to 4.50% for the three months ended September 30, 2004,
from 6.09% for the three months ended September 30, 2003. The decrease in the
average balance of other securities was primarily due to a decrease in the
average balance of FHLB-NY stock, which reflects the reduction in the levels of
FHLB-NY borrowings. The decrease in the average yield is primarily the result of
the reduction in the FHLB-NY dividend. Dividends on FHLB-NY stock totaled
$804,000 for the three months ended September 30, 2004 and $3.7 million for the
three months ended September 30, 2003. 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. The dividend payment received in July 2004 was at
a rate of 2.08%.
Interest income for the nine months ended September 30, 2004 decreased $21.4
million to $777.7 million, from $799.1 million for the nine months ended
September 30, 2003. This decrease was primarily the result of a decrease in the
average yield on interest-earning assets to 4.83% for the nine months ended
September 30, 2004, from 5.03% for the nine months ended September 30, 2003,
partially offset by an increase of $283.9 million in the average balance of
interest-earning assets to $21.46 billion for the nine months ended September
30, 2004, from $21.17 billion for the nine months ended September 30, 2003. The
decrease in the average yield on interest-earning assets was due to decreases in
the average yields on substantially all asset categories, partially offset by an
increase in the average yield on mortgage-backed securities. The decreases in
the average yields on interest-earning assets are attributable to a reduction in
coupon rates on our one-to-four family mortgage loans and mortgage-backed
securities resulting from the extraordinarily high levels of repayments on these
portfolios, primarily during the first nine months of 2003, resulting in
reinvestment in those assets at lower rates, coupled with the significant growth
in the multi-family, commercial real estate and construction loan portfolio in a
relatively low interest rate environment. Partially offsetting this decrease in
coupon rates was the significant decrease in net premium amortization,
particularly for mortgage-backed securities, as a result of the reduction in
refinance activity in 2004, as well as the reduced amount of unamortized net
premium remaining in our mortgage-backed securities portfolio. The increase in
the average balance of interest-earning assets was primarily due to increases in
the average balances of multi-family, commercial real estate and construction
loans and consumer and other loans, partially offset by decreases in the average
balances of other securities, mortgage-backed securities, one-to-four family
mortgage loans and federal funds sold and repurchase agreements.
Interest income on one-to-four family mortgage loans decreased $34.2 million to
$320.9 million for the nine months ended September 30, 2004, from $355.1 million
for the nine months ended September 30, 2003, which was primarily the result of
a decrease in the average yield to 4.82% for the nine months ended September 30,
2004, from 5.26% for the nine months ended September 30, 2003, coupled with a
$122.0 million decrease in the average balance of such loans.
Interest income on multi-family, commercial real estate and construction loans
increased $15.8 million to $164.9 million for the nine months ended September
30, 2004, from $149.1 million
33
for the nine months ended September 30, 2003, which was primarily the result of
an increase of $731.1 million in the average balance of such loans, partially
offset by a decrease in the average yield to 6.53% for the nine months ended
September 30, 2004, from 7.55% for the nine months ended September 30, 2003.
The principal reasons for the changes in the average yields and average balances
of our loans for the nine months ended September 30, 2004 are consistent with
the principal reasons for the changes noted for the three months ended September
30, 2004, previously discussed.
Interest income on mortgage-backed securities increased $10.9 million to $264.4
million for the nine months ended September 30, 2004, from $253.5 million for
the nine months ended September 30, 2003. This increase was primarily the result
of an increase in the average yield to 4.25% for the nine months ended September
30, 2004, from 4.01% for the nine months ended September 30, 2003, partially
offset by a $126.3 million decrease in the average balance of the portfolio. The
increase in the average yield on mortgage-backed securities reflects the impact
of the significant reduction in net premium amortization in 2004, previously
discussed. Net premium amortization on mortgage-backed securities decreased
$50.5 million to $7.7 million for the nine months ended September 30, 2004, from
$58.2 million for the nine months ended September 30, 2003. The benefit from the
reduction in the amount of net premium amortization was partially offset by a
reduction in coupon rates resulting from the substantial repayments and
reinvestments we experienced in this portfolio, previously discussed.
Interest income on other securities decreased $13.6 million to $11.8 million for
the nine months ended September 30, 2004, from $25.4 million for the nine months
ended September 30, 2003. This decrease resulted from a decrease of $180.0
million in the average balance of this portfolio, coupled with a decrease in the
average yield to 4.25% for the nine months ended September 30, 2004, from 6.15%
for the nine months ended September 30, 2003. The decrease in the average
balance was due to a decrease in the average balance of FHLB-NY stock reflecting
the reduction in the level of FHLB-NY borrowings, coupled with a reduction in
the levels of other securities as a result of securities which were called, sold
or matured in 2003 and early 2004. The decrease in the average yield is
primarily the result of the reduction in the FHLB-NY dividend. Dividends on
FHLB-NY stock totaled $2.6 million for the nine months ended September 30, 2004
and $10.6 million for the nine months ended September 30, 2003.
Interest Expense
Interest expense for the three months ended September 30, 2004 decreased $25.4
million to $142.2 million, from $167.6 million for the three months ended
September 30, 2003. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 2.70% for the three months ended
September 30, 2004, from 3.24% for the three months ended September 30, 2003,
partially offset by an increase of $369.7 million in the average balance of
interest-bearing liabilities to $21.04 billion for the three months ended
September 30, 2004, from $20.67 billion for the three months ended September 30,
2003. The decrease in the average cost of our interest-bearing liabilities
reflects the impact of the repayment of certain higher cost borrowings as they
matured and the refinancing of the remainder at substantially lower rates. The
increase in the average balance of interest-bearing liabilities was primarily
attributable to an increase in the average balance of deposits, partially offset
by a decrease in the average balance of borrowed funds.
Interest expense on deposits increased $6.9 million to $62.1 million for the
three months ended September 30, 2004, from $55.2 million for the three months
ended September 30, 2003, primarily due to an increase of $800.1 million in the
average balance of total deposits. The
34
increase in the average balance of total deposits was primarily the result of
increases in the average balances of certificates of deposit, savings and NOW
and demand deposit accounts, partially offset by a decrease in the average
balance of money market accounts. The average cost of deposits in each of the
deposit categories slightly decreased for the three months ended September 30,
2004, as compared to the three months ended September 30, 2003, as a result of
the low interest rate environment. However, our overall average cost of deposits
increased to 2.06% for the three months ended September 30, 2004, from 1.96% for
the three months ended September 30, 2003, primarily due to the significant
increase in the average balance of certificates of deposit.
Interest expense on certificates of deposit increased $7.6 million resulting
from an increase of $1.02 billion in the average balance, partially offset by a
decrease in the average cost to 3.56% for the three months ended September 30,
2004, from 3.67% for the three months ended September 30, 2003. The increase in
the average balance of certificates of deposit was primarily a result of the
success of our marketing campaigns which have focused on attracting medium- and
long-term certificates of deposit as part of our interest rate risk management
strategy to extend liabilities as well as to enable us to reduce borrowings.
During the three months ended September 30, 2004, $706.5 million of certificates
of deposit, with a weighted average rate of 1.88% and a weighted average
maturity at inception of fifteen months, matured and $1.04 billion of
certificates of deposit were issued or repriced, with a weighted average rate of
2.67% and a weighted average maturity at inception of nineteen months. The
impact of the issuance or repricing of certificates of deposit at higher rates
than those maturing is expected to be reflected in the average cost of
certificates of deposit going forward.
Interest expense on money market accounts decreased $513,000 reflecting a
decrease of $290.3 million in the average balance, coupled with a decrease in
the average cost to 0.56% for the three months ended September 30, 2004, from
0.59% for the three months ended September 30, 2003. The decrease in the average
balance of money market accounts is attributable to continued intense
competition for these accounts, as previously discussed. Interest paid on money
market accounts is on a tiered basis with 81.0% of the balance at September 30,
2004 in the highest tier (accounts with balances of $50,000 and higher). We
increased the rate paid on the highest tier at the end of the 2004 third quarter
from 0.60% to 0.75%.
Interest expense on savings accounts decreased $110,000 which was attributable
to a decrease in the average cost to 0.40% for the three months ended September
30, 2004, from 0.43% for the three months ended September 30, 2003, partially
offset by an increase of $50.1 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $59,000 as a result of a decrease
in the average cost to 0.06% for the three months ended September 30, 2004, from
0.08% for the three months ended September 30, 2003, slightly offset by an
increase of $16.5 million in the average balance of these accounts.
Interest expense on borrowed funds for the three months ended September 30, 2004
decreased $32.3 million to $80.1 million, from $112.4 million for the three
months ended September 30, 2003, resulting from a decrease in the average cost
of borrowings to 3.56% for the three months ended September 30, 2004, from 4.77%
for the three months ended September 30, 2003, coupled with a decrease of $430.4
million in the average balance. The decrease in the average cost of borrowings
is the result of the repayment of certain higher cost borrowings as they matured
and the refinancing of the remainder at substantially lower rates. The decrease
in the average balance of borrowed funds was primarily the result of the
repayment of certain higher cost borrowings as they matured, primarily through
the increase in certificates of deposits opened as a result of our successful
2004 certificate of deposit marketing campaign, previously discussed.
35
Interest expense for the nine months ended September 30, 2004 decreased $86.1
million to $428.1 million, from $514.2 million for the nine months ended
September 30, 2003. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 2.74% for the nine months ended
September 30, 2004, from 3.29% for the nine months ended September 30, 2003,
slightly offset by an increase in the average balance of interest-bearing
liabilities to $20.82 billion for the nine months ended September 30, 2004, from
$20.81 billion for the nine months ended September 30, 2003. Consistent with the
changes noted for the three months ended September 30, 2004, the decrease in the
overall average cost of our interest-bearing liabilities reflects the impact of
the repayment and refinancing of higher cost borrowings as they matured at
substantially lower rates. The slight increase in the average balance of
interest-bearing liabilities was primarily attributable to an increase in the
average balance of deposits, substantially offset by a decrease in the average
balance of borrowed funds.
Interest expense on deposits increased $2.6 million to $173.2 million for the
nine months ended September 30, 2004, from $170.6 million for the nine months
ended September 30, 2003, reflecting an increase of $462.5 million in the
average balance of total deposits, partially offset by a decrease in the average
cost of deposits to 1.98% for the nine months ended September 30, 2004, from
2.03% for the nine months ended September 30, 2003. The increase in the average
balance of total deposits was primarily the result of increases in the average
balances of certificates of deposit, savings and NOW and demand deposit
accounts, partially offset by a decrease in the average balance of money market
accounts. The decrease in the average cost of total deposits was driven by
decreases in rates in all deposit categories as a result of the low interest
rate environment.
Interest expense on certificates of deposit increased $8.2 million resulting
from an increase of $649.6 million in the average balance, partially offset by a
decrease in the average cost to 3.51% for the nine months ended September 30,
2004, from 3.73% for the nine months ended September 30, 2003. During the nine
months ended September 30, 2004, $2.94 billion of certificates of deposit, with
a weighted average rate of 2.21% and a weighted average maturity at inception of
fourteen months, matured and $3.93 billion of certificates of deposit were
issued or repriced, with a weighted average rate of 2.62% and a weighted average
maturity at inception of twenty months.
Interest expense on money market accounts decreased $3.6 million reflecting a
decrease in the average cost to 0.55% for the nine months ended September 30,
2004, from 0.75% for the nine months ended September 30, 2003, coupled with a
decrease of $328.3 million in the average balance of such accounts.
Interest expense on savings accounts decreased $1.3 million which was
attributable to a decrease in the average cost to 0.40% for the nine months
ended September 30, 2004, from 0.47% for the nine months ended September 30,
2003, partially offset by an increase of $87.2 million in the average balance.
Interest expense on NOW and demand deposit accounts decreased $620,000 as a
result of a decrease in the average cost to 0.06% for the nine months ended
September 30, 2004, from 0.12% for the nine months ended September 30, 2003,
partially offset by an increase of $53.9 million in the average balance of these
accounts.
Interest expense on borrowed funds for the nine months ended September 30, 2004
decreased $88.8 million to $254.8 million, from $343.6 million for the nine
months ended September 30, 2003, resulting from a decrease in the average cost
of borrowings to 3.71% for the nine months ended September 30, 2004, from 4.77%
for the nine months ended September 30, 2003, coupled with a decrease of $455.4
million in the average balance.
36
The principal reasons for the changes in the average costs and average balances
of deposits and borrowings noted above for the nine months ended September 30,
2004 are consistent with the principal reasons for the changes noted for the
three months ended September 30, 2004, previously discussed.
Provision for Loan Losses
During the three and nine months ended September 30, 2004 and 2003, no provision
for loan losses was recorded. We review our allowance for loan losses on a
quarterly basis. Our 2004 analyses did not indicate that a change in our
allowance for loan losses was warranted. Our net charge-off experience during
the three and nine months ended September 30, 2004 remained at an annualized
rate of less than one basis point of average loans outstanding for the periods.
We believe our current allowance for loan losses is adequate to reflect the
risks inherent in our loan portfolio.
The allowance for loan losses totaled $82.8 million at September 30, 2004 and
$83.1 million at December 31, 2003. Net loan charge-offs totaled $15,000 for the
three months ended September 30, 2004 compared to $185,000 for the three months
ended September 30, 2003 and totaled $318,000 for the nine months ended
September 30, 2004 compared to $341,000 for the nine months ended September 30,
2003. Non-performing loans decreased $2.7 million to $27.0 million at September
30, 2004, from $29.7 million at December 31, 2003. The allowance for loan losses
as a percentage of non-performing loans increased to 306.78% at September 30,
2004, from 280.10% at December 31, 2003, primarily due to the decrease in
non-performing loans from December 31, 2003 to September 30, 2004. The allowance
for loan losses as a percentage of total loans was 0.65% at September 30, 2004
and 0.66% at December 31, 2003. For further discussion of non-performing loans
and the allowance for loan losses, see "Critical Accounting Policies" and "Asset
Quality."
Non-Interest Income
Non-interest income for the three months ended September 30, 2004 decreased $9.9
million, to $24.0 million, from $33.9 million for the three months ended
September 30, 2003, primarily due to decreases in mortgage banking income, net
and net gain on sales of securities. For the nine months ended September 30,
2004, non-interest income decreased $17.3 million to $74.0 million, from $91.3
million for the nine months ended September 30, 2003, primarily due to decreases
in net gain on sales of securities; mortgage banking income, net; income from
bank owned life insurance, or BOLI; other loan fees and customer service fees.
Net gain on sales of securities totaled $2.3 million for the three months ended
September 30, 2004 compared to $4.5 million for the three months ended September
30, 2003 and totaled $4.7 million for the nine months ended September 30, 2004
compared to $14.7 million for the nine months ended September 30, 2003. During
2004, we sold other securities with an amortized cost of $20.3 million at a net
gain of $2.4 million during the first quarter and mortgage-backed securities
with an amortized cost of $145.2 million at a net gain of $2.3 million during
the third quarter. During 2003, we sold mortgage-backed securities with an
amortized cost of $199.7 million at a net gain of $2.2 million during the first
quarter; mortgage-backed securities with an amortized cost of $619.8 million at
a net gain of $8.0 million during the second quarter; and other securities with
an amortized cost of $45.6 million at a net gain of $4.5 million during the
third quarter. Gains on sales of securities were used as a natural hedge to
offset MSR valuation allowance adjustments caused by the impairment of MSR.
37
Mortgage banking income, net, which includes loan servicing fees, net gain on
sales of loans, amortization of MSR and valuation allowance adjustments for the
impairment of MSR, decreased $7.2 million to net mortgage banking loss of $1.2
million for the three months ended September 30, 2004, compared to net mortgage
banking income of $6.0 million for the three months ended September 30, 2003.
This decrease was primarily due to a provision recorded in the valuation
allowance for the impairment of MSR for the three months ended September 30,
2004, compared to a recovery recorded for the three months ended September 30,
2003, and a decrease in net gain on sales of loans, partially offset by a
decrease in amortization of MSR. For the nine months ended September 30, 2004,
net mortgage banking income decreased $2.1 million to $3.9 million, compared to
$6.0 million for the nine months ended September 30, 2003. The decrease for the
nine months ended September 30, 2004 compared to the nine months ended September
30, 2003 was primarily due to decreases in net gain on sales of loans and loan
servicing fees, partially offset by a decrease in amortization of MSR and an
increase in the recovery recorded in the valuation allowance for the impairment
of MSR.
Net gain on sales of loans decreased $3.6 million to $712,000 for the three
months ended September 30, 2004, from $4.3 million for the three months ended
September 30, 2003 and decreased $7.4 million to $2.8 million for the nine
months ended September 30, 2004, from $10.2 million for the nine months ended
September 30, 2003. The decreases in net gain on sales of loans were primarily
due to decreases in the volume of fixed rate loans originated and sold into the
secondary market, coupled with less favorable pricing opportunities for the
three and nine months ended September 30, 2004 compared to the three and nine
months ended September 30, 2003. Loan servicing fees, which include all
contractual and ancillary servicing revenue we receive, decreased $455,000 to
$1.4 million for the three months ended September 30, 2004, from $1.8 million
for the three months ended September 30, 2003 and decreased $1.8 million to $4.4
million for the nine months ended September 30, 2004, from $6.2 million for the
nine months ended September 30, 2003, primarily as a result of a decrease in the
balance of loans serviced for others to $1.71 billion at September 30, 2004,
from $1.98 billion at September 30, 2003. The decrease in the balance of loans
serviced for others was the result of repayments in that portfolio exceeding the
level of new servicing volume from loan sales. Amortization of MSR decreased
$1.6 million to $1.4 million for the three months ended September 30, 2004, from
$3.0 million for the three months ended September 30, 2003 and decreased $5.4
million to $5.2 million for the nine months ended September 30, 2004, from $10.6
million for the nine months ended September 30, 2003. The decrease in MSR
amortization is attributable to the reduction in the level of mortgage loan
repayments as a result of the decrease in mortgage loan refinance activity
previously discussed. We recorded a provision in the valuation allowance for the
impairment of MSR of $1.9 million for the three months ended September 30, 2004
and a recovery of $1.9 million for the nine months ended September 30, 2004,
compared to recoveries of $2.9 million for the three months ended September 30,
2003 and $157,000 for the nine months ended September 30, 2003. The provision
recorded during the three months ended September 30, 2004 reflects an increase
in projected loan prepayment speeds as of September 30, 2004 compared to June
30, 2004, which was a result of the decrease in interest rates during the 2004
third quarter. However, the projected loan prepayment speeds as of September 30,
2004 have decreased from December 31, 2003, as a result of the increase in
interest rates during that period, resulting in a recovery in the valuation
allowance for the impairment of MSR for the nine months ended September 30,
2004. The recovery recorded for the three months ended September 30, 2003
reflected the decrease in projected loan prepayment speeds as of September 30,
2003 compared to June 30, 2003 resulting from the increase in interest rates in
the 2003 third quarter.
38
Income from BOLI decreased $721,000 to $4.2 million for the three months ended
September 30, 2004, from $4.9 million for the three months ended September 30,
2003 and decreased $2.3 million to $12.9 million for the nine months ended
September 30, 2004, from $15.2 million for the nine months ended September 30,
2003. These decreases are primarily attributable to a reduction in the yield on
the BOLI investment as a result of the low interest rate environment.
Customer service fees increased $230,000 to $15.3 million for the three months
ended September 30, 2004, from $15.1 million for the three months ended
September 30, 2003 and decreased $2.1 million to $43.6 million for the nine
months ended September 30, 2004, from $45.7 million for the nine months ended
September 30, 2003. The increase in customer service fees for the three months
ended September 30, 2004 compared to the three months ended September 30, 2003
was primarily due to an increase in commissions on sales of annuities. The
decrease in customer service fees for the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003 was primarily due to a
decrease in debit card interchange fees, resulting from a decrease in the fees
we receive from our service provider on our customers' signature based debit
card transactions and a decrease in business checking account fees. We reduced
the minimum balance requirements on our business checking accounts and increased
the number of free transactions at the end of 2003 in an effort to grow our
business checking deposits.
Other loan fees decreased $815,000 to $1.2 million for the three months ended
September 30, 2004, from $2.0 million for the three months ended September 30,
2003 and decreased $2.3 million to $3.6 million for the nine months ended
September 30, 2004, from $5.9 million for the nine months ended September 30,
2003, primarily due to decreases in mortgage related fees due to the decrease in
loan origination and refinance activity previously discussed.
Non-Interest Expense
Non-interest expense increased $7.8 million to $59.2 million for the three
months ended September 30, 2004, from $51.4 million for the three months ended
September 30, 2003 and increased $16.4 million to $171.6 million for the nine
months ended September 30, 2004, from $155.2 million for the nine months ended
September 30, 2003. The increases in non-interest expense were primarily due to
increases in compensation and benefits expense, occupancy, equipment and systems
expense and other expense.
Compensation and benefits expense increased $3.3 million to $30.5 million for
the three months ended September 30, 2004, from $27.2 million for the three
months ended September 30, 2003 and increased $7.9 million to $91.5 million for
the nine months ended September 30, 2004, from $83.6 million for the nine months
ended September 30, 2003. The increases were primarily attributable to increases
in salary expense and ESOP expense. The increases in salary expense were
primarily attributable to an increase in estimated corporate bonuses for 2004
compared to 2003. No bonuses were paid to executive management for 2003. The
increases in ESOP expense were primarily attributable to a higher average market
value of our common stock during the three and nine months ended September 30,
2004 compared to the three and nine months ended September 30, 2003.
Occupancy, equipment and systems expense increased $849,000 to $15.9 million for
the three months ended September 30, 2004, from $15.1 million for the three
months ended September 30, 2003 and increased $3.5 million to $48.4 million for
the nine months ended September 30, 2004, from $44.9 million for the nine months
ended September 30, 2003. These increases resulted from increases in furniture,
fixtures and computer equipment expense and computer equipment
39
depreciation as a result of systems enhancements over the past year. In
addition, the increase for the nine months ended September 30, 2004 also
resulted from an increase in office building expense, resulting from increased
maintenance costs, primarily snow removal costs in the 2004 first quarter due to
the harsh winter.
Other expense increased $3.5 million to $10.6 million for the three months ended
September 30, 2004, from $7.1 million for the three months ended September 30,
2003 and increased $4.6 million to $25.2 million for the nine months ended
September 30, 2004, from $20.6 million for the nine months ended September 30,
2003, primarily due to a $3.2 million arbitration settlement resulting from the
final disposition of a compensation dispute between us and three former
directors of Long Island Bancorp, Inc. and increased legal fees and other costs
as a result of increased activity in preparation for trial in the action
entitled The Long Island Savings Bank, FSB et al. vs. The United States pending
in the United States Court of Federal Claims which has now been scheduled by the
court for trial commencing January 18, 2005.
Our percentage of general and administrative expense to average assets increased
to 1.04% for the three months ended September 30, 2004 and 1.02% for the nine
months ended September 30, 2004, from 0.92% for the three months ended September
30, 2003 and 0.91% for the nine months ended September 30, 2003. These increases
are primarily attributable to the previously discussed increases in general and
administrative expense for the three and nine months ended September 30, 2004
compared to the three and nine months ended September 30, 2003. The efficiency
ratio, which represents general and administrative expense divided by the sum of
net interest income plus non-interest income, was 40.56% for the three months
ended September 30, 2004 and 40.49% for the nine months ended September 30,
2004, compared to 45.29% for the three months ended September 30, 2003 and
41.26% for the nine months ended September 30, 2003. The decreases in the
efficiency ratios for the three and nine months ended September 30, 2004
compared to the three and nine months ended September 30, 2003 are primarily due
to the previously discussed increases in net interest income.
Income Tax Expense
Income tax expense totaled $28.6 million for the three months ended September
30, 2004, compared to $20.5 million for the three months ended September 30,
2003, representing an effective tax rate of 33.0% for both periods. For the nine
months ended September 30, 2004, income tax expense totaled $83.1 million,
representing an effective tax rate of 33.0%, compared to $72.1 million,
representing an effective tax rate of 32.6%, for the nine months ended September
30, 2003.
Asset Quality
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 relative to both the size of our loan portfolio and 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.
40
Non-Performing Assets
The following table sets forth information regarding non-performing assets at
September 30, 2004 and December 31, 2003. In addition to non-performing assets,
we had $1.1 million of potential problem loans at September 30, 2004 compared to
$839,000 at December 31, 2003. Such loans are 60-89 days delinquent as shown on
page 42.
At September 30, At December 31,
(Dollars in Thousands) 2004 2003
- --------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $25,871 $28,321
Non-accrual delinquent consumer and other loans 769 792
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 351 563
- --------------------------------------------------------------------------------------
Total non-performing loans 26,991 29,676
Real estate owned, net (3) 378 1,635
- --------------------------------------------------------------------------------------
Total non-performing assets $27,369 $31,311
======================================================================================
Non-performing loans to total loans 0.21% 0.23%
Non-performing loans to total assets 0.12 0.13
Non-performing assets to total assets 0.12 0.14
Allowance for loan losses to non-performing loans 306.78 280.10
Allowance for loan losses to total loans 0.65 0.66
(1) Includes multi-family and commercial real estate loans totaling $6.2
million at September 30, 2004 and $6.1 million at December 31, 2003.
(2) Loans delinquent 90 days or more and still accruing interest consist solely
of loans delinquent 90 days or more as to their maturity date but not their
interest due, and are primarily secured by one-to-four family properties.
(3) Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is recorded at the lower of cost or fair value, less estimated
selling costs.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of September 30, 2004, $7.9 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$1.3 million for the nine months ended September 30, 2004 and $1.9 million for
the year ended December 31, 2003. This compares to actual payments recorded as
interest income, with respect to such loans, of $659,000 for the nine months
ended September 30, 2004 and $1.2 million for the year ended December 31, 2003.
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 $2.8 million at September
30, 2004 and $3.9 million at December 31, 2003.
41
Delinquent Loans
The following table shows a comparison of delinquent loans at September 30, 2004
and December 31, 2003.
At September 30, 2004 At December 31, 2003
-----------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-----------------------------------------------------------------------
Number Number Number Number
of of of of
(Dollars in Thousands) Loans Amount Loans Amount Loans Amount Loans Amount
- ---------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family 4 $ 242 114 $19,995 5 $192 143 $22,744
Multi-family 1 233 12 4,222 1 60 10 3,448
Commercial real estate -- -- 3 2,005 -- -- 4 2,692
Consumer and other loans 70 651 88 769 83 587 90 792
- ---------------------------------------------------------------------------------------------------------
Total delinquent loans 75 $1,126 217 $26,991 89 $839 247 $29,676
=========================================================================================================
Delinquent loans to total loans 0.01% 0.21% 0.01% 0.23%
Allowance for Loan Losses
The following table sets forth the change in our allowance for losses on loans
for the nine months ended September 30, 2004.
(In Thousands)
--------------
Balance at December 31, 2003 $83,121
Provision charged to operations --
Charge-offs:
One-to-four family (190)
Consumer and other loans (498)
- --------------------------------------------------------------------------------
Total charge-offs (688)
- --------------------------------------------------------------------------------
Recoveries:
One-to-four family 76
Consumer and other loans 294
- --------------------------------------------------------------------------------
Total recoveries 370
- --------------------------------------------------------------------------------
Net charge-offs (318)
- --------------------------------------------------------------------------------
Balance at September 30, 2004 $82,803
================================================================================
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. 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.
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 44, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at September 30, 2004 that we anticipate will reprice or mature in
each of the future
42
time periods shown using certain assumptions based on our historical experience
and other market-based data available to us. As indicated in the Gap Table, our
one-year cumulative gap at September 30, 2004 was positive 1.17%. This compares
to a one-year cumulative gap of negative 6.83% at December 31, 2003. The change
in our one-year cumulative gap is primarily attributable to a decrease in
borrowings due in one year or less at September 30, 2004, as compared to
December 31, 2003, as a result of the repayment or refinancing of medium-term
borrowings which matured during the nine months ended September 30, 2004,
partially offset by a decrease in estimated mortgage loan repayments as of
September 30, 2004, as compared to December 31, 2003, as a result of the
decrease in refinance activity previously discussed.
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.
43
At September 30, 2004
------------------------------------------------------------------
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) $3,008,129 $3,037,511 $5,376,325 $ 810,193 $12,232,158
Consumer and other loans (1) 458,068 28,610 -- -- 486,678
Federal funds sold and
repurchase agreements 126,535 -- -- -- 126,535
Mortgage-backed and other
securities available-for-sale and
FHLB stock 791,425 685,738 392,710 796,003 2,665,876
Mortgage-backed and other securities
held-to-maturity 1,707,712 2,023,988 1,136,530 1,372,230 6,240,460
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,091,869 5,775,847 6,905,565 2,978,426 21,751,707
Net unamortized purchase premiums
and deferred costs (2) 17,462 14,828 29,994 2,298 64,582
- ------------------------------------------------------------------------------------------------------------
Net interest-earning assets (3) 6,109,331 5,790,675 6,935,559 2,980,724 21,816,289
- ------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 163,061 326,120 326,120 2,146,959 2,962,260
Money market 856,805 17,007 17,007 127,552 1,018,371
NOW and demand deposit 43,643 87,287 87,287 1,315,711 1,533,928
Certificates of deposit 2,382,747 3,278,962 840,132 153,469 6,655,310
Borrowed funds, net (4) 2,396,739 3,042,601 3,098,778 377,722 8,915,840
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,842,995 6,751,977 4,369,324 4,121,413 21,085,709
- ------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 266,336 (961,302) 2,566,235 (1,140,689) $ 730,580
============================================================================================================
Cumulative interest sensitivity gap $ 266,336 $ (694,966) $1,871,269 $ 730,580
============================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets 1.17% (3.05)% 8.22% 3.21%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 104.56% 94.48% 111.03% 103.46%
(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.
(4) Excludes the hedge accounting adjustment on our Junior Subordinated
Debentures.
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.
44
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 October 1, 2004 would decrease by approximately 1.66% from the base
projection. At December 31, 2003, in the up 200 basis point scenario, our
projected net interest income for the twelve month period beginning January 1,
2004 would have decreased by approximately 0.54% from the base projection. The
current low interest rate environment prevents us from performing an income
simulation for a decline in interest rates of the same magnitude and timing as
our rising interest rate simulation, since certain asset yields, liability
costs, and related indexes are below 2.00%. However, assuming the entire yield
curve was to decrease 100 basis points, through quarterly parallel decrements of
25 basis points, and remain at that level thereafter, our projected net interest
income for the twelve month period beginning October 1, 2004 would decrease by
approximately 1.80% from the base projection. At December 31, 2003, in the down
100 basis point scenario, our projected net interest income for the twelve month
period beginning January 1, 2004 would have decreased by approximately 3.46%
from the base projection.
Various shortcomings are inherent in both the Gap Table and NII sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from the NII sensitivity analysis. These include income from BOLI, changes in
the fair value of MSR and the mark-to-market adjustments on certain derivative
instruments. With respect to these items alone, and 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 income
for the twelve month period beginning October 1, 2004 would increase by
approximately $6.5 million. Conversely, 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 income for the
twelve month period beginning October 1, 2004 would decrease by approximately
$5.6 million with respect to these items alone.
For further information regarding our market risk and the limitations of our gap
analysis and NII sensitivity analysis, see Part II, Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk," included in our 2003 Annual Report
on Form 10-K.
Item 4. Controls and Procedures
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2004.
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
45
communicated to our management as appropriate to allow timely decisions
regarding required disclosure.
There were no changes in our internal control 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 II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse effect on
our financial condition, operating results or liquidity.
We are a party to two actions pending against the United States, involving
assisted acquisitions made in the early 1980's and supervisory goodwill
accounting utilized in connection therewith, which could result in a gain. The
ultimate outcomes of such actions are uncertain and there can be no assurance
that we will benefit financially from such litigation. See Part I, Item 2,
"MD&A," for further discussion regarding the actions pending.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the repurchases of our common stock by month
during the three months ended September 30, 2004.
Total Number Maximum
Total of Shares Number of Shares
Number of Average Purchased as Part that May Yet Be
Shares Price Paid of Publicly Purchased Under the
Period Purchased per Share Announced Plans Plans
- --------------------------------------------------------------------------------------------
July 1, 2004 through
July 31, 2004 330,000 $34.76 330,000 7,728,200
August 1, 2004 through
August 31, 2004 1,103,500 $35.47 1,103,500 6,624,700
September 1, 2004 through
September 30, 2004 566,500 $36.38 566,500 6,058,200
- --------------------------------------------------------------------------------------------
Total 2,000,000 $35.61 2,000,000
============================================================================================
During the quarter ended September 30, 2004, we completed our ninth stock
repurchase plan, which was approved by our Board of Directors on October 16,
2002. This plan authorized 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. On
May 19, 2004, our Board of Directors approved our tenth stock repurchase plan
authorizing the purchase, at management's discretion, of 8,000,000 shares, or
approximately 10% of our common stock then outstanding, over a two year period
in open-market or privately negotiated transactions. Stock repurchases under our
tenth stock repurchase plan commenced immediately following the completion of
the ninth stock repurchase plan on July 9, 2004.
46
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
Exhibit No. Identification of Exhibit
- ----------- -------------------------
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.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: November 5, 2004 By: /s/ Monte N. Redman
------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
47
Exhibit Index
-------------
Exhibit No. Identification of Exhibit
- ----------- -------------------------
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.
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.
48