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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 001-11967
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Astoria Federal Plaza, Lake Success, New York 11042
(Address of principal executive offices)
(516) 327-3000
(Registrant's telephone number, including area code)
(Securities registered pursuant to Section 12(b) of the Act):
Name of each exchange
Title of each class on which registered
Common Stock, par value New York
$.01 per share, and related Stock Exchange
preferred share purchase rights
(Securities registered pursuant to Section 12(g) of the Act): None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 30, 2004, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.70 billion. The number of shares of the registrant's Common
Stock outstanding as of March 2, 2005 was 109,751,265 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the
Annual Meeting of Stockholders to be held on May 18, 2005 and any adjournment
thereof, which will be filed with the Securities and Exchange Commission within
120 days from December 31, 2004, are incorporated by reference into Part III.
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ASTORIA FINANCIAL CORPORATION
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business..............................................................2
Item 2. Properties...........................................................29
Item 3. Legal Proceedings....................................................29
Item 4. Submission of Matters to a Vote of Security Holders..................30
Part II
Item 5. Market for Astoria Financial Corporation's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.....30
Item 6. Selected Financial Data..............................................32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........68
Item 8. Financial Statements and Supplementary Data..........................70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................70
Item 9A. Controls and Procedures..............................................71
Item 9B. Other Information....................................................71
Part III
Item 10. Directors and Executive Officers of Astoria Financial Corporation....71
Item 11. Executive Compensation...............................................72
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.......................................72
Item 13. Certain Relationships and Related Transactions.......................72
Item 14. Principal Accountant Fees and Services...............................73
Part IV
Item 15. Exhibits and Financial Statement Schedules...........................73
SIGNATURES........................................................................74
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These statements may be identified by the use of
the words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "outlook," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate under the circumstances. These statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins
or affect the value of our investments;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause our
financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, principally Astoria Federal
Savings and Loan Association.
All share and per share data included in this Form 10-K have been retroactively
adjusted to reflect the three-for-two common stock split in the form of a 50%
stock dividend which was declared by our Board of Directors on January 19, 2005.
On March 1, 2005 stockholders received one additional share of our common stock
for every two shares owned.
ITEM 1. BUSINESS
General
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. Astoria Federal's primary business is
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, principal repayments on loans and
securities and borrowed funds, primarily in one-to-four family mortgage loans,
mortgage-backed securities, multi-family mortgage loans and commercial real
estate loans. To a smaller degree, Astoria Federal also invests in construction
loans and consumer and other loans. In addition, Astoria Federal invests in U.S.
government, government agency and government-sponsored enterprise, or GSE,
securities and other investments permitted by federal laws and regulations.
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. Non-interest income
generally includes customer service fees; other loan fees; net gain on sales of
securities; mortgage banking income, net; income from bank owned life insurance,
or BOLI; and other non-interest income. General and administrative expense
consists of compensation and benefits; occupancy, equipment and systems expense;
federal deposit insurance premiums; advertising; and other operating expenses.
Other non-interest expense consisted of a loss on extinguishment of debt in 2002
and, prior to January 1, 2002, amortization of goodwill. Our earnings are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates and U.S. Treasury yield curves,
government policies and actions of regulatory authorities.
In addition to Astoria Federal, Astoria Financial Corporation has two other
subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF
Insurance Agency, Inc. is a life insurance and property and casualty insurance
agency. Through contractual agreements with various third party marketing
organizations, AF Insurance Agency, Inc. provides insurance products primarily
to the customers of Astoria Federal. AF Insurance Agency, Inc. is a wholly-owned
subsidiary which is consolidated with Astoria Financial Corporation for
financial reporting purposes. Our other subsidiary, Astoria Capital Trust I, is
not consolidated with Astoria Financial Corporation for financial reporting
purposes as a result of our adoption of 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 $3.9 million of common securities
which are 100% owned by Astoria Financial Corporation, and using the proceeds to
acquire Junior Subordinated Debentures issued by Astoria
2
Financial Corporation. 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. The Capital Securities have
substantially identical repayment provisions as the Junior Subordinated
Debentures. Astoria Financial Corporation has fully and unconditionally
guaranteed the Capital Securities along with all obligations of Astoria
Capital Trust I under the trust agreement relating to the Capital Securities.
We have acquired, and may continue to acquire or organize either directly or
indirectly through Astoria Federal, other subsidiaries and financial
institutions. We continue to evaluate merger and acquisition activity as part of
our strategic objective for long term growth.
Available Information
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at www.sec.gov.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2004, our loan portfolio totaled $13.26 billion, or 56.6% of total assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Mortgage loan originations
and purchases totaled $4.35 billion for the year ended December 31, 2004 and
$7.29 billion for the year ended December 31, 2003. Mortgage loan originations
include originations of loans held-for-sale totaling $323.2 million for the year
ended December 31, 2004 and $613.3 million for the year ended December 31, 2003.
Our retail loan origination program accounted for $1.83 billion of originations
during 2004 and $3.14 billion of originations during 2003. We also have an
extensive broker network in twenty-three states: New York, New Jersey,
Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio, Virginia,
North Carolina, South Carolina, Georgia, Illinois, California, Florida,
Michigan, New Hampshire, Rhode Island, Missouri, Tennessee, Indiana, Kentucky
and Alabama; and the District of Columbia. Our broker loan origination program
consists of relationships with mortgage brokers and accounted for $1.36 billion
of originations during 2004 and $2.61 billion of originations during 2003. Our
third party loan origination program includes relationships with other financial
institutions and mortgage bankers in forty-four states and the District of
Columbia and accounted for purchases of $1.16 billion during 2004 and $1.54
billion during 2003. Mortgage loans purchased through our third party loan
origination program are subject to the same underwriting standards as our retail
and broker originations. See the "Loan Portfolio Composition" table on page 7
and the "Loan Maturity, Repricing and Activity" tables on pages 8 and 9.
3
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment by
the borrower. We also originate a limited number of second mortgage loans which
are underwritten according to the same standards as first mortgage loans.
At December 31, 2004, $9.05 billion, or 68.7%, of our total loan portfolio
consisted of one-to-four family mortgage loans, of which $8.42 billion, or
93.0%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio
consists primarily of hybrid ARM loans. We currently offer ARM loans which
initially have a fixed rate for one, three, five, seven or ten years and convert
into one year ARM loans at the end of the initial fixed rate period. The one,
three, five and seven year ARM loans have terms of up to forty years and the ten
year ARM loans have terms of up to thirty years. We also offer interest only ARM
loans, generally with thirty year terms, which have an initial fixed rate for
three, five or seven years and convert into one year interest only ARM loans at
the end of the initial fixed rate period. The interest only ARM loans require
the borrower to pay interest only during the first ten years of the loan term.
After the tenth anniversary of the loan, principal and interest payments are
required to amortize the loan over the remaining loan term.
All ARM loans we offer have annual and lifetime interest rate ceilings and
floors. Generally, ARM loans pose credit risks somewhat greater than the risks
posed by fixed rate loans primarily because, as interest rates rise, once in the
adjustment period the underlying payments of the borrower rise, increasing the
potential for default. ARM loans may be offered with an initial interest rate
which is less than the fully indexed rate for the loan at the time of
origination. We determine the initial discounted rate in accordance with market
and competitive factors. To recognize the credit risks associated with ARM loans
initially offered below their fully-indexed rates, we generally underwrite our
one-year ARM loans assuming a rate equal to 200 basis points over the initial
discounted rate, but not less than 7.00%. For ARM loans with longer adjustment
periods, and therefore less credit risk due to the longer period for the
borrower's income to adjust to anticipated higher future payments, we underwrite
the loans using the initial rate, which may be a discounted rate. We use the
same underwriting standards for our retail, broker and third party mortgage loan
originations.
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various GSEs or other investors with either
servicing retained or released. Generally, the sale of such loans is arranged
through a master commitment either on a mandatory delivery or best efforts
basis. At December 31, 2004, loans serviced for others totaled $1.67 billion.
One-to-four family loan originations and purchases, including originations of
loans held-for-sale, decreased $2.37 billion to $3.20 billion in 2004, from
$5.57 billion in 2003. This decrease was primarily the result of the decrease in
mortgage refinance activity due to the increase in interest rates during the
second half of 2003 and the full year of 2004.
4
Multi-Family and Commercial Real Estate Lending
While we continue to primarily be a one-to-four family mortgage lender, over the
past several years we have increased our emphasis on multi-family and commercial
real estate loan originations. As of December 31, 2004, our total loan portfolio
contained $2.56 billion, or 19.4%, of multi-family mortgage loans and $944.9
million, or 7.2%, of commercial real estate loans. During 2004, we originated
$1.05 billion of multi-family, commercial real estate and mixed use loans
compared to $1.65 billion in 2003. Mixed use loans are secured by properties
which are intended for both residential and business use and are classified as
multi-family or commercial real estate based on the greater number of
residential versus commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans generally are
provided as five to fifteen year term balloon loans amortized over fifteen to
thirty years. Our policy generally has been to originate multi-family and
commercial real estate loans in the New York metropolitan area, although, to a
smaller degree, we also originate loans throughout New York State and in various
other states including New Jersey, Connecticut, Pennsylvania, Florida,
Massachusetts, Delaware and Maryland. Originations in states other than New York
represented 19.4% of our total originations of multi-family and commercial real
estate loans in 2004, of which 16.5% were originated in New Jersey and
Connecticut. We are authorized by our Board of Directors to further expand the
areas in which we originate multi-family and commercial real estate loans. In
making such loans, we primarily consider the ability of the net operating income
generated by the real estate to support the debt service, the financial
resources, income level and managerial expertise of the borrower, the
marketability of the property and our lending experience with the borrower. Our
current policy is to require a minimum debt service coverage ratio of 1.20 times
for multi-family and commercial real estate loans. Additionally, on multi-family
loans, our current policy is to finance up to 80% of the lesser of the purchase
price or appraised value of the property securing the loan on purchases or 80%
of the appraised value on refinances. On commercial real estate loans, our
current policy is to finance up to 75% of the lesser of the purchase price or
appraised value of the property securing the loans on purchases or 75% of the
appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
fifty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2004, our single largest multi-family loan
had an outstanding balance of $10.9 million and was current and secured by a
281-unit apartment complex in Bronx, New York. At December 31, 2004, the average
balance of loans in our multi-family portfolio was approximately $700,000.
Commercial real estate loans are typically secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2004, our single largest commercial real estate loan had an
outstanding principal balance of $7.9 million and was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2004, the
average balance of loans in our commercial real estate portfolio was
approximately $1.1 million.
Historically, multi-family and commercial real estate loans generally involve a
greater degree of credit risk than one-to-four family loans because they
typically have larger balances and are more affected by adverse conditions in
the economy. As such, these loans require more ongoing evaluation and
monitoring. Because payments on loans secured by multi-family properties and
commercial real estate often depend upon the successful operation and management
of the properties and the businesses which operate from within them, repayment
of such loans may be affected by factors outside the borrower's control, such as
adverse conditions in the real estate market or the economy or changes in
government regulation.
5
Construction Loans
As of December 31, 2004, $117.8 million, or 0.9%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Generally, we offer
construction loans up to a maximum of $10.0 million. As of December 31, 2004,
our average construction loan commitment was approximately $2.9 million and the
average outstanding balance of loans in our construction loan portfolio was
approximately $1.5 million.
Construction lending generally involves additional credit risks to the lender as
compared with other types of mortgage lending. These credit risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Construction loans are funded monthly, based on the work completed,
and are generally monitored by a professional construction engineer and our
commercial real estate lending department. To a lesser extent, qualified bank
appraisers and certified home inspectors are utilized to monitor less complex
projects.
Consumer and Other Loans
At December 31, 2004, $507.3 million, or 3.9%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity and commercial lines of credit, are offered primarily on a fixed
rate, short-term basis. The underwriting standards we employ for consumer and
other loans include a determination of the borrower's payment history on other
debts and an assessment of the borrower's ability to make payments on the
proposed loan and other indebtedness. In addition to the credit worthiness of
the borrower, the underwriting process also includes a review of the value of
the collateral, if any, in relation to the proposed loan amount. Our consumer
and other loans tend to have higher interest rates, shorter maturities and are
considered to entail a greater risk of default than one-to-four family mortgage
loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 90% of the appraised value
of the property. Such lines of credit are underwritten based on our evaluation
of the borrower's ability to repay the debt. Home equity lines of credit are
adjustable rate loans which are indexed to the prime rate and generally reset
monthly.
Included in consumer and other loans were $21.8 million of commercial business
loans at December 31, 2004. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for individual loans in excess of $15.0 million or when the overall
lending relationship exceeds $60.0 million (unless the Board of Directors has
set a higher limit with respect to a particular borrower), mortgage loan
approval authority has been delegated by the Board of Directors to our
underwriters and Loan Committee, which consists of certain members of executive
management and other Astoria Federal officers. For loans between $10.0 million
and $15.0 million, the approval of two non-officer directors is also required.
6
For mortgage loans secured by one-to-four family properties, upon receipt of a
completed application from a prospective borrower, we generally order a credit
report, verify income and other information and, if necessary, obtain additional
financial or credit related information. For mortgage loans secured by
multi-family properties and commercial real estate, we obtain financial
information concerning the operation of the property. Personal guarantees are
generally not obtained with respect to such loans. An appraisal of the real
estate used as collateral for mortgage loans is also obtained as part of the
underwriting process. All appraisals are performed by licensed or certified
appraisers, the majority of which are licensed independent third party
appraisers. We have an internal appraisal review process to monitor third party
appraisals. The Board of Directors annually reviews and approves our appraisal
policy.
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31,
------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------
Percent Percent Percent
of of of
(Dollars in Thousands) Amount Total Amount Total Amount Total
- ------------------------------------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 9,054,747 68.68% $ 8,971,048 71.13% $ 9,209,360 76.86%
Multi-family 2,558,935 19.41 2,230,414 17.69 1,599,985 13.35
Commercial real estate 944,859 7.17 880,296 6.98 744,623 6.21
Construction 117,766 0.89 99,046 0.79 56,475 0.47
- ------------------------------------------------------------------------------------------------------------
Total mortgage loans 12,676,307 96.15 12,180,804 96.59 11,610,443 96.89
- ------------------------------------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 466,087 3.53 386,846 3.07 323,494 2.70
Commercial 21,819 0.17 21,937 0.17 22,569 0.19
Lines of Credit, Overdraft 11,835 0.09 12,963 0.10 15,475 0.13
Other 7,547 0.06 8,400 0.07 11,100 0.09
- ------------------------------------------------------------------------------------------------------------
Total consumer and other loans 507,288 3.85 430,146 3.41 372,638 3.11
- ------------------------------------------------------------------------------------------------------------
Total loans (gross) 13,183,595 100.00% 12,610,950 100.00% 11,983,081 100.00%
Net unamortized premiums
and deferred loan costs 79,684 76,037 76,280
- ------------------------------------------------------------------------------------------------------------
Total loans 13,263,279 12,686,987 12,059,361
Allowance for loan losses (82,758) (83,121) (83,546)
- ------------------------------------------------------------------------------------------------------------
Total loans, net $13,180,521 $12,603,866 $11,975,815
============================================================================================================
At December 31,
---------------------------------------------
2001 2000
---------------------------------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
- ---------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $10,105,063 83.59% $ 9,850,390 86.79%
Multi-family 1,094,312 9.05 801,917 7.07
Commercial real estate 598,334 4.95 480,211 4.23
Construction 50,739 0.42 34,599 0.30
- ---------------------------------------------------------------------------------
Total mortgage loans 11,848,448 98.01 11,167,117 98.39
- ---------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 189,259 1.57 133,748 1.18
Commercial 18,124 0.15 8,822 0.08
Lines of Credit, Overdraft 18,046 0.15 20,603 0.18
Other 14,765 0.12 19,383 0.17
- ---------------------------------------------------------------------------------
Total consumer and other loans 240,194 1.99 182,556 1.61
- ---------------------------------------------------------------------------------
Total loans (gross) 12,088,642 100.00% 11,349,673 100.00%
Net unamortized premiums
and deferred loan costs 78,619 72,622
- ---------------------------------------------------------------------------------
Total loans 12,167,261 11,422,295
Allowance for loan losses (82,285) (79,931)
- ---------------------------------------------------------------------------------
Total loans, net $12,084,976 $11,342,364
=================================================================================
7
Loan Maturity, Repricing and Activity
The following table shows the contractual maturities of our loans receivable at
December 31, 2004 and does not reflect the effect of prepayments or scheduled
principal amortization.
At December 31, 2004
------------------------------------------------------------------------------
One-to- Consumer
Four Multi- Commercial and Total Loans
(In Thousands) Family Family Real Estate Construction Other Receivable
- -------------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 5,451 $ 1,751 $ 2,048 $ 74,176 $ 17,929 $ 101,355
After one year:
One to three years 11,847 24,152 7,850 39,612 17,058 100,519
Three to five years 51,379 17,289 19,458 3,978 7,654 99,758
Five to ten years 451,643 1,094,355 487,974 -- 12,185 2,046,157
Ten to twenty years 358,522 1,075,960 398,807 -- 14,679 1,847,968
Over twenty years 8,175,905 345,428 28,722 -- 437,783 8,987,838
- -------------------------------------------------------------------------------------------------------------
Total due after one year 9,049,296 2,557,184 942,811 43,590 489,359 13,082,240
- -------------------------------------------------------------------------------------------------------------
Total amount due $9,054,747 $2,558,935 $944,859 $117,766 $507,288 $13,183,595
Net unamortized premiums and
deferred loan costs 79,684
Allowance for loan losses (82,758)
- -------------------------------------------------------------------------------------------------------------
Loans receivable, net $13,180,521
=============================================================================================================
The following table sets forth at December 31, 2004, the dollar amount of our
loans receivable contractually maturing after December 31, 2005, and whether
such loans have fixed interest rates or adjustable interest rates. Our hybrid
ARM loans are classified as adjustable rate loans.
Maturing After December 31, 2005
--------------------------------------
(In Thousands) Fixed Adjustable Total
- ------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 630,618 $ 8,418,678 $ 9,049,296
Multi-family 363,111 2,194,073 2,557,184
Commercial real estate 109,174 833,637 942,811
Construction -- 43,590 43,590
Consumer and other loans 17,538 471,821 489,359
- ------------------------------------------------------------------
Total $1,120,441 $11,961,799 $13,082,240
- ------------------------------------------------------------------
8
The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31,
---------------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------
Mortgage loans (gross) (1):
At beginning of year $12,202,231 $11,671,567 $11,889,940
Mortgage loans originated:
One-to-four family 2,043,538 4,036,573 2,992,746
Multi-family 798,120 1,231,944 750,196
Commercial real estate 256,183 418,107 259,986
Construction 91,704 64,300 50,942
- --------------------------------------------------------------------------------------
Total mortgage loans originated 3,189,545 5,750,924 4,053,870
- --------------------------------------------------------------------------------------
Purchases of mortgage loans (2) 1,160,118 1,536,139 1,534,999
Principal repayments (3,517,383) (6,126,919) (5,334,940)
Sales of mortgage loans (322,079) (645,908) (463,984)
Originations (in excess of) less than
advances on construction loans (12,189) 18,519 (6,076)
Transfer of loans to real estate owned (1,365) (2,028) (1,900)
Net loans charged off (153) (63) (342)
- --------------------------------------------------------------------------------------
At end of year $12,698,725 $12,202,231 $11,671,567
======================================================================================
Consumer and other loans (gross) (3):
At beginning of year $ 431,792 $ 374,183 $ 242,092
Consumer and other loans originated 333,393 286,238 279,905
Principal repayments (253,156) (225,113) (143,592)
Sales of consumer and other loans (3,128) (3,154) (3,518)
Net loans charged off (210) (362) (704)
- --------------------------------------------------------------------------------------
At end of year $ 508,691 $ 431,792 $ 374,183
======================================================================================
(1) Includes loans classified as held-for-sale totaling $22.4 million, $21.4
million and $61.2 million at December 31, 2004, 2003 and 2002,
respectively.
(2) Purchases of mortgage loans represent third party loan originations and are
predominantly secured by one-to-four family properties.
(3) Includes loans classified as held-for-sale totaling $1.4 million, $1.6
million and $1.5 million at December 31, 2004, 2003 and 2002, respectively.
Asset Quality
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, the maintenance of sound credit standards for new loan originations and
a strong real estate market have resulted in our maintaining a very low level of
non-performing assets 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.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent,
in the case of one-to-four family mortgage loans and consumer loans, primarily
on employment and other sources of income, and in the case of multi-family and
commercial real estate loans, on the cash flow generated by the property, which
in turn is impacted by general economic conditions. Other factors, such as
unanticipated expenditures or changes in the financial markets may also impact a
borrower's ability to pay. Collateral values, particularly real estate values,
are also impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
9
Non-performing Assets
Non-performing assets include non-accrual loans, mortgage loans delinquent 90
days or more and still accruing interest and real estate owned, or REO. Total
non-performing assets increased to $33.5 million at December 31, 2004, from
$31.3 million at December 31, 2003. Non-performing loans, the most significant
component of non-performing assets, increased $2.9 million to $32.6 million at
December 31, 2004, from $29.7 million at December 31, 2003. The ratio of
non-performing loans to total loans was 0.25% at December 31, 2004, compared to
0.23% at December 31, 2003. Our ratio of non-performing assets to total assets
was 0.14% at December 31, 2004 and 2003. The allowance for loan losses as a
percentage of total non-performing loans was 254.02% at December 31, 2004,
compared to 280.10% at December 31, 2003. For a further discussion of the
allowance for loan losses and non-performing assets and loans, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," or "MD&A."
We discontinue accruing interest on mortgage loans when such loans become 90
days delinquent as to their interest due, even though in some instances the
borrower has only missed two payments. As of December 31, 2004, $12.3 million of
mortgage loans classified as non-performing had missed only two payments. We
discontinue accruing interest on consumer and other loans when such loans become
90 days delinquent as to their payment due. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted. In some circumstances, we continue to accrue interest on mortgage
loans delinquent 90 days or more as to their maturity date, but not their
interest due. In general, 90 days prior to a loan's maturity, the borrower is
reminded of the maturity date. Where the borrower has continued to make monthly
payments to us and where we do not have a reason to believe that any loss will
be incurred on the loan, we have treated these loans as current and have
continued to accrue interest. Such loans totaled $573,000 at December 31, 2004
and $563,000 at December 31, 2003.
The net carrying value of our REO totaled $920,000 at December 31, 2004 and $1.6
million at December 31, 2003 and consisted of one-to-four family properties. REO
is carried net of all allowances for losses at the lower of cost or fair value
less estimated selling costs.
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our classified assets.
Federal regulations and our policy require the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as special mention, substandard, doubtful or loss. An asset classified as
special mention has potential weaknesses, which, if uncorrected, may result in
the deterioration of the repayment prospects or in our credit position at some
future date. An asset classified as substandard is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full satisfaction of the
loan amount, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. Assets classified as loss are those
considered uncollectible and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Those assets classified as substandard, doubtful or loss are considered
adversely classified. See the table on page 65 for additional information on our
classified assets.
10
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the estimated fair value.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2004, net of
their related allowance for loan losses of $2.2 million, totaled $15.9 million.
Interest income recognized on impaired loans amounted to $616,000 for the year
ended December 31, 2004. For further detail on our impaired loans, see Note 4 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies" in Item 7, "MD&A."
In addition to the requirements of accounting principles generally accepted in
the United States of America, or GAAP, related to loss contingencies, a
federally chartered savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other
federal banking agencies, provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of valuation allowances. It is required that all
institutions have effective systems and controls to identify, monitor and
address asset quality problems, analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner and establish acceptable
allowance evaluation processes that meet the objectives of the federal
regulatory agencies. While we believe that the allowance for loan losses has
been established and maintained at adequate levels, future adjustments may be
necessary if economic or other conditions differ substantially from the
conditions used in making the initial determinations. In addition, there can be
no assurance that the OTS or other regulators, as a result of reviewing our loan
portfolio and/or allowance, will not request that we alter our allowance for
loan losses, thereby affecting our financial condition and earnings.
Investment Activities
General
Our investment policy is designed to complement our lending activities, generate
a favorable return without incurring undue interest rate and credit risk, enable
us to manage the interest rate sensitivity of our overall assets and liabilities
and provide and maintain liquidity, primarily through cash flow. In establishing
our investment strategies, we consider our business and growth plans, the
economic environment, our interest rate sensitivity position, the types of
securities held and other factors. At December 31, 2004, our portfolio of
mortgage-backed and other securities totaled $8.71 billion, or 37.2% of total
assets.
11
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations; securities of government
agencies and GSEs; mortgage-backed securities, including collateralized
mortgage obligations, or CMOs, and real estate mortgage investment conduits,
or REMICs; certain certificates of deposit of insured banks and federally
chartered savings associations; certain bankers acceptances; and, subject
to certain limits, corporate securities, commercial paper and mutual
funds. Our investment policy also permits us to invest in certain derivative
financial instruments. We do not use derivatives for trading purposes. See Note
1 and Note 10 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data," for further discussion of such
derivative financial instruments.
Securities
Our securities portfolio is comprised primarily of mortgage-backed securities.
At December 31, 2004, our mortgage-backed securities totaled $8.54 billion, or
98.1% of total securities, of which $8.41 billion, or 96.5% of total securities,
were REMIC and CMO mortgage-backed securities, substantially all of which had
fixed rates. During the year ended December 31, 2004, we purchased $3.07 billion
of REMIC and CMO mortgage-backed securities as a result of our redeployment of
our cash flows in excess of our mortgage and other loan fundings. These
securities provide liquidity, collateral for borrowings and minimal credit risk
while providing appropriate returns and are an attractive alternative to other
investments due to the wide variety of maturity and repayment options available.
Of the REMIC and CMO mortgage-backed securities portfolio, $7.85 billion, or
93.4%, are guaranteed by Fannie Mae, or FNMA, Freddie Mac, or FHLMC, or Ginnie
Mae, or GNMA, as issuer. The balance of this portfolio is comprised of privately
issued securities, substantially all of which have a credit rating of AAA. In
addition to our REMIC and CMO mortgage-backed securities, at December 31, 2004,
we had $135.7 million, or 1.6% of total securities, in mortgage-backed
pass-through certificates guaranteed by either FNMA, FHLMC or GNMA.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, our mortgage-backed securities are weighted at no more
than 20% for OTS risk-based capital purposes, compared to the 50% risk weighting
assigned to most non-securitized one-to-four family mortgage loans. While
mortgage-backed securities carry a reduced credit risk as compared to whole
loans, they, along with whole loans, remain subject to the risk of a fluctuating
interest rate environment. Changes in interest rates affect both the prepayment
rate and estimated fair value of mortgage-backed securities and mortgage loans.
The other securities portfolio totaled $167.7 million, or 1.9% of total
securities, and consisted of FNMA and FHLMC preferred stock, obligations of
states and political subdivisions and corporate debt and other securities.
Included in the other securities portfolio are various securities, which, by
their terms, may be called by the issuer, typically after the passage of a fixed
period of time. As of December 31, 2004, the amortized cost of such callable
securities totaled $125.1 million. No securities were called during the year
ended December 31, 2004.
At December 31, 2004, our securities available-for-sale totaled $2.41 billion
and our securities held-to-maturity totaled $6.30 billion. For a further
discussion of our securities portfolio, see the tables on pages 13 and 14, Item
7, "MD&A" and Note 1 and Note 3 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY,
Astoria Federal is required to maintain a specified investment in the capital
stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank
System."
12
Federal Funds Sold and Repurchase Agreements
We invest in various money market instruments, including overnight and term
federal funds and repurchase agreements (securities purchased under agreements
to resell), although at December 31, 2004 and 2003 we had no investments in
federal funds sold. Money market instruments are used to invest our available
funds resulting from cash flow and to help satisfy liquidity needs. For a
further discussion of our federal funds sold and repurchase agreements, see Item
7, "MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
Securities Portfolio
The following table sets forth the composition of our available-for-sale and
held-to-maturity securities portfolios at their respective carrying values in
dollar amounts and in percentages of the portfolios at the dates indicated.
At December 31,
---------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------
Percent Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities:
GSE pass-through certificates $ 126,570 5.26% $ 166,724 6.28% $ 249,459 8.93%
REMICs and CMOs:
GSE issuance 2,077,902 86.33 2,227,851 83.90 616,552 22.08
Non-GSE issuance 75,715 3.15 103,740 3.91 1,587,622 56.86
FNMA and FHLMC preferred stock 123,548 5.13 131,361 4.95 136,682 4.89
Other securities 3,148 0.13 25,316 0.96 202,266 7.24
- ------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,406,883 100.00% $2,654,992 100.00% $2,792,581 100.00%
========================================================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
GSE pass-through certificates $ 9,154 0.15% $ 14,345 0.25% $ 24,534 0.49%
REMICs and CMOs:
GSE issuance 5,772,676 91.58 4,958,633 85.60 3,595,244 71.31
Non-GSE issuance 480,053 7.62 772,728 13.34 1,306,113 25.91
Obligations of the U.S. Government
and GSEs -- -- -- -- 65,776 1.30
Obligations of states and political
subdivisions and corporate debt securities 41,053 0.65 47,021 0.81 49,590 0.99
- ------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $6,302,936 100.00% $5,792,727 100.00% $5,041,257 100.00%
========================================================================================================================
The following table sets forth the aggregate amortized cost and estimated fair
value of our securities, substantially all of which are mortgage-backed
securities, where the aggregate book value of securities from a single issuer
exceeds ten percent of our stockholders' equity at December 31, 2004.
Amortized Estimated
(In Thousands) Cost Fair Value
- --------------------------------------------------------------------------------
FHLMC $5,021,986 $5,017,664
FNMA 2,819,514 2,788,373
Countrywide Home Loans, Inc. 182,942 183,373
FHLB-NY (1) 164,456 164,447
Residential Funding Corporation Affiliates 141,638 136,398
- ----------
(1) Includes FHLB-NY stock.
13
The table below sets forth certain information regarding the amortized costs,
estimated fair values, weighted average yields and contractual maturities of our
repurchase agreements, FHLB-NY stock and mortgage-backed and other securities
available-for-sale and held-to-maturity portfolios at December 31, 2004.
Within One to Five to
One Year Five Years Ten Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield
- ---------------------------------------------------------------------------------------------------------------------
Repurchase agreements $267,578 2.19% $ -- --% $ -- --%
=====================================================================================================================
FHLB-NY stock (1)(2) $ -- --% $ -- --% $ -- --%
=====================================================================================================================
Mortgage-backed and other securities
available-for-sale:
GSE pass-through certificates $ -- --% $ 687 6.15% $13,262 6.86%
REMICs and CMOs:
GSE issuance -- -- 173 6.55 -- --
Non-GSE issuance -- -- -- -- -- --
FNMA and FHLMC preferred stock (1) -- -- -- -- -- --
Other securities 251 3.69 2,485 4.61 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 251 3.69% $ 3,345 5.03% $13,262 6.86%
=====================================================================================================================
Mortgage-backed and other securities
held-to-maturity:
GSE pass-through certificates $ 6 7.26% $ 1,939 8.23% $ 2,571 6.60%
REMICs and CMOs:
GSE issuance -- -- -- -- -- --
Non-GSE issuance -- -- -- -- -- --
Obligations of states and political
subdivisions and corporate debt securities -- -- 9,987 5.80 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 6 7.26% $11,926 6.20% $ 2,571 6.60%
=====================================================================================================================
Over
Ten Years Total Securities
--------------------- ----------------------------------
Weighted Estimated Weighted
Amortized Average Amortized Fair Average
(Dollars in Thousands) Cost Yield Cost Value Yield
- -------------------------------------------------------------------------------------------------------------
Repurchase agreements $ -- --% $ 267,578 $ 267,578 2.19%
=============================================================================================================
FHLB-NY stock (1)(2) $ 163,700 2.22% $ 163,700 $ 163,700 2.22%
=============================================================================================================
Mortgage-backed and other securities
available-for-sale:
GSE pass-through certificates $ 109,080 4.59% $ 123,029 $ 126,570 4.84%
REMICs and CMOs:
GSE issuance 2,125,376 3.98 2,125,549 2,077,902 3.98
Non-GSE issuance 78,974 3.44 78,974 75,715 3.44
FNMA and FHLMC preferred stock (1) 123,495 5.86 123,495 123,548 5.86
Other securities 416 3.58 3,152 3,148 4.40
- -------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,437,341 4.08% $2,454,199 $2,406,883 4.10%
=============================================================================================================
Mortgage-backed and other securities
held-to-maturity:
GSE pass-through certificates $ 4,638 8.24% $ 9,154 $ 9,691 7.78%
REMICs and CMOs:
GSE issuance 5,772,676 4.48 5,772,676 5,778,885 4.48
Non-GSE issuance 480,053 4.43 480,053 476,707 4.43
Obligations of states and political
subdivisions and corporate debt securities 31,066 6.73 41,053 41,477 6.50
- -------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $6,288,433 4.49% $6,302,936 $6,306,760 4.49%
=============================================================================================================
(1) As equity securities have no maturities, they are classified in the over
ten years category.
(2) The carrying amount of FHLB-NY stock equals cost.
14
Sources of Funds
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
deposits and borrowings.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, NOW accounts, money
market accounts, demand deposit accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on our sales and marketing efforts, including our PEAK Process, new
products, quality service, competitive rates and long-standing customer
relationships to attract and retain these deposits. At December 31, 2004, our
deposits totaled $12.32 billion. Of the total deposit balance, $1.55 billion, or
12.6%, represent Individual Retirement Accounts. We held no brokered deposits at
December 31, 2004.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. 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. Despite continued intense local competition for checking
accounts, we have been successful in growing our total NOW and demand deposit
account balances during the year ended December 31, 2004, including our business
checking deposits. We continue to maintain a strong level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 44.4% of total deposits at December 31, 2004.
For a further discussion of our deposits, see the tables below and on page 16,
Item 7, "MD&A" and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
The following table presents our deposit activity for the years indicated.
For the Year Ended December 31,
---------------------------------------
(Dollars in Thousands) 2004 2003 2002
- --------------------------------------------------------------------
Opening balance $11,186,594 $11,067,196 $10,903,693
Net deposits (withdrawals) 899,234 (105,853) (124,497)
Interest credited 237,429 225,251 288,000
- --------------------------------------------------------------------
Ending balance $12,323,257 $11,186,594 $11,067,196
====================================================================
Net increase $ 1,136,663 $ 119,398 $ 163,503
====================================================================
Percentage increase 10.16% 1.08% 1.50%
====================================================================
The following table sets forth the maturity periods of our certificates of
deposit in amounts of $100,000 or more at December 31, 2004.
(In Thousands) Amount
- ---------------------------------
Within three months $ 251,999
Three to six months 126,662
Six to twelve months 221,389
Over twelve months 984,197
- ---------------------------------
Total $1,584,247
=================================
15
The following table sets forth the distribution of our average deposit balances
for the periods indicated and the weighted average nominal interest rates for
each category of deposit presented.
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Average Percent Nominal Average Percent Nominal Average Percent Nominal
(Dollars in Thousands) Balance of Total Rate Balance of Total Rate Balance of Total Rate
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 2,973,054 25.18% 0.40% $ 2,907,541 25.96% 0.45% $ 2,754,000 24.80% 1.05%
Money market 1,088,915 9.22 0.58 1,403,363 12.53 0.71 1,876,107 16.90 1.72
NOW 927,632 7.86 0.10 851,723 7.60 0.18 732,905 6.60 0.43
Non-interest bearing NOW
and demand deposit 607,190 5.14 -- 618,082 5.52 -- 536,961 4.84 --
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,596,791 47.40 0.34 5,780,709 51.61 0.43 5,899,973 53.14 1.09
- -------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit (1):
Within one year 955,919 8.10 1.26 1,424,825 12.72 1.55 1,493,726 13.45 2.31
One to three years 2,340,879 19.82 2.80 1,688,220 15.07 3.51 1,790,529 16.12 4.48
Three to five years 2,645,262 22.40 4.82 2,071,864 18.51 5.22 1,658,333 14.94 5.67
Over five years 126,132 1.07 4.95 86,749 0.77 4.95 79,177 0.71 5.53
Jumbo 142,822 1.21 1.65 148,067 1.32 1.74 181,845 1.64 2.75
- -------------------------------------------------------------------------------------------------------------------------------
Total 6,211,014 52.60 3.44 5,419,725 48.39 3.62 5,203,610 46.86 4.19
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $11,807,805 100.00% 1.97% $11,200,434 100.00% 1.97% $11,103,583 100.00% 2.54%
===============================================================================================================================
(1) Terms indicated are original, not term remaining to maturity.
The following table presents, by rate categories, the remaining periods to
maturity of our certificates of deposit outstanding at December 31, 2004 and the
balances of our certificates of deposit outstanding at December 31, 2004, 2003
and 2002.
Period to maturity from December 31, 2004 At December 31,
--------------------------------------------------- ------------------------------------
Within One to two Two to three Over three
(In Thousands) one year years years years 2004 2003 2002
- ------------------------------------------------------------------------------ ------------------------------------
Certificates of deposit:
1.99% or less $ 959,292 $ 22,867 $ -- $ -- $ 982,159 $1,446,137 $ 919,465
2.00% to 2.99% 1,075,796 1,082,430 46,688 67 2,204,981 797,506 1,003,774
3.00% to 3.99% 24,004 668,186 729,346 479,539 1,901,075 1,268,117 625,858
4.00% to 4.99% 87,059 159,876 97,132 355,869 699,936 611,975 775,861
5.00% to 5.99% 970 233,610 301,827 52,637 589,044 678,556 955,627
6.00% and over 425,446 45,494 -- -- 470,940 699,107 872,453
- ---------------------------------------------------------------------------------------------------------------------
Total $2,572,567 $2,212,463 $1,174,993 $888,112 $6,848,135 $5,501,398 $5,153,038
=====================================================================================================================
Borrowings
Borrowings are used as a complement to deposit generation as a funding source
for asset growth and are an integral part of our interest rate risk management
strategy. We enter into reverse repurchase agreements (securities sold under
agreements to repurchase) with nationally recognized primary securities dealers
and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings
and are secured by the securities sold under the agreements. We also obtain
advances from the FHLB-NY which are generally secured by a blanket lien against,
among other things, our one-to-four family mortgage loan portfolio and our
investment in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will
advance, for purposes other than for meeting withdrawals, fluctuates from time
to time in accordance with the policies of the FHLB-NY. See "Regulation and
Supervision - Federal Home Loan Bank System." Occasionally, we will obtain funds
through the issuance of unsecured debt obligations. These obligations are
classified as other borrowings in our consolidated statement of financial
condition. At December 31, 2004, borrowings totaled $9.47 billion.
16
In addition, at December 31, 2004, we had a 12-month commitment for overnight
and one month lines of credit with the FHLB-NY totaling $100.0 million, of which
$50.0 million, which is included in total borrowings, was outstanding under the
one-month line of credit. Both lines of credit are priced at the federal funds
rate plus a spread (generally between 10 and 15 basis points) and reprice daily.
Included in our borrowings are various obligations which, by their terms, may be
called by the securities dealers and the FHLB-NY. At December 31, 2004, we had
$2.18 billion of borrowings which are callable within one year and at various
times thereafter and have contractual remaining maturities of up to four years.
For further information regarding our borrowings, including our borrowings
outstanding, average borrowings, maximum borrowings and weighted average
interest rates at and for each of the years ended December 31, 2004, 2003 and
2002, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and
growing our mutual fund, deferred annuities and insurance sales. Our mutual
fund, deferred annuities and insurance sales occur through our wholly-owned
subsidiaries. See "Subsidiary Activities."
Market Area and Competition
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our retail banking network includes
multiple delivery channels including full service banking offices, automated
teller machines, or ATMs, and telephone and internet banking capabilities. We
consider our strong retail banking network, together with our reputation for
financial strength and customer service, as our major strengths in attracting
and retaining customers in our market areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. At December 31, 2004, Astoria Federal ranked fourth in
deposit market share, with an 8.3% market share, in the Long Island market,
which includes the counties of Queens, Brooklyn, Nassau and Suffolk, based on
the Federal Deposit Insurance Corporation, or FDIC, "Summary of Deposits -
Market Share Report" dated June 30, 2004, as adjusted for acquisitions which
closed in the latter half of 2004.
Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network in twenty-three states and the District of Columbia and through a
third party loan origination program in forty-four states and the District of
Columbia. Our broker and third party loan origination programs provide efficient
and diverse delivery channels for deployment of our cash flows. Additionally,
they provide geographic diversification, reducing our exposure to concentrations
of credit risk. At December 31, 2004, $6.93 billion, or 54.7%, of our total
mortgage loan portfolio was secured by properties located in 43 states other
than New York. Excluding New York, we have a concentration of greater than 5.0%
of our total mortgage loan portfolio in four states: New Jersey, which comprises
12.0%, Connecticut, which comprises 8.8%; Virginia, which comprises 5.9%; and
Illinois, which comprises 5.7%.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past several years, various large
out-of-state financial institutions have entered the New York metropolitan
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area market. All are our competitors to varying degrees. Our competition for
loans, both locally and in the aggregate, comes principally from mortgage
banking companies, commercial banks, savings banks and savings and loan
associations. We also have experienced continued intense competition for
deposits, particularly money market and checking accounts, from certain local
competitors who have offered these accounts at premium rates. Our most direct
competition for deposits comes from commercial banks, savings banks, savings
and loan associations and credit unions. We also face intense competition for
deposits from money market mutual funds and other corporate and government
securities funds as well as from other financial intermediaries such as
brokerage firms and insurance companies.
During 2004, the national economy continued to strengthen. The national and
local real estate markets have remained strong and continue to support new and
existing home sales, which has helped us maintain our strong credit quality and
purchase mortgage activity. During 2004, there has been interest rate volatility
within individual calendar quarters which has resulted in volatility in cash
flows and refinance activity, although not to the magnitude which we had
experienced in 2003, when declining interest rates had resulted in extraordinary
increases in refinance and prepayment activity. The Federal Open Market
Committee, or FOMC, raised the federal funds rate five times (a total of 125
basis points) during 2004, all since the end of June. While short-term U.S.
Treasury yields have shown somewhat similar increases in the second half of
2004, the two and three year U.S. Treasury yields have shown only modest
increases and the five, ten and thirty year U.S. Treasury yields have decreased
since June 30, 2004, resulting in a significant flattening of the U.S. Treasury
yield curve, which is expected to continue in 2005. Our earnings are
significantly affected by changes in market interest rates and U.S. Treasury
yield curves, among other things. See Item 7, "MD&A" and Item 7A, "Quantitative
and Qualitative Disclosures About Market Risk" for further discussion on how
changes in market interest rates and U.S. Treasury yield curves affect our
results of operations.
Subsidiary Activities
We have two direct wholly-owned subsidiaries, Astoria Federal and AF Insurance
Agency, Inc., which are reported on a consolidated basis at December 31, 2004.
AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. provides insurance products
primarily to the customers of Astoria Federal.
We have one other direct subsidiary, Astoria Capital Trust I, which is not
consolidated with Astoria Financial Corporation for financial reporting purposes
as a result of our adoption of FIN 46(R) effective January 1, 2004. Astoria
Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million of
Capital Securities and $3.9 million of common securities and using the proceeds
to acquire $128.9 million of Junior Subordinated Debentures issued by us. See
Note 1 and Note 8 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data" for further discussion of the
Capital Securities, Junior Subordinated Debentures and the deconsolidation of
Astoria Capital Trust I upon adoption of FIN 46(R).
At December 31, 2004, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety
of mutual funds through an unaffiliated third party vendor. Astoria Federal is
reimbursed for expenses and administrative services it provides to AF Agency,
Inc. Fees generated by AF Agency, Inc. totaled $8.1 million for the year ended
December 31, 2004, which represented 10.2% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. Premiums paid to
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purchase BOLI in 2000 and 2002 totaled $350.0 million. The carrying amount of
our investment in BOLI was $374.7 million, or 1.6% of total assets, at December
31, 2004.
Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999, to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, which qualifies as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. APFC
mortgage loans totaled $5.61 billion at December 31, 2004.
Suffco Service Corporation serves as document custodian in connection with
mortgage loans being serviced for FNMA and certain other investors.
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has four subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
Astoria Federal has five additional subsidiaries, one of which is a single
purpose entity that has an interest in a real estate investment, which is not
material to our financial condition, and three of which have no assets or
operations but may be used to acquire interests in real estate in the future.
The fifth such subsidiary serves as a holding company for one of the other four.
Astoria Federal has three additional subsidiaries which are inactive, two of
which Astoria Federal intends to dissolve.
Personnel
As of December 31, 2004, we had 1,716 full-time employees and 291 part-time
employees, or 1,862 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
Regulation and Supervision
General
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its
deposit accounts are insured up to applicable limits by the FDIC under the
Savings Association Insurance Fund, or SAIF, except for those deposits acquired
from The Greater New York Savings Bank, which are insured by the FDIC under the
Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the
OTS concerning our activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other financial institutions. The OTS
periodically performs safety and soundness examinations of Astoria Federal and
us and tests our compliance with various regulatory requirements. The FDIC
reserves the right to do so as well. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the OTS that enforcement action be taken with respect to a
particular federally chartered savings association and, if action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.
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This regulation and supervision establish a comprehensive framework to regulate
and control the activities in which we can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OTS, FDIC or Congress, could have a material adverse
impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
Federally Chartered Savings Association Regulation
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations, Astoria Federal may invest in mortgage loans secured
by residential and non-residential real estate, commercial and consumer loans,
certain types of debt securities and certain other assets. Astoria Federal may
also establish service corporations that may engage in activities not otherwise
permissible for Astoria Federal, including certain real estate equity
investments and securities and insurance brokerage activities. These investment
powers are subject to various limitations, including (1) a prohibition against
the acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (2) a limit of 400% of an association's capital
on the aggregate amount of loans secured by non-residential real estate
property, (3) a limit of 20% of an association's assets on commercial loans,
with the amount of commercial loans in excess of 10% of assets being limited to
small business loans, (4) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt securities,
(5) a limit of 5% of assets on non-conforming loans (loans in excess of the
specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or
an association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core) capital ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2004, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 5.99%, leverage capital ratio of 5.99% and total risk-based
capital ratio of 12.44%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS regulations do not include a specific IRR
component of the risk-based capital requirement. However, the OTS monitors the
IRR of individual institutions through a variety of means, including an analysis
of the change in net portfolio value, or NPV. NPV is defined as the net present
value of the expected future cash flows of an entity's assets and liabilities
and, therefore, hypothetically represents the value of an institution's net
worth. The OTS has also
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used this NPV analysis as part of its evaluation of certain applications or
notices submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a
provides guidance on the management of IRR and the responsibility of boards of
directors in that area. The OTS, through its general oversight of the safety and
soundness of savings associations, retains the right to impose minimum capital
requirements on individual institutions to the extent the institution is not in
compliance with certain written guidelines established by the OTS regarding NPV
analysis. The OTS has not imposed any such requirements on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to take other, supervisory actions
against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized," the severity of which depends upon the
institution's degree of capitalization. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2004, Astoria Federal was considered
"well capitalized" by the OTS.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2004 for
the assessment for the FICO payments was $1.8 million.
Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such
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loans or extensions of credit are secured by readily-marketable collateral.
Astoria Federal is in compliance with applicable loans to one borrower
limitations. At December 31, 2004, Astoria Federal's largest aggregate amount of
loans to one borrower totaled $67.1 million. All of the loans for the largest
borrower were performing in accordance with their terms and the borrower had no
affiliation with Astoria Federal.
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, credit card loans, student loans, and small business loans) on a
monthly basis during at least 9 out of every 12 months. As of December 31, 2004,
Astoria Federal maintained in excess of 93% of its portfolio assets in qualified
thrift investments and had more than 65% of its portfolio assets in qualified
thrift investments for each of the 12 months ended December 31, 2004. Therefore,
Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Our ability to pay dividends, service our debt obligations and repurchase our
common stock is dependent primarily upon receipt of dividend payments from
Astoria Federal. Astoria Federal may not pay dividends to us if, after paying
those dividends, it would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified Astoria Federal that it was in need of
more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA,
an insured depository institution such as Astoria Federal is prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institution would become "undercapitalized" (as
such term is used in the FDIA). Payment of dividends by Astoria Federal also may
be restricted at any time at the discretion of the appropriate regulator if it
deems the payment to constitute an unsafe and unsound banking practice.
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Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
results in an additional assessment based on a percentage of the basic
assessment for any savings association that managed over $1.00 billion in trust
assets, serviced for others loans aggregating more than $1.00 billion, or had
certain off-balance sheet assets aggregating more than $1.00 billion. Effective
July 1, 2004, the OTS adopted a final rule replacing examination fees for
savings and loan holding companies with semi-annual assessments. The OTS is
phasing in the assessments at a rate of 25% of the first semi-annual assessment
on July 1, 2004, 50% of the second semi-annual assessment on January 1, 2005 and
100% of the third semi-annual assessment on July 1, 2005. For the year ended
December 31, 2004, we paid $2.8 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with its examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans in its designated assessment
areas; (2) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs benefiting
low or moderate income individuals and businesses; and (3) a service test, to
evaluate the institution's delivery of banking services throughout its CRA
assessment area. The CRA also requires all institutions to make public
disclosure of their CRA ratings. Astoria Federal has been rated as "outstanding"
over its last five CRA examinations. Regulations require that we publicly
disclose certain agreements that are in fulfillment of CRA. We have no such
agreements in place at this time.
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
Regulation W issued by the Federal Reserve Board, or FRB, as well as additional
limitations as adopted by the Director of the OTS. OTS regulations regarding
transactions with affiliates conform to Regulation W. These provisions, among
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other things, prohibit, limit or place restrictions upon a savings institution
extending credit to, or entering into certain transactions with, its affiliates
(which for Astoria Federal would include us and our non-federally chartered
savings association subsidiaries, if any), principal stockholders, directors
and executive officers. In addition, the OTS regulations include additional
restrictions on savings associations under Section 11 of HOLA, including
provisions prohibiting a savings association from making a loan to an
affiliate that is engaged in non-bank holding company activities and
provisions prohibiting a savings association from purchasing or investing
in securities issued by an affiliate that is not a subsidiary. The OTS
regulations also include certain specific exemptions from these prohibitions.
The FRB and the OTS require each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure compliance
with Regulation W and the OTS regulations regarding transactions with
affiliates.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Astoria
Federal, that is subject to the insider lending restrictions of Section 22(h) of
the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the OTS, together with the
other federal bank regulatory agencies, adopted guidelines establishing general
standards relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, earnings, compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In addition, the OTS
adopted regulations pursuant to FDICIA to require a savings association that is
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the OTS. If, after being so
notified, a savings association fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance plan, the OTS
must issue an order directing corrective actions and may issue an order
directing other actions of the types to which a significantly undercapitalized
institution is subject under the "prompt corrective action" provisions of
FDICIA. If a savings association fails to comply with such an order, the OTS may
seek to enforce such order in judicial proceedings and to impose civil money
penalties. For further discussion, see "Regulation and Supervision - Federally
Chartered Savings Association Regulation - Prompt Corrective Regulatory Action."
Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
Privacy Protection
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The
24
regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the
ability to "opt-out" of having Astoria Federal share their nonpublic
personal information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to ensure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.
Anti-Money Laundering and Customer Identification
Astoria Federal is subject to OTS regulations implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act
gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act and the related OTS
regulations impose the following requirements with respect to financial
institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable
period of time.
o Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks and
compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
In addition, bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on FRA and Bank Merger
Act applications.
Federal Home Loan Bank System
Astoria Federal is a member of the FHLB System which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year or 5% of its
outstanding borrowings from the FHLB-NY, whichever is greater. Astoria Federal
was in compliance with this requirement with an investment in FHLB-NY stock at
December 31, 2004 of $163.7 million. Dividends from the FHLB-NY to Astoria
Federal amounted to $3.5 million for the year ended December 31, 2004, $10.6
million for the year ended December 31, 2003 and $10.7 million for the year
ended December 31,
25
2002. The FHLB-NY suspended dividend payments to stockholders in the
fourth quarter of 2003, due to losses in its securities portfolio, but
resumed payment in January 2004 at a rate of 1.45% as compared to a rate of
5.05% paid in July 2003, the last dividend payment prior to the
FHLB-NY's dividend suspension. The dividend payment received in October 2004 was
at a rate of 2.22% and the most recent dividend payment received in January 2005
was at a rate of 3.05%.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $7.0 million and $47.6 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $47.6 million. The first $7.0 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation
We are a unitary savings and loan association holding company within the meaning
of the HOLA. As such, we are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over us and our savings association
subsidiary. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan association holding
companies that are "grandfathered," i.e., unitary savings and loan association
holding companies in existence or with applications filed with the OTS on or
before May 4, 1999, such as us, retain their authority under the prior law. All
other unitary savings and loan association holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies
from acquiring grandfathered unitary savings and loan association holding
companies.
The HOLA prohibits a savings and loan association holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
Federal Securities Laws
We are subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Exchange Act.
26
Delaware Corporation Law
We are incorporated under the laws of the State of Delaware. Thus, we are
subject to regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
Federal Taxation
General
We report our income on a calendar year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations.
Corporate Alternative Minimum Tax
In addition to the regular income tax, corporations (including savings and loan
associations) generally are subject to an alternative minimum tax, or AMT, in an
amount equal to 20% of alternative minimum taxable income to the extent the AMT
exceeds the corporation's regular tax. The AMT is available as a credit against
future regular income tax. We do not expect to be subject to the AMT.
Tax Bad Debt Reserves
Effective 1996, federal tax legislation modified the methods by which a thrift
computes its bad debt deduction. As a result, Astoria Federal is required to
claim a deduction equal to its actual loss experience, and the "reserve method"
is no longer available. Any cumulative reserve additions (i.e., bad debt
deductions) in excess of actual loss experience for tax years 1988 through 1995
were recaptured over a six year period. Generally, reserve balances as of
December 31, 1987 will only be subject to recapture upon distribution of such
reserves to shareholders. For a further discussion of bad debt reserves, see
"Distributions."
Distributions
To the extent that Astoria Federal makes "nondividend distributions" to
shareholders, such distributions will be considered to result in distributions
from Astoria Federal's "base year reserve," (i.e., its reserve as of December
31, 1987), to the extent thereof, and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in Astoria Federal's taxable income. Nondividend distributions include
distributions in excess of Astoria Federal's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Astoria Federal's current or accumulated earnings
and profits will not constitute nondividend distributions and, therefore, will
not be included in Astoria Federal's taxable income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 35% federal corporate income tax rate.
Dividends Received Deduction and Other Matters
We may exclude from our income 100% of dividends received from Astoria Federal
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which we will not file a consolidated tax
return, except that if we own more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
27
State and Local Taxation
New York State Taxation
New York State imposes an annual franchise tax on banking corporations, based on
net income allocable to New York State, at a rate of 7.5%. If, however, the
application of an alternative minimum tax (based on taxable assets allocated to
New York, "alternative" net income, or a flat minimum fee) results in a greater
tax, an alternative minimum tax will be imposed. In addition, New York State
imposes a tax surcharge of 17.0% of the New York State Franchise Tax, calculated
using an annual franchise tax rate of 9.0% (which represents the 2000 annual
franchise tax rate), allocable to business activities carried on in the
Metropolitan Commuter Transportation District. These taxes apply to us, Astoria
Federal and certain of Astoria Federal's subsidiaries. Certain subsidiaries of a
banking corporation may be subject to a general business corporation tax in lieu
of the tax on banking corporations. The rules regarding the determination of
income allocated to New York and alternative minimum taxes differ for these
subsidiaries.
Bad Debt Deduction
New York State passed legislation that incorporated the former provisions of
Internal Revenue Code, or IRC, Section 593 into New York State tax law. The
impact of this legislation enabled Astoria Federal to defer the recapture of the
New York State tax bad debt reserves that would have otherwise occurred as a
result of the federal amendment to IRC 593. The legislation also enabled Astoria
Federal to continue to utilize the reserve method for computing its bad debt
deduction. Astoria Federal must meet certain definitional tests, primarily
relating to its assets and the nature of its business to be a qualifying thrift
and would then be permitted to establish a reserve for bad debts and to make
annual additions thereto, which additions may, within specified formula limits,
be deducted in arriving at its taxable income. Astoria Federal will be a
qualifying thrift if, among other requirements, at least 60% of its assets are
assets described in Section 1453(h)(1) of the New York State tax law, or the 60%
Test.
Astoria Federal presently satisfies the 60% Test. Although there can be no
assurance that Astoria Federal will satisfy the 60% Test in the future, we
believe that this level of qualifying assets can be maintained by Astoria
Federal. Astoria Federal's deduction for additions to its bad debt reserve with
respect to qualifying loans may be computed using the experience method or a
percentage equal to 32% of Astoria Federal's taxable income, computed with
certain modifications, without regard to Astoria Federal's actual loss
experience, and reduced by the amount of any addition permitted to the reserve
for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria
Federal's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on its actual loss experience.
Under the experience method, the amount of a reasonable addition, in general,
equals the amount necessary to increase the balance of the bad debt reserve at
the close of the taxable year to the greater of (1) the amount that bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years
bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the base year (assuming
that the loans outstanding have not declined since then). The "base year" for
these purposes is the last taxable year beginning before the NYS Percentage of
Taxable Income Method bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the addition to the
reserve for qualifying real property loans calculated under the NYS Percentage
of Taxable Income Method. Each year Astoria Federal reviews the most favorable
way to calculate the deduction attributable to an addition to the bad debt
reserve.
28
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS Percentage of Taxable Income Method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which 12% of the amount
that the total deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeded the sum of the qualifying
thrift's surplus, undivided profits and reserves at the beginning of such year.
New York City Taxation
Astoria Federal is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. New York City has enacted
legislation regarding the use and treatment of tax bad debt reserves that is
substantially similar to the New York State legislation described above. A
significant portion of Astoria Federal's entire net income for New York City
purposes is allocated outside the jurisdiction which has the effect of
significantly reducing the New York City taxable income of Astoria Federal.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, we are exempt from
Delaware corporate income tax but are required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
ITEM 2. PROPERTIES
At December 31, 2004, we were authorized to operate 86 full-service banking
offices, of which 50 were owned and 36 were leased. At December 31, 2004, we
owned our principal executive office and the office for our mortgage operations,
both located in Lake Success, New York. At December 31, 2004, we also leased our
regional lending office located in New York, New York, as well as the facility
where we maintain our loan documentation in Farmingdale, New York. We believe
such facilities are suitable and adequate for our operational needs.
On December 23, 2004, we had a fire at our Oakdale banking office, which we own,
which resulted in total destruction of the facility. Customers were directed to
our other local banking offices for their banking transactions. We have adequate
insurance to cover the expenses related to the loss and are planning to rebuild
the banking office during 2005.
At December 31, 2004, we leased our previous mortgage operating facility in
Mineola, New York which we no longer occupy. At December 31, 2004 this facility
was fully sublet.
For further information regarding our lease obligations, see Item 7, "MD&A" and
Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse effect on
our financial condition, results of operations or liquidity.
29
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
trial for the suit entitled The Long Island Savings Bank, FSB, et al. vs. The
United States in the United States Court of Federal Claims commenced on January
18, 2005. The ultimate outcomes of such actions are uncertain and there can be
no assurance that we will benefit financially from such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ended December 31, 2004 to a vote of
our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On January 19, 2005, our Board of Directors declared a three-for-two common
stock split in the form of a 50% stock dividend. On March 1, 2005, stockholders
received one additional share of our common stock for every two shares owned. As
previously discussed, all share and per share data included in this Form 10-K
have been retroactively adjusted to reflect this stock split.
Our common stock trades on the New York Stock Exchange, or NYSE, under the
symbol "AF." The table below shows the high and low sale prices reported on the
NYSE for our common stock during the periods indicated.
2004 2003
---------------------------------
High Low High Low
- --------------------------------------------------
First Quarter $28.37 $23.63 $18.87 $15.49
Second Quarter 25.73 22.17 19.45 15.51
Third Quarter 24.82 22.21 22.77 18.00
Fourth Quarter 27.81 23.15 25.69 20.59
As of February 28, 2005, we had approximately 3,750 shareholders of record. As
of December 31, 2004, there were 110,304,669 shares of common stock outstanding.
The following schedule summarizes the cash dividends paid per common share for
2004 and 2003.
2004 2003
- ------------------------------
First Quarter $0.16 $0.13
Second Quarter 0.17 0.14
Third Quarter 0.17 0.15
Fourth Quarter 0.17 0.15
On January 19, 2005, our Board of Directors declared a quarterly cash dividend
of $0.20 per common share, which was paid on March 1, 2005, to common
stockholders of record as of the close of business on February 15, 2005. Our
Board of Directors intends to review the payment of dividends quarterly and
plans to continue to maintain a regular quarterly dividend in the future,
dependent upon our earnings, financial condition and other factors.
30
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. Our payment of dividends is dependent, in large part,
upon receipt of dividends from Astoria Federal. Astoria Federal is subject to
certain restrictions which may limit its ability to pay us dividends. See Item
1, "Business - Regulation and Supervision" and Note 9 of Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data"
for an explanation of the impact of regulatory capital requirements on Astoria
Federal's ability to pay dividends. See Item 1, "Business - Federal Taxation"
and Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" for an explanation of the tax impact of the
unlikely event that Astoria Federal (1) makes distributions in excess of current
and accumulated earnings and profits, as calculated for federal income tax
purposes; (2) redeems its stock; or (3) liquidates.
The following table sets forth the repurchases of our common stock by month
during the three months ended December 31, 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
- -------------------------------------------------------------------------------------------
October 1, 2004 through
October 31, 2004 810,000 $24.58 810,000 8,277,300
November 1, 2004 through
November 30, 2004 1,065,000 26.78 1,065,000 7,212,300
December 1, 2004 through
December 31, 2004 367,500 27.36 367,500 6,844,800
- -------------------------------------------------------------------------------------------
Total 2,242,500 $26.08 2,242,500
===========================================================================================
All of the shares repurchased during the three months ended December 31, 2004
were repurchased under our tenth stock repurchase plan, approved by our Board of
Directors on May 19, 2004, which authorized the purchase, at management's
discretion, of 12,000,000 shares, or approximately 10% of our common stock then
outstanding, over a two year period in open-market or privately negotiated
transactions.
On June 1, 2004, our Chief Executive Officer, George L. Engelke, Jr., submitted
his annual certification to the NYSE indicating that he was not aware of any
violation by Astoria Financial Corporation of NYSE corporate governance listing
standards as of the June 1, 2004 certification date.
31
Item 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other data. This
financial data is derived in part from, and should be read in conjunction with,
our consolidated financial statements and related notes.
At December 31,
-------------------------------------------------------------------
(In Thousands) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Selected Financial Data:
Total assets $23,415,869 $22,461,594 $21,701,758 $22,671,635 $22,340,731
Federal funds sold and repurchase
agreements 267,578 65,926 510,252 1,309,164 171,525
Mortgage-backed and other securities
available-for-sale 2,406,883 2,654,992 2,792,581 3,549,183 7,703,222
Mortgage-backed and other securities
held-to-maturity 6,302,936 5,792,727 5,041,257 4,463,928 1,712,191
Loans receivable, net 13,180,521 12,603,866 11,975,815 12,084,976 11,342,364
Deposits 12,323,257 11,186,594 11,067,196 10,903,693 10,071,687
Borrowed funds, net 9,469,835 9,632,037 8,825,046 9,825,661 10,324,216
Stockholders' equity 1,369,764 1,396,531 1,553,998 1,542,586 1,513,163
For the Year Ended December 31,
--------------------------------------------------------------
(In Thousands, Except Per Share Data) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $1,045,901 $1,057,291 $1,266,262 $1,438,563 $1,517,934
Interest expense 575,335 677,753 801,838 981,605 1,023,353
- --------------------------------------------------------------------------------------------------------------------
Net interest income 470,566 379,538 464,424 456,958 494,581
Provision for loan losses -- -- 2,307 4,028 4,014
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 470,566 379,538 462,117 452,930 490,567
Non-interest income 80,084 119,561 107,407 90,105 69,246
Non-interest expense:
General and administrative 225,011 205,877 195,827 178,767 190,040
Extinguishment of debt -- -- 2,202 -- --
Amortization of goodwill -- -- -- 19,078 19,078
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 225,011 205,877 198,029 197,845 209,118
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of accounting change 325,639 293,222 371,495 345,190 350,695
Income tax expense 106,102 96,376 123,066 120,036 134,146
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 219,537 196,846 248,429 225,154 216,549
Cumulative effect of accounting change, net of tax -- -- -- (2,294) --
- --------------------------------------------------------------------------------------------------------------------
Net income 219,537 196,846 248,429 222,860 216,549
Preferred dividends declared -- 4,500 6,000 6,000 6,000
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 219,537 $ 192,346 $ 242,429 $ 216,860 $ 210,549
====================================================================================================================
Basic earnings per common share $ 2.03 $ 1.68 $ 1.94 $ 1.60 $ 1.46
Diluted earnings per common share $ 2.00 $ 1.66 $ 1.90 $ 1.57 $ 1.44
32
At or For the Year Ended December 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 0.97% 0.87% 1.12% 0.99% 0.97%
Return on average stockholders' equity 15.81 13.26 15.87 14.13 16.70
Return on average tangible stockholders' equity (1) 18.25 15.15 18.00 16.12 20.01
Average stockholders' equity to average assets 6.12 6.54 7.07 7.00 5.81
Average tangible stockholders' equity
to average tangible assets (1)(2) 5.35 5.78 6.28 6.19 4.90
Stockholders' equity to total assets 5.85 6.22 7.16 6.80 6.77
Net interest rate spread 2.09 1.72 2.11 1.91 1.98
Net interest margin 2.17 1.78 2.23 2.12 2.27
Average interest-earning assets to average
interest-bearing liabilities 1.03x 1.02x 1.03x 1.05x 1.06x
General and administrative expense to average assets 0.99% 0.91% 0.88% 0.79% 0.85%
Efficiency ratio (3) 40.86 41.25 34.25 32.68 33.71
Cash dividends paid per common share $ 0.67 $ 0.57 $ 0.51 $ 0.41 $ 0.34
Dividend payout ratio 33.50% 34.34% 26.84% 26.11% 23.61%
Asset Quality Ratios:
Non-performing loans to total loans (4) 0.25 0.23 0.29 0.31 0.32
Non-performing loans to total assets (4) 0.14 0.13 0.16 0.16 0.16
Non-performing assets to total assets (4)(5) 0.14 0.14 0.16 0.18 0.18
Allowance for loan losses to non-performing loans (4) 254.02 280.10 242.04 221.70 220.88
Allowance for loan losses to non-accrual loans 258.57 285.51 249.53 229.60 226.85
Allowance for loan losses to total loans 0.62 0.66 0.69 0.68 0.70
Other Data:
Number of deposit accounts 975,155 963,120 990,873 985,473 972,777
Mortgage loans serviced for others (in thousands) $1,670,062 $1,895,102 $2,671,085 $3,322,087 $3,929,483
Number of full service banking offices 86 86 86 86 86
Regional lending offices 4 3 1 1 1
Full time equivalent employees 1,862 1,971 1,956 1,885 1,862
(1) Average tangible stockholders' equity represents average stockholders'
equity less average goodwill.
(2) Average tangible assets represents average assets less average goodwill.
(3) Efficiency ratio represents general and administrative expense divided by
the sum of net interest income plus non-interest income.
(4) Non-performing loans consist of all non-accrual loans and all mortgage
loans delinquent 90 days or more as to their maturity date but not their
interest due and exclude loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $2.8 million, $3.9 million, $5.0
million, $5.4 million and $5.2 million at December 31, 2004, 2003, 2002,
2001, and 2000, respectively.
(5) Non-performing assets consist of all non-performing loans and real estate
owned.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
Executive Summary
The following overview should be read in conjunction with our MD&A in its
entirety.
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 increased dividends and our stock
repurchases. We have been successful in achieving this goal over the past
several years and that trend continued during 2004.
During the year ended December 31, 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. The FOMC raised the federal funds
rate five times during 2004, all since the end of June. While short-term U.S.
Treasury yields have shown somewhat similar increases in the second half of
2004, the two and three year U.S. Treasury yields have shown only modest
increases and the five, ten and thirty year U.S. Treasury yields have decreased
since June 30, 2004, resulting in a significant flattening of the U.S. Treasury
yield curve. During 2004, there has been interest rate volatility within
individual calendar quarters which has resulted in volatility in cash flows and
refinance activity, although not to the magnitude which we had experienced in
2003.
Total deposits increased during the year ended December 31, 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 during the year ended December 31, 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. Also contributing to the increase in
our total loan portfolio was an increase in home equity lines of credit and a
modest increase in our one-to-four family mortgage loan portfolio where
originations and purchases exceeded the levels of repayments in the 2004 fourth
quarter, resulting in an increase in the balance of this portfolio from December
31, 2003. Our total non-performing assets increased during the year ended
December 31, 2004, primarily in the fourth quarter, yet continue to remain at
very low levels in relation to the size of our loan portfolio and relative to
our peers.
Our securities portfolio also increased during the year ended December 31, 2004,
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. Deposit growth was also utilized to reduce our
overall borrowings during the year ended December 31, 2004.
Net income for 2004 increased from the prior year. This increase was primarily
due to an increase in net interest income, partially offset by a decrease in
non-interest income and an increase in non-interest
34
expense. The increase in net interest income was primarily attributable to a
decrease 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. The decrease in interest expense on borrowings
was partially offset by an increase in interest expense on deposits and
a decrease in interest income. The decrease in non-interest income relates
primarily to an other-than-temporary impairment write-down on our FHLMC
perpetual preferred securities in the 2004 fourth quarter, coupled with
decreases in mortgage banking income, net and other non-interest income. The
increase in non-interest expense relates primarily to increases in compensation
and benefits expense, occupancy, equipment and systems expense and other
expense.
Although the slope of the U.S. Treasury yield curve, which has flattened
considerably in 2004 and is projected to continue to flatten during 2005,
presents a challenge, we should continue to experience solid core business
growth in 2005. Deposit growth is expected to remain robust as we launch several
new deposit products, specifically a short-term liquid certificate of deposit
account and a new business money market account, to augment our very successful
efforts in attracting medium term certificate of deposit accounts. We will also
continue to focus on building our checking account deposit base. With respect to
mortgage lending, particularly one-to-four family lending, the strength of the
purchase mortgage market and the reduced level of loan prepayments should result
in continued strong one-to-four family loan portfolio growth in 2005. We also
anticipate solid growth in the multi-family and commercial real estate loan
portfolios in 2005. Notwithstanding core business growth, based on the projected
further flattening of the U.S. Treasury yield curve, we expect to limit asset
growth by reducing the securities and borrowing portfolios through normal cash
flow in 2005. At the same time, we expect to continue to repurchase our stock,
as we continue to view this activity as a very desirable use of capital.
Critical Accounting Policies
Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" contains a summary of our significant
accounting policies. Various elements of our accounting policies, by their
nature, are inherently subject to estimation techniques, valuation assumptions
and other subjective assessments. Our policies with respect to the methodologies
used to determine the allowance for loan losses, the valuation of mortgage
servicing rights, or MSR, and judgments regarding goodwill and securities
impairment are our most critical accounting policies because they are important
to the presentation of our financial condition and results of operations,
involve a higher degree of complexity and require management to make difficult
and subjective judgments which often require assumptions or estimates about
highly uncertain matters. The use of different judgments, assumptions and
estimates could result in material differences in our results of operations or
financial condition.
The following is a description of our critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical accounting policies and their application are reviewed quarterly with
the Audit Committee of our Board of Directors.
Allowance for Loan Losses
Our allowance for loan losses is established and maintained through a provision
for loan losses based on our evaluation of the risks inherent in our loan
portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The
allowance is comprised of both specific valuation allowances and general
valuation allowances.
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process, including the procedures for
impairment recognition under Statement of Financial Accounting Standards, or
SFAS, No. 114, "Accounting by Creditors for Impairment of a Loan, an Amendment
of FASB Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB
Statement No.
35
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.
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 at
origination, 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 allowances rely 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 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 history of our portfolio and compare that to our previously
determined allowance coverage percentages. In doing so, we evaluate
36
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. 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 0.62% at December 31, 2004, compared to 0.66% at December 31, 2003 and 0.69%
at December 31, 2002. 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.
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses" and "Asset Quality."
Valuation of MSR
MSR are carried at cost and amortized over the estimated remaining lives of the
loans serviced. Impairment, if any, is recognized through a valuation allowance.
The initial recognition of originated MSR is based upon an allocation of the
total cost of the related loans between the loans and the servicing rights based
on their relative estimated fair values. The estimated fair value of MSR is
based
37
upon quoted market prices of similar loans which we sell servicing released.
Impairment exists if the carrying value of MSR exceeds the estimated
fair value. We stratify our MSR by underlying loan type, primarily fixed and
adjustable, and further stratify the fixed rate loans by interest rate.
Individual impairment allowances for each stratum are established when necessary
and then adjusted in subsequent periods to reflect changes in impairment. The
estimated fair values of each MSR stratum are obtained through independent third
party valuations based upon an analysis of future cash flows, incorporating
numerous assumptions including servicing income, servicing costs, market
discount rates, prepayment speeds, default rates and other market driven data,
including the market's perception of future interest rate movements. All
assumptions are reviewed for reasonableness on a quarterly basis to ensure they
reflect current and anticipated market conditions.
At December 31, 2004, our MSR, net, had an estimated fair value of $16.8 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.10%, a weighted average constant prepayment rate on
mortgages of 15.33% and a weighted average life of 4.8 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 fair value of MSR is highly sensitive to changes in assumptions. Changes in
prepayment speed assumptions have the most significant impact on the fair value
of our MSR. Generally, as interest rates decline, mortgage loan prepayments
accelerate due to increased refinance activity, which results in a decrease in
the fair value of MSR. As interest rates rise, mortgage loan prepayments slow
down, which results in an increase in the fair value of MSR. Thus, any
measurement of the fair value of our MSR is limited by the conditions existing
and the assumptions utilized as of a particular point in time, and those
assumptions may not be appropriate if they are applied at a different point in
time. Assuming an increase in interest rates of 100 basis points at December 31,
2004, the estimated fair value of our MSR would have been $6.0 million greater.
Assuming a decrease in interest rates of 100 basis points at December 31, 2004,
the estimated fair value of our MSR would have been $7.4 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 amount of goodwill exceeds its implied fair value. As of December 31,
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. According to
SFAS No. 142, "Goodwill and Other Intangible Assets," quoted market prices in
active markets are the best evidence of fair value and are to be used as the
basis for the measurement, when available. Other acceptable valuation methods
include present value measurement or measurements based on multiples of earnings
or revenue or similar performance measures.
For purposes of our goodwill impairment testing, we identified a single
reporting unit. On September 30, 2004, we performed our annual goodwill
impairment test. We determined the fair value of our 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. We would test our goodwill for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of our reporting unit below its carrying
amount. No events have occurred and no circumstances have changed since our
annual impairment test date that would more likely than not reduce the fair
value of our reporting unit below its carrying amount. The identification of
additional reporting units or the use of other valuation techniques could result
in materially different evaluations of impairment.
38
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value,
with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive loss/income in stockholders' equity. Debt securities which
we have the positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. The fair values of our
securities, which are primarily fixed rate mortgage-backed securities at
December 31, 2004, are based on published or securities dealers' market values
and are affected by changes in interest rates. In general, as interest rates
rise, the fair value of fixed rate securities will decrease; as interest rates
fall, the fair value of fixed rate securities will increase. We conduct a
periodic review and evaluation of the securities portfolio to determine if the
decline in the fair value of any security below its cost basis is
other-than-temporary. We generally view changes in fair value caused by changes
in interest rates as temporary, which is consistent with our experience. If we
deem such decline to be other-than-temporary, the security is written down to a
new cost basis and the resulting loss is charged to earnings. At December 31,
2004, we had 142 securities with an estimated fair value totaling $4.67 billion
which had an unrealized loss totaling $75.3 million. Of the securities in an
unrealized loss position at December 31, 2004, $1.05 billion, with an unrealized
loss of $47.0 million, have been in a continuous unrealized loss position for
more than twelve months. At December 31, 2004, the impairments are deemed
temporary based on the direct relationship of the decline in fair value to
movements in interest rates, the life of the investments and the high credit
quality.
During the 2004 fourth quarter, we recorded a $16.5 million other-than-temporary
impairment write-down charge on $120.0 million face value of perpetual preferred
stock issued by FHLMC which is included as a component of non-interest income.
The FHLMC perpetual preferred securities are investment grade securities, rated
AA- by Standard & Poor's and Aa3 by Moody's Investors Service, held in our
available-for-sale securities portfolio. Prior to recording the
other-than-temporary impairment write-down charge, temporary impairment was
recorded as an unrealized mark-to-market loss on securities available-for-sale
and reflected, net of tax, as a reduction to stockholders' equity through other
comprehensive income. Accordingly, the reclassification of the unrealized
after-tax loss to an other-than-temporary impairment charge to earnings did not
affect stockholders' equity or related capital ratios. The decision to recognize
the other-than-temporary impairment charge is based on a conservative
interpretation of existing accounting literature. Similar to debt securities,
changes in the estimated fair value of these FHLMC perpetual preferred
securities are primarily attributable to changes in market interest rates.
However, as these securities are equity instruments with no stated maturity
date, they cannot be evaluated in the same manner as the changes in the
estimated fair value of debt instruments, according to existing authoritative
literature. While we believed the estimated fair value of these securities would
have increased back to their amortized cost in the future, we could not predict
with certainty that such a recovery would have occurred in the near term,
particularly since a recovery would be predicated on a decline in market
interest rates. The write-down does not change our expectation of the long-term
value of these investment grade securities.
During the 2004 fourth quarter, the Financial Accounting Standards Board, or
FASB, announced plans for a full reconsideration of existing authoritative
literature concerning other-than-temporary impairment of securities. For
additional information, see "Impact of Accounting Standards and Interpretations"
and Note 3 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
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. As mortgage interest rates increase, customers'
refinance activities tend to decelerate causing the cash flow from both our
mortgage loan portfolio and our mortgage-backed securities portfolio to
decrease. When mortgage rates decrease, the opposite tends
39
to occur. Principal payments on loans and mortgage-backed securities and
proceeds from calls and maturities of other securities totaled $6.42 billion for
the year ended December 31, 2004 and $13.42 billion for the year ended
December 31, 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 during 2004. Medium- and long-term U.S. Treasury yields
(maturities of two to ten years) increased 132 basis points on average from
June 30, 2003 to December 31, 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 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 $277.4 million during the year ended December 31, 2004 and $358.2
million during the year ended December 31, 2003. Deposits increased $1.14
billion during the year ended December 31, 2004 and $119.4 million during the
year ended December 31, 2003. The net increases in deposits for the years ended
December 31, 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 year
ended December 31, 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 as part of
our interest rate risk management strategy to extend liabilities as well as to
enable us to reduce borrowings. During the year ended December 31, 2004, $3.90
billion of certificates of deposit, with a weighted average rate of 2.45% and a
weighted average maturity at inception of sixteen months, matured and $5.02
billion of certificates of deposit were issued or repriced, with a weighted
average rate of 2.66% 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 year ended December 31, 2004, including our business
checking deposits, due in large part to our concerted sales and marketing
efforts, including our PEAK sales process. See page 51 for further detail
regarding deposit activity.
Net borrowings decreased $162.2 million during the year ended December 31, 2004
and increased $807.0 million during the year ended December 31, 2003. The
decrease in net borrowings during the year ended December 31, 2004 reflects the
repayment of certain high cost borrowings as they matured. During the year ended
December 31, 2004, $3.44 billion in medium-term borrowings with a weighted
average rate of 5.14% 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
year ended December 31, 2004 were either repaid or rolled over into short-term
borrowings. The increase in net borrowings during the year ended December 31,
2003 was primarily the result of additional medium-term borrowings entered into
during the first quarter of 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 year ended December 31,
2004 totaled $4.35 billion, of which $3.19 billion were originations and $1.16
billion were purchases. This compares to gross mortgage loans originated and
purchased during the year ended December 31, 2003, totaling $7.29 billion, of
which $5.75 billion were originations and $1.54 billion were purchases. Total
mortgage loans originated include originations of loans held-for-sale totaling
$323.2 million during the year ended December 31, 2004 and $613.3 million during
the year ended December 31, 2003. The decrease in loan originations and
purchases for the year ended December 31, 2004 compared to the year ended
December 31, 2003 reflects the previously discussed reduction in the level of
mortgage refinance activity during 2004. Purchases of mortgage-backed securities
totaled $3.07 billion during the year ended December 31, 2004 and $9.30 billion
during the year ended December 31, 2003. The decrease
40
in mortgage-backed securities purchases during the year ended December 31, 2004
also reflects the decrease in cash flows resulting from the reduction in
refinance activity.
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 repurchase agreements, our most liquid assets, totaled $406.4
million at December 31, 2004, compared to $239.8 million at December 31, 2003.
This increase reflects the net effect of our operating, investing and financing
activities. Borrowings maturing over the next twelve months total $3.15 billion
with a weighted average rate of 2.80%. We have the flexibility to either repay
or rollover these borrowings as they mature. In addition, we have $2.57 billion
in certificates of deposit with a weighted average rate of 2.90% 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.
The following table details borrowing and certificate of deposit maturities and
their weighted average rates as of December 31, 2004:
Borrowings Certificates of Deposit
-------------------- -----------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- --------------------------------------------- -----------------------
Contractual Maturity:
2005 $3,150(1) 2.80% $2,573 2.90%
2006 1,424 2.63 2,212 3.49
2007 1,870(2) 3.04 1,175 4.19
2008 2,450(3) 5.02 465 3.87
2009 200 3.00 340 4.17
2010 and thereafter 379 7.11 83 4.87
------ ---- ------ ----
Total $9,473 3.57% $6,848 3.46%
====== ==== ====== ====
(1) Includes $2.18 billion of short term borrowings with a weighted average
rate of 2.35%.
(2) Includes $50.0 million of borrowings which are callable by the counterparty
in 2005 and at various times thereafter.
(3) Includes $2.13 billion of borrowings which are callable by the counterparty
in 2005 and at various times thereafter.
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 subsidiary, Astoria Capital Trust I, and
senior debt. Holding company debt obligations, which are included in other
borrowings, are further described below.
Our Junior Subordinated Debentures total $128.9 million, have an interest rate
of 9.75%, mature on November 1, 2029 and are prepayable, in whole or in part, at
our option on or after November 1, 2009 at declining premiums to November 1,
2019, after which the Junior Subordinated Debentures are prepayable at par
value. The terms of the Junior Subordinated Debentures limit our ability to pay
dividends or otherwise make distributions if we are in default or have elected
to defer interest payments otherwise due under the Junior Subordinated
Debentures. Such limitations do not apply, however, to dividends payable in our
common stock, or our dividend reinvestment plan, our stock option plans or our
stockholders rights plan.
We have $80.0 million of 7.67% senior unsecured notes, which were issued in a
private placement, mature in 2008 and require annual principal payments of $20.0
million per year, which began in 2004. The terms of these notes preclude a sale
of more than 30% of our deposit liabilities and preclude us from incurring
long-term debt, which excludes debt of Astoria Federal incurred in the ordinary
course of business, including FHLB-NY advances, in excess of 90% of our
consolidated stockholders' equity. The terms also require that we maintain a
consolidated capital to assets ratio of not less than 4.0%; a
41
non-performing asset ratio, net of our allowance for loan losses, of less than
3.5% of assets; and a consolidated interest coverage ratio of at least 3.0 to
1.0. However, the terms of our 7.67% senior unsecured notes do not preclude
our merger or sale of all or substantially all of our assets. As of
December 31, 2004, we were in compliance with each of these covenants, and we do
not anticipate these covenants will have a material effect on our operations.
We have $250.0 million of 5.75% senior unsecured notes which are due in 2012 and
are redeemable, in whole or in part, at any time at a "make-whole" redemption
price, together with accrued interest to the redemption date. The terms of our
$250.0 million 5.75% senior unsecured notes restrict our ability to sell,
transfer or pledge as collateral the shares of Astoria Federal or any other
significant subsidiary or of all, or substantially all, of the assets of Astoria
Federal or any other significant subsidiary, other than in connection with a
sale or transfer involving Astoria Financial Corporation.
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, Astoria Federal's ability to pay dividends
to Astoria Financial Corporation, our credit profile and our business model. For
further discussion of our debt obligations, see Note 8 of Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data."
We also continue to receive periodic capital distributions from Astoria Federal,
consistent with applicable laws and regulations. During 2004, Astoria Federal
paid dividends to Astoria Financial Corporation totaling $522.5 million,
amounting to 219.0% of Astoria Federal's net income for 2004. 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 made principal and interest payments on the senior
unsecured notes and Junior Subordinated Debentures totaling $54.6 million in
2004. Our payment of dividends and repurchases of our common stock, which are
further discussed below, totaled $297.1 million in 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.
Additionally, all proposed distributions must be submitted to the OTS for
review. For further discussion of limitations on capital distributions from
Astoria Federal, see "Regulation and Supervision" in Item 1, "Business."
We declared cash dividends on our common stock totaling $72.0 million during the
year ended December 31, 2004 and $65.6 million during the year ended December
31, 2003. On January 19, 2005, we declared a quarterly cash dividend of $0.20
per share on shares of our common stock which was paid on March 1, 2005 to
stockholders of record as of the close of business on February 15, 2005.
During the year ended December 31, 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 15,000,000 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 12,000,000 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 year ended
December 31, 2004, we repurchased 9,067,500 shares of our common stock at an
aggregate cost of $225.1 million, of which 5,155,200 shares at an aggregate cost
of $127.6 million were repurchased pursuant to our tenth stock repurchase plan.
For further information on our common stock repurchases, see Item 5, "Market for
Astoria Financial Corporation's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities."
42
See "Financial Condition" for a further discussion of the changes in
stockholders' equity.
At December 31, 2004, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 5.99%, leverage
capital ratio of 5.99% and total risk-based capital ratio of 12.44%. 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, lease commitments and derivative instruments as
described below.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum
exposure to credit risk is represented by the contractual amount of the
instruments.
In addition to our lending commitments, we have contractual obligations related
to operating lease commitments. Operating lease commitments are obligations
under various non-cancelable operating leases on buildings and land used for
office space and banking purposes.
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. We are exposed to credit risk in the event of
non-performance by counterparties to derivative instruments. In the event of
default by a counterparty, we would be subject to an economic loss that
corresponds to the cost to replace the agreement. We control the credit risk
associated with our derivative instruments through dealing only with
counterparties with the highest credit ratings, establishing counterparty
exposure limits and monitoring procedures.
Additionally, in connection with our mortgage banking activities, we have
commitments to fund loans held-for-sale and commitments to sell loans which are
considered derivative instruments. Commitments to sell loans totaled $56.0
million at December 31, 2004 and represent obligations to sell loans either
servicing retained or servicing released on a mandatory delivery or best efforts
basis. We enter into commitments to sell loans as a hedge against our pipeline
of fixed rate loans which we originate primarily for sale into the secondary
market. The fair values of our mortgage banking derivative instruments are
immaterial to our financial condition and results of operations.
43
The following table details our contractual obligations at December 31, 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 $7,292,866 $ 970,000 $3,294,000 $2,650,000 $378,866
Minimum rental payments due under non-cancelable
operating leases 79,938 6,957 13,894 11,549 47,538
Commitments to originate and purchase loans (1) 616,284 616,284 -- -- --
Commitments to fund unused lines of credit (2) 396,994 396,994 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total $8,386,082 $1,990,235 $3,307,894 $2,661,549 $426,404
========================================================================================================================
(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. We are obligated under various recourse provisions associated with
certain first mortgage loans we sold in the secondary market. The principal
balance of loans sold with recourse amounted to $565.8 million at December 31,
2004. The carrying amount of our liability for loans sold with recourse at
December 31, 2004 is immaterial to our financial condition and results of
operations. 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
do not believe that our recourse obligations subject us to risk of material
loss. We also have two collateralized repurchase obligations due to the sale of
certain long-term fixed rate municipal revenue bonds and Federal Housing
Administration project loans to investment trust funds for proceeds that
approximated par value. The trust funds have put options that require us to
repurchase the securities or loans for specified amounts prior to maturity under
certain specified circumstances, as defined in the agreements. The outstanding
option balance on the two agreements totaled $34.9 million at December 31, 2004.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$5.2 million at December 31, 2004.
See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data," for additional
information regarding our commitments, contingent liabilities and derivative
instruments.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2004 and 2003
Financial Condition
Total assets increased $954.3 million to $23.42 billion at December 31, 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. This growth was funded primarily through an increase in deposits.
Mortgage loans, net, increased $497.4 million to $12.75 billion at December 31,
2004, from $12.25 billion at December 31, 2003. This increase was primarily due
to an increase in our multi-family mortgage loan portfolio. Gross mortgage loans
originated and purchased during the year ended December 31, 2004 totaled $4.35
billion, of which $3.19 billion were originations and $1.16 billion were
purchases. This compares to gross mortgage loans originated and purchased during
the year ended December 31, 2003 totaling $7.29 billion, of which $5.75 billion
were originations and $1.54
44
billion were purchases. Total mortgage loans originated include originations
of loans held-for-sale totaling $323.2 million during the year ended
December 31, 2004 and $613.3 million during the year ended December 31, 2003.
Mortgage loan repayments decreased to $3.52 billion for the year ended
December 31, 2004, from $6.11 billion for the year ended December 31, 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. During 2004, the
reduction in repayment activity and continued strong loan origination volume,
primarily in the fourth quarter, resulted in a modest increase in our
one-to-four family loan portfolio from December 31, 2003. Our one-to-four family
mortgage loans increased $83.7 million to $9.05 billion at December 31, 2004,
from $8.97 billion at December 31, 2003, and represented 68.7% of our total loan
portfolio at December 31, 2004. The strong growth we experienced in the fourth
quarter of 2004 offset the impact of repayments outpacing originations during
the first nine months of 2004 and is expected to continue in 2005.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate loan
originations over the past several years. Our multi-family mortgage loan
portfolio increased $328.5 million to $2.56 billion at December 31, 2004, from
$2.23 billion at December 31, 2003. Our commercial real estate loan portfolio
increased $64.6 million to $944.9 million at December 31, 2004, from $880.3
million at December 31, 2003. Multi-family and commercial real estate loan
originations totaled $1.05 billion for the year ended December 31, 2004 and
$1.65 billion for the year ended December 31, 2003. The average loan balance
within 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. Consumer and other loans, net, increased
$78.9 million to $517.1 million at December 31, 2004, from $438.2 million at
December 31, 2003. This increase is primarily in home equity lines of credit as
a result of the continued strong housing market and low interest rate
environment.
Mortgage-backed securities increased $298.0 million to $8.54 billion at December
31, 2004, from $8.24 billion at December 31, 2003. This increase was primarily
the result of purchases of fixed rate REMICs and CMOs totaling $3.07 billion,
partially offset by principal payments received of $2.64 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. At December 31, 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 $8.44
billion at December 31, 2004. Included in this total is $1.49 billion of
securities which have a remaining gross premium of $12.2 million, a weighted
average current coupon of 4.94%, a weighted average collateral coupon of 6.00%
and a weighted average life of 2.2 years. The remaining $6.95 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 5.73% and a
weighted average life of 3.3 years. Included in the totals for discount
securities are $819.8 million of securities at par. Other securities decreased
$36.0 million to $167.7 million at December 31, 2004, from $203.7 million at
December 31, 2003, primarily due to sales of $20.3 million, coupled with the
other-than-temporary impairment write-down on our FHLMC perpetual preferred
securities, previously discussed, and principal paydowns.
Deposits increased $1.13 billion to $12.32 billion at December 31, 2004, from
$11.19 billion at December 31, 2003. The increase in deposits was primarily due
to an increase of $1.35 billion in certificates of deposit to $6.85 billion at
December 31, 2004 and an increase of $87.3 million in NOW and demand deposit
accounts to $1.58 billion at December 31, 2004, partially offset by a decrease
of $267.5 million in our money market accounts to $965.3 million at December 31,
2004. The increase in
45
our certificates of deposit was primarily the result of the success of
our marketing campaigns, 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 year ended December 31, 2004, including our business
checking deposits, due in large part to our concerted sales and marketing
efforts, including our PEAK sales process.
Total borrowings, net, decreased $162.2 million to $9.47 billion at December 31,
2004, from $9.63 billion at December 31, 2003. This decrease is primarily the
result of a $155.0 million decrease in reverse repurchase agreements. The net
decrease in total borrowings reflects the repayment of certain high cost
borrowings that matured. For additional information, see "Liquidity and Capital
Resources."
Stockholders' equity decreased to $1.37 billion at December 31, 2004, from $1.40
billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $225.1 million and dividends declared of
$72.0 million. These decreases were partially offset by net income of $219.5
million, the effect of stock options exercised and related tax benefit of $24.1
million, a decrease in accumulated other comprehensive loss, net of tax, of
$17.9 million, which was primarily due to the 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 $8.7 million.
Results of Operations
General
Net income for the year ended December 31, 2004 increased $22.7 million to
$219.5 million, from $196.8 million for the year ended December 31, 2003.
Diluted earnings per common share totaled $2.00 per share for the year ended
December 31, 2004 and $1.66 per share for the year ended December 31, 2003.
Return on average assets increased to 0.97% for the year ended December 31,
2004, from 0.87% for the year ended December 31, 2003. Return on average
stockholders' equity increased to 15.81% for the year ended December 31, 2004,
from 13.26% for the year ended December 31, 2003. Return on average tangible
stockholders' equity, which represents average stockholders' equity less average
goodwill, increased to 18.25% for the year ended December 31, 2004, from 15.15%
for the year ended December 31, 2003. The increase in the return on average
assets is primarily due to the increase in net income. The increase in the
returns on average stockholders' equity and average tangible stockholders'
equity is primarily due to the increase in net income, coupled with the decrease
in the average balance of stockholders' equity for the year ended December 31,
2004, compared to the year ended December 31, 2003.
Our results of operations for the year ended December 31, 2004 include a $16.5
million, before-tax ($9.6 million, after-tax), other-than-temporary impairment
write-down charge on $120.0 million face value of perpetual preferred stock
issued by FHLMC. This charge reduced diluted earnings per common share by $0.09
per share for the year ended December 31, 2004. This charge also reduced our
return on average assets by 4 basis points, return on average stockholders'
equity by 69 basis points, and return on average tangible stockholders' equity
by 79 basis points. We believe it is important for shareholders to understand
the incremental impact of this charge. For a further discussion of the
other-than-temporary impairment write-down, see "Critical Accounting Policies -
Securities Impairment."
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
46
assets and interest-bearing liabilities and the corresponding interest rates
earned or paid. Our net interest income is significantly impacted by changes
in interest rates and market yield curves and their related impact on cash
flows. See Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk," for further discussion of the potential impact of changes in interest
rates on our results of operations.
For the year ended December 31, 2004, net interest income increased $91.1
million to $470.6 million, from $379.5 million for the year ended December 31,
2003. The net interest margin increased to 2.17% for the year ended December 31,
2004, from 1.78% for the year ended December 31, 2003. The increases in net
interest income and the net interest margin for the year ended December 31,
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 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 $81.0 million to $32.0 million for the year ended
December 31, 2004, from $113.0 million for the year ended December 31, 2003.
The average balance of net interest-earning assets increased $241.3 million to
$665.7 million for the year ended December 31, 2004, from $424.4 million for the
year ended December 31, 2003. The increase in the average balance of net
interest-earning assets was primarily the result of an increase of $343.2
million in the average balance of total interest-earning assets to $21.66
billion for the year ended December 31, 2004, from $21.32 billion for the year
ended December 31, 2003, partially offset by an increase of $102.0 million in
the average balance of total interest-bearing liabilities to $20.99 billion for
the year ended December 31, 2004, from $20.89 billion for the year ended
December 31, 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 2.09% for the
year ended December 31, 2004, from 1.72% for the year ended December 31, 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 year
ended December 31, 2004, from 3.24% for the year ended December 31, 2003. The
average yield on interest-earning assets decreased to 4.83% for the year ended
December 31, 2004, from 4.96% for the year ended December 31, 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 table sets forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the years
ended December 31, 2004, 2003 and 2002. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The yields and costs include amortization of fees, costs, premiums and discounts
which are considered adjustments to interest rates.
47
For the Year Ended December 31,
-------------------------------------
2004
-------------------------------------
Average
Average Yield/
(Dollars in Thousands) Balance Interest Cost
- --------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,894,219 $ 428,229 4.81%
Multi-family, commercial
real estate and construction 3,419,369 220,703 6.45
Consumer and other loans (1) 478,195 21,312 4.46
----------- ----------
Total loans 12,791,783 670,244 5.24
Mortgage-backed securities (2) 8,395,987 358,583 4.27
Other securities (2)(3) 384,033 15,934 4.15
Federal funds sold and
repurchase agreements 86,625 1,140 1.32
----------- ----------
Total interest-earning assets 21,658,428 1,045,901 4.83
Goodwill 185,151 ----------
Other non-interest-earning assets 848,106
-----------
Total assets $22,691,685
===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,973,054 11,920 0.40
Money market 1,088,915 6,379 0.59
NOW and demand deposit 1,534,822 921 0.06
Certificates of deposit 6,211,014 218,209 3.51
----------- ----------
Total deposits 11,807,805 237,429 2.01
Borrowed funds 9,184,928 337,906 3.68
----------- ----------
Total interest-bearing liabilities 20,992,733 575,335 2.74
----------
Non-interest-bearing liabilities 310,662
-----------
Total liabilities 21,303,395
Stockholders' equity 1,388,290
-----------
Total liabilities and
stockholders' equity $22,691,685
===========
Net interest income/net
interest rate spread (4) $ 470,566 2.09%
========== ====
Net interest-earning assets/
net interest margin (5) $ 665,695 2.17%
=========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.03x
===========
For the Year Ended December 31,
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,990,636 $ 466,544 5.19% $10,077,810 $ 626,251 6.21%
Multi-family, commercial
real estate and construction 2,757,481 203,785 7.39 2,072,805 162,677 7.85
Consumer and other loans (1) 410,095 19,247 4.69 307,103 17,623 5.74
----------- ---------- ----------- ----------
Total loans 12,158,212 689,576 5.67 12,457,718 806,551 6.47
Mortgage-backed securities (2) 8,491,108 337,222 3.97 6,599,887 377,623 5.72
Other securities (2)(3) 529,592 28,955 5.47 1,011,280 69,211 6.84
Federal funds sold and
repurchase agreements 136,272 1,538 1.13 766,906 12,877 1.68
----------- ---------- ----------- ----------
Total interest-earning assets 21,315,184 1,057,291 4.96 20,835,791 1,266,262 6.08
Goodwill 185,151 ---------- 185,151 ----------
Other non-interest-earning assets 1,176,908 1,120,809
----------- -----------
Total assets $22,677,243 $22,141,751
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,907,541 13,198 0.45 $ 2,754,000 29,096 1.06
Money market 1,403,363 9,934 0.71 1,876,107 32,512 1.73
NOW and demand deposit 1,469,805 1,526 0.10 1,269,866 3,176 0.25
Certificates of deposit 5,419,725 200,593 3.70 5,203,610 223,216 4.29
----------- ---------- ----------- -------
Total deposits 11,200,434 225,251 2.01 11,103,583 288,000 2.59
Borrowed funds 9,690,325 452,502 4.67 9,101,064 513,838 5.65
----------- ---------- ----------- -------
Total interest-bearing liabilities 20,890,759 677,753 3.24 20,204,647 801,838 3.97
Non-interest-bearing liabilities 302,391 ---------- 372,130 -------
----------- -----------
Total liabilities 21,193,150 20,576,777
Stockholders' equity 1,484,093 1,564,974
----------- -----------
Total liabilities and
stockholders' equity $22,677,243 $22,141,751
=========== ===========
Net interest income/net
interest rate spread (4) $ 379,538 1.72% $ 464,424 2.11%
========== ==== ========== ====
Net interest-earning assets/
net interest margin (5) $ 424,425 1.78% $ 631,144 2.23%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.02x 1.03x
=========== ===========
(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.
48
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Year Ended December 31, 2004 Year Ended December 31, 2003
Compared to Compared to
Year Ended December 31, 2003 Year Ended December 31, 2002
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
--------------------------------------------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $ (4,895) $ (33,420) $ (38,315) $(63,312) $ (96,395) $(159,707)
Multi-family, commercial
real estate and construction 44,943 (28,025) 16,918 51,111 (10,003) 41,108
Consumer and other loans 3,050 (985) 2,065 5,224 (3,600) 1,624
Mortgage-backed securities (3,819) 25,180 21,361 92,179 (132,580) (40,401)
Other securities (6,933) (6,088) (13,021) (28,339) (11,917) (40,256)
Federal funds sold and
repurchase agreements (627) 229 (398) (8,110) (3,229) (11,339)
- ---------------------------------------------------------------------------------------------------------
Total 31,719 (43,109) (11,390) 48,753 (257,724) (208,971)
- ---------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 275 (1,553) (1,278) 1,564 (17,462) (15,898)
Money market (2,027) (1,528) (3,555) (6,760) (15,818) (22,578)
NOW and demand deposit 57 (662) (605) 449 (2,099) (1,650)
Certificates of deposit 28,268 (10,652) 17,616 8,994 (31,617) (22,623)
Borrowed funds (22,627) (91,969) (114,596) 31,815 (93,151) (61,336)
- ---------------------------------------------------------------------------------------------------------
Total 3,946 (106,364) (102,418) 36,062 (160,147) (124,085)
- ---------------------------------------------------------------------------------------------------------
Net change in net interest
income $ 27,773 $ 63,255 $ 91,028 $ 12,691 $ (97,577) $ (84,886)
=========================================================================================================
Interest Income
Interest income for the year ended December 31, 2004 decreased slightly to $1.05
billion, from $1.06 billion for the year ended December 31, 2003. This decrease
was primarily the result of a decrease in the average yield on interest-earning
assets to 4.83% for the year ended December 31, 2004, from 4.96% for the year
ended December 31, 2003, substantially offset by an increase of $343.2 million
in the average balance of interest-earning assets to $21.66 billion for the year
ended December 31, 2004, from $21.32 billion for the year ended December 31,
2003. The decrease in the average yield on interest-earning assets was primarily
due to decreases in the average yields on mortgage loans and other securities,
partially offset by an increase in the average yield on mortgage-backed
securities. The decreases in the average yields on our mortgage loan portfolios
are attributable to a reduction in coupon rates resulting from the
extraordinarily high levels of repayments in these portfolios, primarily during
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 as a result of the reduction in refinance activity in 2004.
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 the reduced amount of
unamortized premium remaining in our portfolio, partially offset by a reduction
in coupon rates. The increase in the average balance of interest-earning assets
was primarily due to increases in the
49
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, one-to-four family mortgage loans, mortgage-backed
securities and federal funds sold and repurchase agreements.
Interest income on one-to-four family mortgage loans decreased $38.3 million to
$428.2 million for the year ended December 31, 2004, from $466.5 million for the
year ended December 31, 2003, which was the result of a decrease in the average
yield to 4.81% for the year ended December 31, 2004, from 5.19% for the year
ended December 31, 2003, coupled with a decrease of $96.4 million in the average
balance of such loans. The decrease in the average yield on one-to-four family
mortgage loans reflects the impact of the low interest rate environment as
higher rate loans were repaid and replaced with lower yielding new originations
and purchases throughout most of 2003. However, the yield has been positively
impacted by a reduction of mortgage loan premium amortization as a result of the
decreased refinance activity during 2004 as compared to 2003. The decrease in
the average balance of one-to-four family mortgage loans is the result of
repayments continuing to outpace originations and purchases of one-to-four
family mortgage loans during the first nine months of 2004. However, as a result
of reduced prepayment activity and continued strong purchase mortgage activity,
during the 2004 fourth quarter, originations and purchases exceeded the levels
of repayments resulting in a modest increase in the balance of the portfolio
from December 31, 2003 to December 31, 2004.
Interest income on multi-family, commercial real estate and construction loans
increased $16.9 million to $220.7 million for the year ended December 31, 2004,
from $203.8 million for the year ended December 31, 2003, which was primarily
the result of an increase of $661.9 million in the average balance of such
loans, partially offset by a decrease in the average yield to 6.45% for the year
ended December 31, 2004, from 7.39% for the year ended December 31, 2003. The
increase in the average balance of multi-family, commercial real estate and
construction loans reflects our increased emphasis on originations of such loans
over the past several years, 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 decrease of $3.4 million in prepayment penalties
which totaled $12.6 million in 2004 compared to $16.0 million in 2003.
Interest income on mortgage-backed securities increased $21.4 million to $358.6
million for the year ended December 31, 2004, from $337.2 million for the year
ended December 31, 2003. This increase was the result of an increase in the
average yield to 4.27% for the year ended December 31, 2004, from 3.97% for the
year ended December 31, 2003, partially offset by a slight decrease of $95.1
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. Net premium amortization on mortgage-backed securities
decreased $62.8 million to $8.1 million for the year ended December 31, 2004,
from $70.9 million for the year ended December 31, 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 turnover we experienced
in this portfolio during 2003 as higher yielding securities paid off and were
replaced with lower yielding securities. As previously discussed, we continued
to purchase mortgage-backed securities to effectively redeploy our securities
and excess mortgage cash flows, in addition to cash flows from deposit growth,
which resulted in an increase in the balance of mortgage-backed securities at
December 31, 2004, compared to December 31, 2003. The slight decrease in the
average balance of the mortgage-backed securities portfolio for the year ended
December 31, 2004, compared to the year ended December 31, 2003, is the result
of the volatility in cash flows we experienced in 2004, due to the interest rate
volatility which occurred between quarters in 2004.
Interest income on other securities decreased $13.1 million to $15.9 million for
the year ended December 31, 2004, from $29.0 million for the year ended December
31, 2003. This decrease resulted
50
from a decrease of $145.6 million in the average balance of this portfolio,
coupled with a decrease in the average yield to 4.15% for the year ended
December 31, 2004, from 5.47% for the year ended December 31, 2003. The
decrease in the average balance of other securities was primarily 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 sold or called 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 $3.5 million for the
year ended December 31, 2004 and $10.6 million for the year ended December 31,
2003. As previously discussed, the FHLB-NY suspended dividend payments in the
2003 fourth quarter but resumed payments in January 2004 at a reduced rate from
that which they had paid prior to the suspension.
Interest Expense
Interest expense for the year ended December 31, 2004 decreased $102.5 million
to $575.3 million, from $677.8 million for the year ended December 31, 2003.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 2.74% for the year ended December 31, 2004, from
3.24% for the year ended December 31, 2003, slightly offset by an increase of
$102.0 million in the average balance of interest-bearing liabilities to $20.99
billion for the year ended December 31, 2004, from $20.89 billion for the year
ended December 31, 2003. The decrease in the overall average cost of our
interest-bearing liabilities primarily 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 due 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 $12.1 million, to $237.4 million for the
year ended December 31, 2004, from $225.3 million for the year ended December
31, 2003, reflecting an increase of $607.4 million in the average balance of
total deposits which was primarily due to an increase in the average balance of
certificates of deposit, partially offset by a decrease in the average balance
of money market accounts. The average cost of deposits in each of the deposit
categories decreased for the year ended December 31, 2004, as compared to the
year ended December 31, 2003, as a result of the low interest rate environment.
However, our overall average cost of deposits remained at 2.01% for the year
ended December 31, 2004, primarily due to the significant increase in the
average balance of certificates of deposit which have a higher average cost than
our other deposit products.
Interest expense on certificates of deposit increased $17.6 million resulting
from an increase of $791.3 million in the average balance, partially offset by a
decrease in the average cost to 3.51% for the year ended December 31, 2004, from
3.70% for the year ended December 31, 2003. The increase in the average balance
of 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. During the year
ended December 31, 2004, $3.90 billion of certificates of deposit, with a
weighted average rate of 2.45% and a weighted average maturity at inception of
sixteen months, matured and $5.02 billion of certificates of deposit were issued
or repriced, with a weighted average rate of 2.66% and a weighted average
maturity at inception of twenty months. While the average cost of certificates
of deposit decreased during the year ended December 31, 2004 compared to the
year ended December 31, 2003, as a result of the low interest rate environment,
the impact of the issuance or repricing of certificates of deposit at higher
rates than those maturing may result in an increase in the average cost of
certificates of deposit going forward.
Interest expense on money market accounts decreased $3.6 million reflecting a
decrease of $314.4 million in the average balance, coupled with a decrease in
the average cost to 0.59% for the year ended December 31, 2004, from 0.71% for
the year ended December 31, 2003. The decrease in the average
51
balance of money market accounts is attributable to the continued intense
competition for these accounts, previously discussed. The decrease in the
average cost of money market accounts is a result of the low interest rate
environment.
Interest expense on savings accounts decreased $1.3 million which was
attributable to a decrease in the average cost to 0.40% for the year ended
December 31, 2004, from 0.45% for the year ended December 31, 2003, partially
offset by an increase of $65.5 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $605,000 as a result of a decrease
in the average cost to 0.06% for the year ended December 31, 2004, from 0.10%
for the year ended December 31, 2003, slightly offset by an increase of $65.0
million in the average balance of these accounts. The increases in the average
balances of savings and NOW and demand deposit accounts are consistent with our
emphasis on core deposit generation.
Interest expense on borrowed funds decreased $114.6 million to $337.9 million
for the year ended December 31, 2004, from $452.5 million for year ended
December 31, 2003, resulting from a decrease in the average cost of borrowings
to 3.68% for the year ended December 31, 2004, from 4.67% for the year ended
December 31, 2003, coupled with a decrease of $505.4 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 as a result of the success of our marketing campaigns,
previously discussed.
Provision for Loan Losses
During the years ended December 31, 2004 and 2003, no provision for loan losses
was recorded. We review our allowance coverage percentages 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 year ended
December 31, 2004 remained at an annualized rate of less than one basis point of
average loans outstanding for the period. 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 December 31, 2004 and
$83.1 million at December 31, 2003. Net loan charge-offs totaled $363,000 for
the year ended December 31, 2004 compared to $425,000 for the year ended
December 31, 2003. Non-performing loans increased $2.9 million to $32.6 million
at December 31, 2004, from $29.7 million at December 31, 2003. The allowance for
loan losses as a percentage of non-performing loans decreased to 254.02% at
December 31, 2004, from 280.10% at December 31, 2003, primarily due to the
increase in non-performing loans from December 31, 2003 to December 31, 2004.
The allowance for loan losses as a percentage of total loans decreased to 0.62%
at December 31, 2004, from 0.66% at December 31, 2003. For further discussion of
non-performing loans and allowance for loan losses, see "Critical Accounting
Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the year ended December 31, 2004 decreased $39.5 million
to $80.1 million, from $119.6 million for the year ended December 31, 2003. All
components of non-interest income for the year ended December 31, 2004 decreased
as compared to the year ended December 31, 2003. However, the decrease in total
non-interest income was primarily due to the $16.5 million other-than-temporary
impairment write-down of securities, previously discussed under "Critical
Accounting Policies - Securities Impairment," and the decreases in mortgage
banking income, net, and other non-interest income.
52
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 $5.6 million to $4.7 million for the year ended
December 31, 2004, from $10.3 million for the year ended December 31, 2003.
This decrease 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. Net gain on sales of loans decreased $8.6 million to $3.5 million for
the year ended December 31, 2004, from $12.1 million for the year ended
December 31, 2003. The decrease in net gain on sales of loans was primarily
due to a significant decrease in the volume of fixed rate loans originated
and sold into the secondary market during 2004, coupled with less favorable
pricing opportunities during the year ended December 31, 2004 as compared
to the year ended December 31, 2003. Loan servicing fees decreased
$2.1 million to $5.8 million for the year ended December 31, 2004, from
$7.9 million for the year ended December 31, 2003, primarily as a result of
the decrease in the balance of loans serviced for others to $1.67 billion at
December 31, 2004, from $1.90 billion at December 31, 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 $6.0 million to $6.8 million for the year ended
December 31, 2004, from $12.8 million for the year ended December 31, 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 recovery in the valuation allowance
of MSR of $2.2 million for the year ended December 31, 2004 compared to a
recovery of $3.1 million for the year ended December 31, 2003.
Other non-interest income decreased $7.7 million to $6.8 million for the year
ended December 31, 2004, from $14.5 million for the year ended December 31,
2003, primarily due to a $10.1 million gain on the sale of our interest in a
joint venture real estate investment held by one of our wholly-owned
subsidiaries in the 2003 fourth quarter, partially offset by income in 2004 from
an investment in a limited partnership.
Net gain on sales of securities decreased $2.6 million to $4.7 million for the
year ended December 31, 2004, from $7.3 million for the year ended December 31,
2003. During 2004, we sold mortgage-backed securities with an amortized cost of
$145.2 million and other securities with an amortized cost of $20.3 million.
During 2003, we sold mortgage-backed securities with an amortized cost of $1.40
billion and other securities with an amortized cost of $45.6 million. Net gains
on sales of securities are used as a natural hedge to offset MSR valuation
allowance adjustments.
Income from BOLI decreased $2.9 million to $17.1 million for the year ended
December 31, 2004, from $20.0 million for the year ended December 31, 2003,
primarily due to a reduction in the yield on the BOLI investment as a result of
the low interest rate environment. Other loan fees decreased $2.8 million to
$4.8 million for the year ended December 31, 2004, from $7.6 million for the
year ended December 31, 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 $19.1 million to $225.0 million for the year
ended December 31, 2004, from $205.9 million for the year ended December 31,
2003. This increase was primarily due to increases in compensation and benefits
expense, occupancy, equipment and systems expense and other expense.
Compensation and benefits expense increased $8.4 million to $118.7 million for
the year ended December 31, 2004, from $110.3 million for the year ended
December 31, 2003. This increase was primarily attributable to increases in
salary expense and ESOP expense, partially offset by a reduction in pension
expense. The increase in salary expense was primarily attributable to an
increase in corporate bonuses for 2004 compared to 2003. No bonuses were paid to
executive management for
53
2003. The increase in ESOP expense was primarily attributable to a higher
average market value of our common stock during the year ended December 31, 2004
compared to the year ended December 31, 2003. Pension expense decreased
primarily due to the increase in the expected return on plan assets in 2004
compared to 2003 as a result of the increase in the fair value of
plan assets from December 31, 2002 to December 31, 2003.
Occupancy, equipment and systems expense increased $4.7 million to $64.6 million
for the year ended December 31, 2004, from $59.9 million for the year ended
December 31, 2003. This increase was primarily due to increased furniture,
fixtures and computer equipment expense and computer equipment depreciation, as
a result of systems enhancements over the past two years, and 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 $5.5 million to $33.4 million for the year ended
December 31, 2004, from $27.9 million for the year ended December 31, 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 in the United States Court
of Federal Claims which commenced January 18, 2005. Additionally, we incurred
$800,000 in consulting fees related to our implementation of the Sarbanes-Oxley
Act of 2002.
Although non-interest expense increased in 2004, we continue to focus on expense
control, with expense ratios that are significantly lower than our peer
averages. Our percentage of general and administrative expense to average assets
increased to 0.99% for the year ended December 31, 2004, from 0.91% for the year
ended December 31, 2003, primarily due to the increase in general and
administrative expense. The efficiency ratio, which represents general and
administrative expense divided by the sum of net interest income plus
non-interest income, decreased to 40.86% for the year ended December 31, 2004,
from 41.25% for the year ended December 31, 2003, primarily due to the increase
in net interest income.
Income Tax Expense
For the year ended December 31, 2004, income tax expense totaled $106.1 million,
representing an effective tax rate of 32.6%, compared to $96.4 million,
representing an effective tax rate of 32.9%, for the year ended December 31,
2003.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2003 and 2002
Financial Condition
Total assets increased $759.8 million to $22.46 billion at December 31, 2003,
from $21.70 billion at December 31, 2002. The primary reason for the increase in
total assets was the increase in mortgage-backed securities and mortgage loans,
partially offset by decreases in federal funds sold and repurchase agreements
and other securities. This growth was funded primarily through increases in
borrowings and deposits.
Mortgage loans, net, increased $568.6 million to $12.25 billion at December 31,
2003, from $11.68 billion at December 31, 2002. This increase was primarily due
to an increase in our multi-family and commercial real estate loan portfolios,
partially offset by a decrease in our one-to-four family mortgage loan
portfolio. Gross mortgage loans originated and purchased during the year ended
December 31, 2003 totaled $7.29 billion, including originations of loans
held-for-sale totaling $613.3 million, of
54
which $5.75 billion were originations and $1.54 billion were purchases.
This compares to $4.06 billion of originations and $1.53 billion of purchases
for a total of $5.59 billion, including originations of loans held-for-sale
totaling $484.3 million, during the year ended December 31, 2002. Mortgage
loan repayments increased to $6.11 billion for the year ended December 31,
2003, from $5.34 billion for the year ended December 31, 2002.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans decreased $238.3 million to $8.97 billion at December 31,
2003, from $9.21 billion at December 31, 2002, and represented 71.1% of our
total loan portfolio at December 31, 2003. This decrease was primarily due to
the continued high level of one-to-four family loan repayments during 2003,
particularly during the first nine months, which have outpaced our levels of
one-to-four family loan originations and purchases. Although medium- and
long-term U.S. Treasury yields have increased on average 38 basis points from
December 31, 2002 to December 31, 2003, interest rates remain at historical lows
and were extremely volatile during the second and third quarters of 2003. The
decline in rates during the second quarter of 2003 created a surge of refinance
activity which was greater than that which we had previously experienced. The
rise in rates during the third quarter of 2003 resulted in a reduction in
repayments on our mortgage loans in the 2003 fourth quarter.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate loan
originations. Our multi-family mortgage loan portfolio increased $630.4 million
to $2.23 billion at December 31, 2003, from $1.60 billion at December 31, 2002.
Our commercial real estate loan portfolio increased $135.7 million to $880.3
million at December 31, 2003, from $744.6 million at December 31, 2002.
Multi-family and commercial real estate loan originations totaled $1.65 billion
for the year ended December 31, 2003 and $1.01 billion for the year ended
December 31, 2002. This increase reflects the increase in refinance activity,
our emphasis on this type of lending and the competitive rates we offer on these
types of loans. Prepayment activity within our multi-family and commercial real
estate loan portfolio increased in 2003 as compared to 2002, however, such
activity is not as significant as that which we have experienced in our
one-to-four family mortgage loan portfolio due in part to the prepayment
penalties associated with these loans. The average loan balance of loans in our
combined multi-family and commercial real estate portfolio continues to be less
than $1.0 million. Our portfolio of consumer and other loans, net, increased
$59.0 million to $438.2 million at December 31, 2003, from $379.2 million at
December 31, 2002. This increase is primarily in home equity lines of credit as
a result of the continued strong housing market and the low interest rate
environment.
Mortgage-backed securities increased $864.5 million to $8.24 billion at December
31, 2003, from $7.38 billion at December 31, 2002. This increase was primarily
the result of purchases of REMICs and CMOs totaling $9.30 billion, partially
offset by principal payments received of $6.87 billion, sales of $1.40 billion,
net premium amortization of $70.9 million and a decrease of $93.4 million in the
net unrealized gain on our available-for-sale portfolio. This increase in
mortgage-backed securities reflects our use of excess cash flows, as well as
cash flows from increased deposits and borrowings, for the purchase of these
securities. The decrease in the net unrealized gain on our mortgage-backed
securities available-for-sale portfolio is primarily due to the substantial
turnover of securities in our portfolio resulting in a decrease in the average
coupon rate of the portfolio, coupled with the increase in interest rates from
December 31, 2002 to December 31, 2003.
Other securities decreased $250.6 million to $203.7 million at December 31,
2003, from $454.3 million at December 31, 2002, primarily due to $201.9 million
in securities which were called or matured and sales of $45.6 million. The
continued low interest rate environment in 2003 resulted in a significant
portion of our remaining callable investment securities being called, primarily
in the first half of 2003.
55
Federal funds sold and repurchase agreements decreased $444.4 million to $65.9
million at December 31, 2003, from $510.3 million at December 31, 2002,
primarily due to our use of funds for the purchase of mortgage-backed
securities. Other assets increased $29.0 million to $118.4 million at December
31, 2003, primarily due to an increase in the net deferred tax asset which was
related to the decrease in the fair value of our mortgage-backed securities
available-for-sale.
Deposits increased $119.4 million to $11.19 billion at December 31, 2003, from
$11.07 billion at December 31, 2002. The increase in deposits was primarily due
to an increase of $348.4 million in certificates of deposit to $5.50 billion at
December 31, 2003, from $5.15 billion at December 31, 2002, an increase of
$126.7 million in savings accounts to $2.96 billion at December 31, 2003 and an
increase of $110.1 million in NOW and demand deposit accounts to $1.49 billion
at December 31, 2003. These increases were partially offset by a decrease of
$465.8 million in our money market accounts to $1.23 billion at December 31,
2003, from $1.70 billion at December 31, 2002. The increase in our certificates
of deposit was primarily the result of our efforts to extend the maturities of
our certificates of deposit through promotional rates and targeted marketing and
sales efforts in the prevailing low interest rate environment. During 2003,
$3.45 billion of certificates of deposit, with a weighted average rate of 2.31%
and a weighted average maturity at inception of thirteen months, matured and
$3.60 billion of certificates of deposit were issued or repriced, with a
weighted average rate of 1.93% and a weighted average maturity at inception of
sixteen months. 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 increased the rates we offer on these accounts because we do not consider it
a cost effective strategy. However, despite the continued intense competition
for checking accounts, we have been successful in increasing our NOW and demand
deposit account balances, including our business checking deposits, due in large
part to our concerted sales and marketing efforts, including our PEAK Process.
Reverse repurchase agreements increased $950.0 million to $7.24 billion at
December 31, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances
decreased $140.0 million to $1.92 billion at December 31, 2003, from $2.06
billion at December 31, 2002. The overall increase in borrowings was a cost
effective strategy to fund asset growth. During the year ended December 31,
2003, we extended $1.70 billion of borrowings with a weighted average rate of
2.55% and a weighted average original term of 3.0 years to help protect against
the impact on interest expense of future interest rate increases. All other
borrowings that matured in 2003 were rolled over into short-term borrowings.
During the 2003 fourth quarter, we entered into forward borrowing commitments
totaling $500.0 million, with a weighted average rate of 3.05% and a weighted
average term of 3.3 years, and in January 2004 we entered into an additional
$700.0 million of forward borrowing commitments, with a weighted average rate of
3.01% and a weighted average term of 3.7 years, to replace a portion of the
$2.81 billion in borrowings, with a weighted average rate of 4.97%, scheduled to
mature in the first quarter of 2004.
Stockholders' equity decreased to $1.40 billion at December 31, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $195.5 million, dividends declared of
$70.1 million, a decrease in accumulated other comprehensive income, net of tax,
of $56.3 million, which was primarily due to the decrease in the fair value of
our mortgage-backed securities available-for-sale, and the redemption of our
Series B Preferred Stock totaling $54.5 million. These decreases were partially
offset by net income of $196.8 million, the effect of stock options exercised
and related tax benefit of $14.9 million and the amortization of the allocated
portion of shares held by the ESOP of $7.2 million.
56
Results of Operations
General
Net income for the year ended December 31, 2003 decreased $51.6 million to
$196.8 million, from $248.4 million for the year ended December 31, 2002.
Diluted earnings per common share totaled $1.66 per share for the year ended
December 31, 2003 and $1.90 per share for the year ended December 31, 2002.
Return on average assets decreased to 0.87% for the year ended December 31,
2003, from 1.12% for the year ended December 31, 2002. Return on average
stockholders' equity decreased to 13.26% for the year ended December 31, 2003,
from 15.87% for the year ended December 31, 2002. Return on average tangible
stockholders' equity decreased to 15.15% for the year ended December 31, 2003,
from 18.00% for the year ended December 31, 2002. The decreases in net income
and the related return ratios for the year ended December 31, 2003 were
primarily the result of the decrease in net interest income which is discussed
further below.
Net Interest Income
For the year ended December 31, 2003, net interest income decreased $84.9
million to $379.5 million, from $464.4 million for the year ended December 31,
2002. The net interest margin decreased to 1.78% for the year ended December 31,
2003, from 2.23% for the year ended December 31, 2002. The decreases in net
interest income and the net interest margin were the result of a decrease in
interest income, partially offset by a decrease in interest expense, primarily
due to the more rapid decline in the yields on interest-earning assets than the
decline in the costs of interest-bearing liabilities and the impact of
repurchases of our common stock over the past year. The decrease in the yield on
interest-earning assets is primarily the result of the high level of mortgage
loan and mortgage-backed securities repayments as a result of the continued low
interest rate environment, particularly for medium- and long-term instruments
for which rates continued to decline throughout 2002 and the first half of 2003,
resulting in reinvestment in those assets at lower rates. These high levels of
repayments have also resulted in accelerated premium amortization which has
further contributed to the decline in the yields on these portfolios. Net
premium amortization on our mortgage-backed securities and mortgage loan
portfolios increased $60.4 million to $113.0 million for the year ended December
31, 2003, from $52.6 million for the year ended December 31, 2002. The decrease
in interest expense was primarily attributable to the decrease in our cost of
funds, which is due to the repayment and refinancing of various higher cost
borrowings, along with the downward repricing of deposits.
The average balance of net interest-earning assets decreased $206.7 million to
$424.4 million for the year ended December 31, 2003, from $631.1 million for the
year ended December 31, 2002. The decrease in the average balance of net
interest-earning assets was the result of an increase of $686.1 million in the
average balance of total interest-bearing liabilities to $20.89 billion for the
year ended December 31, 2003, from $20.20 billion for the year ended December
31, 2002, partially offset by an increase of $479.4 million in the average
balance of total interest-earning assets to $21.32 billion for the year ended
December 31, 2003, from $20.84 billion for the year ended December 31, 2002. The
primary reasons for the decrease in net interest-earning assets are the
repurchases of our common stock over the past year, an increase in the monthly
mortgage-backed securities principal payments receivable due to the accelerated
mortgage-backed securities cash flow, and the $100.0 million premium paid in the
first quarter of 2002 to purchase additional BOLI. The net interest rate spread
decreased to 1.72% for the year ended December 31, 2003, from 2.11% for the year
ended December 31, 2002. The average yield on interest-earning assets decreased
to 4.96% for the year ended December 31, 2003, from 6.08% for the year ended
December 31, 2002. The average cost of interest-bearing liabilities decreased to
3.24% for the year ended December 31, 2003, from 3.97% for the year ended
December 31, 2002. The changes in the yields on interest-earning assets and the
costs of interest-bearing liabilities for the year ended December 31, 2003 were
a result of the continued low interest rate
57
environment previously discussed. The changes in average interest-earning
assets and interest-bearing liabilities and their related yields and costs
are discussed in greater detail under "Interest Income" and "Interest Expense."
Interest Income
Interest income for the year ended December 31, 2003 decreased $209.0 million to
$1.06 billion, from $1.27 billion for the year ended December 31, 2002. This
decrease was primarily the result of a decrease in the average yield on
interest-earning assets to 4.96% for the year ended December 31, 2003, from
6.08% for the year ended December 31, 2002, partially offset by an increase of
$479.4 million in the average balance of interest-earning assets to $21.32
billion for the year ended December 31, 2003, from $20.84 billion for the year
ended December 31, 2002. The decrease in the average yield on interest-earning
assets was due to decreases in the average yields on all asset categories,
primarily our mortgage-backed securities and one-to-four family mortgage loans.
The declines in medium- and long-term U.S. Treasury yields during 2002 and the
first half of 2003 resulted in continued high levels of repayments on our
mortgage-backed securities and one-to-four family mortgage loan portfolios and
accelerated premium amortization. The increase in the average balance of
interest-earning assets was primarily due to increases in the average balances
of mortgage-backed securities and multi-family, commercial real estate and
construction loans, partially offset by decreases in the average balances of
one-to-four family mortgage loans, federal funds sold and repurchase agreements
and other securities.
Interest income on one-to-four family mortgage loans decreased $159.8 million to
$466.5 million for the year ended December 31, 2003, from $626.3 million for the
year ended December 31, 2002, which was the result of a decrease in the average
yield to 5.19% for the year ended December 31, 2003, from 6.21% for the year
ended December 31, 2002, coupled with a decrease of $1.09 billion in the average
balance of such loans. The decrease in the average yield on one-to-four family
mortgage loans reflects the impact of the continued low interest rate
environment as higher rate loans were repaid and replaced with lower yielding
new originations and purchases, coupled with the lower repricing of ARM loans.
Additionally, the yield has been negatively impacted by accelerated loan premium
amortization, discussed previously, as a result of the increased refinance
activity. The decrease in the average balance of one-to-four family mortgage
loans reflects the extraordinarily high level of repayment activity, due to
refinancings, particularly in the second half of 2002 and continuing through the
first nine months of 2003, partially offset by originations and purchases of
one-to-four family mortgage loans. The previously discussed increase in medium-
and long-term U.S. Treasury yields during the third quarter of 2003 resulted in
a reduction in the one-to-four family mortgage refinance activity which reduced
the repayments on our mortgage loans in the 2003 fourth quarter.
Interest income on multi-family, commercial real estate and construction loans
increased $41.1 million to $203.8 million for the year ended December 31, 2003,
from $162.7 million for the year ended December 31, 2002, which was primarily
the result of an increase of $684.7 million in the average balance of such
loans, partially offset by a decrease in the average yield to 7.39% for the year
ended December 31, 2003, from 7.85% for the year ended December 31, 2002. The
increase in the average balance of multi-family, commercial real estate and
construction loans reflects our increased emphasis on originations of such
loans, coupled with the fact that repayment activity within this portfolio is
not as significant as that which we have experienced on our one-to-four family
mortgage loan portfolio in part due to the prepayment penalties associated with
these loans. The decrease in the average yield on multi-family, commercial real
estate and construction loans reflects the growth in this portfolio resulting
from lower yielding new originations due to the impact of the continued low
interest rate environment. The yield on multi-family, commercial real estate and
construction loans has not declined to the same extent as the yield on
one-to-four family mortgage loans primarily as a result of the lower level of
repayment activity within this portfolio as well as the additional income from
prepayment penalties received on loans which have prepaid. Prepayment penalties
totaled $16.0 million for the year ended December 31, 2003 and $4.9 million for
the year ended December 31, 2002.
58
Interest income on mortgage-backed securities decreased $40.4 million to $337.2
million for the year ended December 31, 2003, from $377.6 million for the year
ended December 31, 2002. This decrease was the result of a decrease in the
average yield to 3.97% for the year ended December 31, 2003, from 5.72% for the
year ended December 31, 2002, partially offset by an increase of $1.89 billion
in the average balance of the portfolio. The decrease in the average yield on
mortgage-backed securities reflects the substantial turnover we have experienced
in this portfolio as a result of the continued low interest rate environment as
higher yielding securities were repaid and replaced with lower yielding
securities, coupled with accelerated premium amortization. Net premium
amortization on mortgage-backed securities increased $57.2 million to $70.9
million for the year ended December 31, 2003, from $13.7 million for the year
ended December 31, 2002. The increase in the average balance of mortgage-backed
securities was the result of increased levels of purchases of REMICs and CMOs
during the second half of 2002 and throughout 2003 to effectively deploy our
cash flows in excess of mortgage and other loan fundings, partially offset by
increased levels of principal repayments. At December 31, 2003, we had $8.06
billion in REMIC and CMO mortgage-backed securities, which comprised 95.5% of
our total securities portfolio, substantially all of which had fixed rates. The
amortized cost of our fixed rate REMICs and CMOs totaled $8.11 billion at
December 31, 2003. Included in this total is $2.53 billion of securities which
have a remaining gross premium of $26.9 million, a weighted average current
coupon of 5.04%, a weighted average collateral coupon of 6.10% and a weighted
average life of 2.6 years. The remaining $5.58 billion of these securities have
a remaining gross discount of $18.5 million, a weighted average current coupon
of 4.14%, a weighted average collateral coupon of 5.80% and a weighted average
life of 3.5 years. Included in the totals for discount securities are $617.7
million of securities at par.
Interest income on other securities decreased $40.2 million to $29.0 million for
the year ended December 31, 2003, from $69.2 million for the year ended December
31, 2002. This decrease resulted from a decrease of $481.7 million in the
average balance of this portfolio, coupled with a decrease in the average yield
to 5.47% for the year ended December 31, 2003, from 6.84% for the year ended
December 31, 2002, primarily due to higher yielding securities being called
throughout 2002 and the first half of 2003 as a result of the continued low
interest rate environment. Interest income on other securities includes
dividends on FHLB-NY stock. Dividends on FHLB-NY stock totaled $10.6 million for
the year ended December 31, 2003 and $10.7 million for the year ended December
31, 2002. The FHLB-NY suspended dividend payments to stockholders in the fourth
quarter of 2003, due to losses in its securities portfolio, but resumed payment
in January 2004, at a rate of 1.45%, as compared to a rate of 5.05% paid in July
2003, the last dividend payment prior to the FHLB-NY's dividend suspension.
Interest income on federal funds sold and repurchase agreements decreased $11.3
million as a result of the $630.6 million decrease in the average balance of the
portfolio, coupled with a decrease in the average yield to 1.13% for the year
ended December 31, 2003, from 1.68% for the year ended December 31, 2002.
Interest Expense
Interest expense for the year ended December 31, 2003 decreased $124.0 million
to $677.8 million, from $801.8 million for the year ended December 31, 2002.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 3.24% for the year ended December 31, 2003, from
3.97% for the year ended December 31, 2002, partially offset by an increase of
$686.1 million in the average balance of interest-bearing liabilities to $20.89
billion for the year ended December 31, 2003, from $20.20 billion for the year
ended December 31, 2002. The decrease in the average cost of our
interest-bearing liabilities reflects the impact of the continued low interest
rate environment on the cost of our deposits and borrowings. The increase in the
average balance of interest-bearing liabilities was attributable to increases in
the average balances of borrowings and deposits.
59
Interest expense on deposits decreased $62.7 million, to $225.3 million for the
year ended December 31, 2003, from $288.0 million for the year ended December
31, 2002, reflecting a decrease in the average cost of deposits to 2.01% for the
year ended December 31, 2003, from 2.59% for the year ended December 31, 2002,
slightly offset by an increase of $96.9 million in the average balance of total
deposits. The decrease in the average cost of total deposits was driven by
decreases in rates in all deposit categories as a result of the continued low
interest rate environment. The increase in the average balance of total deposits
was primarily the result of increases in the average balances of certificates of
deposit, NOW and demand deposit accounts and savings accounts, partially offset
by a decrease in the average balance of money market accounts.
Interest expense on certificates of deposit decreased $22.6 million resulting
from a decrease in the average cost to 3.70% for the year ended December 31,
2003, from 4.29% for the year ended December 31, 2002, partially offset by a
$216.1 million increase in the average balance. The increase in the average
balance of certificates of deposit was primarily the result of our efforts to
extend the maturities of our certificates of deposit through promotional rates
and targeted marketing and sales efforts in the prevailing low interest rate
environment. During 2003, $3.45 billion of certificates of deposit, with an
average rate of 2.31% and an average maturity at inception of thirteen months,
matured and $3.60 billion of certificates of deposit were issued or repriced,
with an average rate of 1.93% and an average maturity at inception of sixteen
months.
Interest expense on money market accounts decreased $22.6 million reflecting a
decrease in the average cost to 0.71% for the year ended December 31, 2003, from
1.73% for the year ended December 31, 2002, coupled with a decrease of $472.7
million in the average balance of such accounts. Interest paid on money market
accounts is on a tiered basis with 82.7% of the balance at December 31, 2003 in
the highest tier. The decrease in the average balance of money market accounts
is attributable to the continued intense competition for these accounts,
previously discussed.
Interest expense on savings accounts decreased $15.9 million which was
attributable to a decrease in the average cost to 0.45% for the year ended
December 31, 2003, from 1.06% for the year ended December 31, 2002, partially
offset by an increase of $153.5 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $1.7 million as a result of a
decrease in the average cost to 0.10% for the year ended December 31, 2003, from
0.25% for the year ended December 31, 2002, slightly offset by an increase of
$199.9 million in the average balance of these accounts. The increases in the
average balances of savings and NOW and demand deposit accounts are consistent
with our emphasis on core deposit generation.
Interest expense on borrowed funds for the year ended December 31, 2003
decreased $61.3 million to $452.5 million, from $513.8 million for year ended
December 31, 2002, resulting from a decrease in the average cost of borrowings
to 4.67% for the year ended December 31, 2003, from 5.65% for the year ended
December 31, 2002, partially offset by an increase of $589.3 million in the
average balance. The decrease in the average cost of borrowings is the result of
the refinancing of higher cost borrowings as they matured at substantially lower
rates. The increase in the average balance of borrowed funds is a result of our
issuance of $250.0 million senior unsecured notes during the 2002 fourth quarter
and our use of short-term borrowings during the year to fund our loan
originations and securities purchases.
Provision for Loan Losses
During the year ended December 31, 2003, no provision for loan losses was
recorded. The provision for loan losses totaled $2.3 million for the year ended
December 31, 2002. The decrease in the provision for loan losses is due to an
analysis performed during 2002 of the actual charge-off history of our loan
portfolio compared to our previously determined allowance coverage percentages.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining
60
our general valuation allowances. Our analysis indicated that our estimate of
losses inherent in our portfolio exceeded our actual charge-off history. In
response to the results of that analysis, we adjusted our allowance coverage
percentages for our portfolio segments accordingly. We review our allowance
coverage percentages on a quarterly basis. Our 2003 analyses did not indicate
that changes in our allowance coverage percentages were required.
The allowance for loan losses totaled $83.1 million at December 31, 2003 and
$83.5 million at December 31, 2002. Net loan charge-offs totaled $425,000 for
the year ended December 31, 2003 compared to $1.0 million for the year ended
December 31, 2002. Non-performing loans decreased $4.8 million to $29.7 million
at December 31, 2003, from $34.5 million at December 31, 2002. The allowance for
loan losses as a percentage of non-performing loans increased to 280.10% at
December 31, 2003, from 242.04% at December 31, 2002, primarily due to the
decrease in non-performing loans from December 31, 2002 to December 31, 2003.
The allowance for loan losses as a percentage of total loans decreased to 0.66%
at December 31, 2003 from 0.69% at December 31, 2002. For further discussion of
non-performing loans and allowance for loan losses, see "Critical Accounting
Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the year ended December 31, 2003 increased $12.2 million
to $119.6 million, from $107.4 million for the year ended December 31, 2002. The
increase in non-interest income was primarily due to increases in mortgage
banking income, net, and other non-interest income, partially offset by a
decrease in net gain on sales of securities.
Mortgage banking income, net, increased $12.6 million to net mortgage banking
income of $10.3 million for the year ended December 31, 2003, from net mortgage
banking loss of $2.3 million for the year ended December 31, 2002. This increase
is primarily due to the change in the valuation allowance adjustments for the
impairment of MSR, to a recovery recorded for the year ended December 31, 2003
compared to a provision recorded for the year ended December 31, 2002, and an
increase in net gain on sales of loans, partially offset by a decrease in loan
servicing fees and an increase in amortization of MSR. We recorded a recovery in
the valuation allowance of MSR of $3.1 million for the year ended December 31,
2003 compared to a provision of $10.8 million for the year ended December 31,
2002. The recovery in the valuation allowance of MSR for the year ended December
31, 2003 is a result of a decrease in projected loan prepayment speeds at
December 31, 2003, compared to the projected loan prepayment speeds used in
valuing our MSR at December 31, 2002. The decrease in projected loan prepayment
speeds reflects the increase in medium- and long-term interest rates during the
second half of 2003. Net gain on sales of loans increased $5.5 million to $12.1
million for the year ended December 31, 2003 from $6.6 million for the year
ended December 31, 2002. The increase in net gain on sales of loans was
primarily due to more favorable pricing opportunities during the year ended
December 31, 2003 as compared to the year ended December 31, 2002 and an
increase in the volume of fixed rate loans originated and sold into the
secondary market during 2003. Loan servicing fees decreased $4.2 million to $7.9
million for the year ended December 31, 2003, from $12.1 million for the year
ended December 31, 2002, primarily as a result of the decrease in the balance of
loans serviced for others to $1.90 billion at December 31, 2003, from $2.67
billion at December 31, 2002. The decrease in the balance of loans serviced for
others was due to increased repayments in that portfolio in the continued low
interest rate environment which have exceeded the level of new servicing volume
from loan sales. Amortization of MSR increased $2.6 million to $12.8 million for
the year ended December 31, 2003, from $10.2 million for the year ended December
31, 2002. The increase in MSR amortization is attributable to the continued high
level of mortgage loan repayments, particularly during the first nine months of
2003.
Other non-interest income increased $4.9 million to $14.5 million for the year
ended December 31, 2003, from $9.6 million for the year ended December 31, 2002.
This increase was primarily due to a $10.1 million gain on the sale of our
interest in a joint venture real estate investment held by one of our
wholly-owned subsidiaries in the 2003 fourth quarter, partially offset by the
receipt of a $3.8 million net insurance settlement in 2002 regarding a lawsuit.
61
Net gain on sales of securities decreased $3.5 million to $7.3 million for the
year ended December 31, 2003, from $10.8 million for the year ended December 31,
2002. During 2003, we sold mortgage-backed and other securities with an
amortized cost of $1.45 billion. During 2002, we sold mortgage-backed
securities with an amortized cost of $438.6 million.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2003 totaled $205.9
million, an increase of $7.9 million from $198.0 million for the year ended
December 31, 2002. This increase was primarily due to an increase of $10.1
million in general and administrative expense to $205.9 million for the year
ended December 31, 2003, from $195.8 million for the year ended December 31,
2002, partially offset by a $2.2 million prepayment penalty incurred in December
2002 on the prepayment of a $100.0 million reverse repurchase agreement. The
increase in general and administrative expense was primarily due to increases in
occupancy, equipment and systems expense and compensation and benefits expense.
Occupancy, equipment and systems expense increased $6.8 million to $59.9 million
for the year ended December 31, 2003, from $53.1 million for the year ended
December 31, 2002, due to increases in building and furniture, fixtures and
equipment expense, data processing and depreciation, as a result of facilities
and systems enhancements over the past year, and increases in rent and utilities
expense.
Compensation and benefits expense increased $3.6 million to $110.3 million for
the year ended December 31, 2003, from $106.7 million for the year ended
December 31, 2002. The increase was primarily attributable to increases in
pension and other postretirement benefits expense, partially offset by a
decrease in ESOP expense.
Pension expense increased $6.1 million to net expense of $5.7 million for the
year ended December 31, 2003, from a net benefit of $358,000 for the year ended
December 31, 2002. The increase in pension expense was primarily related to the
decrease in the value of our pension assets which was a result of the decline in
the equities markets during 2002. The decline in the equities markets during
2002 resulted in a $23.7 million decrease in the fair value of plan assets, to
$128.9 million at December 31, 2002 compared to $152.6 million at December 31,
2001, which resulted in a $1.9 million decrease in the expected return on plan
assets for 2003, thereby increasing pension expense compared to 2002. An
expected long term rate of return on plan assets of 8.00% was utilized in
determining pension expense (benefit) for both 2003 and 2002.
Additionally, the decline in the equities markets during 2002 resulted in a
negative 11.00% actual return on plan assets for the year as compared to the
expected long term positive rate of return of 8.00%. These divergent rates of
return resulted in a $27.4 million actuarial loss in the fair value of our plan
assets in 2002 which contributed to the significant increase in the unrecognized
net actuarial loss to $44.3 million as of December 31, 2002. Also contributing
to the unrecognized net actuarial loss was an $8.3 million actuarial loss in
2002 on our projected benefit liabilities from the decrease in the discount rate
as a result of the low interest rate environment. The total increase in the
unrecognized net actuarial loss in 2002 resulted in the unrecognized net
actuarial loss at December 31, 2002 exceeding 10% of the greater of the
projected benefit obligation or the market related value of plan assets. We
amortize unrecognized gains and losses on the minimum basis as prescribed by
SFAS No. 87, "Employers' Accounting for Pensions." As a result, we amortized
$3.4 million of the unrecognized net actuarial loss as an expense in 2003
compared to amortization of only $46,000 for 2002.
The decrease in ESOP expense is primarily attributable to a reduction in the
number of shares of our common stock allocated to participant accounts, due to
an increase in the market value of our common stock during the period used for
the calculations, during the year ended December 31, 2003, compared to the year
ended December 31, 2002.
62
Although non-interest expense increased in 2003, we continue to focus on expense
control, with expense ratios that are significantly lower than our peer
averages. Our percentage of general and administrative expense to average assets
increased to 0.91% for the year ended December 31, 2003, from 0.88% for the year
ended December 31, 2002, primarily due to the increase in general and
administrative expense, partially offset by the increase in average assets. The
efficiency ratio increased to 41.25% for the year ended December 31, 2003, from
34.25% for the year ended December 31, 2002, primarily due to the decrease in
net interest income, coupled with the increase in general and administrative
expense. The increase in general and administrative expense and the decrease in
net interest income for the year ended December 31, 2003 compared to the year
ended December 31, 2002 were discussed previously.
Income Tax Expense
For the year ended December 31, 2003, income tax expense totaled $96.4 million,
representing an effective tax rate of 32.9%, compared to $123.1 million,
representing an effective tax rate of 33.1%, for the year ended December 31,
2002.
Asset Quality
Our non-performing assets continue to remain at very low levels in relation to
both the size of our loan portfolio and relative to our peers. Non-performing
assets increased $2.2 million to $33.5 million at December 31, 2004, from $31.3
million at December 31, 2003. The ratio of non-performing loans to total loans
increased to 0.25% at December 31, 2004, from 0.23% at December 31, 2003. The
ratio of non-performing assets to total assets was 0.14% at December 31, 2004
and 2003. See Item 1, "Business" for further discussion of our asset quality.
Non-Performing Assets
The following table sets forth information regarding non-performing assets.
At December 31,
------------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $31,462 $28,321 $31,997 $34,848 $34,332
Non-accrual delinquent consumer and other loans 544 792 1,485 991 903
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 573 563 1,035 1,277 952
- --------------------------------------------------------------------------------------------------
Total non-performing loans 32,579 29,676 34,517 37,116 36,187
Real estate owned, net (3) 920 1,635 1,091 2,987 3,801
- --------------------------------------------------------------------------------------------------
Total non-performing assets $33,499 $31,311 $35,608 $40,103 $39,988
==================================================================================================
Non-performing loans to total loans 0.25% 0.23% 0.29% 0.31% 0.32%
Non-performing loans to total assets 0.14 0.13 0.16 0.16 0.16
Non-performing assets to total assets 0.14 0.14 0.16 0.18 0.18
(1) Includes multi-family and commercial real estate loans totaling $11.5
million, $6.1 million, $2.9 million, $3.6 million and $2.5 million at
December 31, 2004, 2003, 2002, 2001 and 2000, respectively.
(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.
(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.
63
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
$1.8 million for the year ended December 31, 2004, $1.9 million for the year
ended December 31, 2003 and $2.3 million for the year ended December 31, 2002.
This compares to actual payments recorded as interest income, with respect to
such loans, of $1.0 million for the year ended December 31, 2004, $1.2 million
for the year ended December 31, 2003 and $1.6 million for the year ended
December 31, 2002.
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 December 31,
2004, $3.9 million at December 31, 2003, $5.0 million at December 31, 2002, $5.4
million at December 31, 2001 and $5.2 million at December 31, 2000.
In addition to non-performing assets, we had $4.1 million of potential problem
loans at December 31, 2004 compared to $839,000 at December 31, 2003. Such loans
are 60-89 days delinquent as shown in the following table.
Delinquent Loans
The following table shows a comparison of delinquent loans at December 31, 2004,
2003 and 2002.
Principal Balance of Loans Past Due
----------------------------------------
60-89 Days 90 Days or More
----------------------------------------
Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount
- --------------------------------------------------------------------------------
At December 31, 2004:
Mortgage loans:
One-to-four family 6 $ 805 98 $20,497
Multi-family 4 460 12 8,843
Commercial real estate -- -- 4 2,695
Construction (1) 2 1,994 -- --
Consumer and other loans 56 880 57 544
- --------------------------------------------------------------------------------
Total delinquent loans 68 $4,139 171 $32,579
================================================================================
Delinquent loans to total loans 0.03% 0.25%
At December 31, 2003:
Mortgage loans:
One-to-four family 5 $ 192 143 $22,744
Multi-family 1 60 10 3,448
Commercial real estate -- -- 4 2,692
Consumer and other loans 83 587 90 792
- --------------------------------------------------------------------------------
Total delinquent loans 89 $ 839 247 $29,676
================================================================================
Delinquent loans to total loans 0.01% 0.23%
At December 31, 2002:
Mortgage loans:
One-to-four family 12 $ 417 185 $30,130
Multi-family 1 192 6 2,114
Commercial real estate 2 324 1 788
Consumer and other loans 85 571 131 1,485
- --------------------------------------------------------------------------------
Total delinquent loans 100 $1,504 323 $34,517
================================================================================
Delinquent loans to total loans 0.01% 0.29%
(1) Construction loans classified as 60-89 days past due at December 31, 2004
consist solely of loans which are delinquent 60-89 days as to their
maturity date but not their interest due. In January 2005, the loans were
extended to May 1, 2005 and are current and performing in accordance with
the extended loan agreement terms.
64
Classified Assets
The following table sets forth the carrying value of our assets, exclusive of
general valuation allowances, classified as special mention, substandard or
doubtful at December 31, 2004. There were no assets classified as loss at
December 31, 2004.
Special Mention Substandard Doubtful
------------------ ------------------ -----------------
Number Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount of Loans Amount
- ------------------------------------------------------------------------------------------
Loans:
Mortgage loans:
One-to-four family -- $ -- 104 $20,842 4 $ 271
Multi-family 4 5,540 16 9,947 -- --
Commercial real estate 2 2,695 4 1,870 1 990
Construction 5 2,735 -- -- -- --
Consumer and other loans 1 177 58 545 -- --
- ------------------------------------------------------------------------------------------
Total loans 12 11,147 182 33,204 5 1,261
Real estate owned:
One-to-four family -- -- 5 920 -- --
- ------------------------------------------------------------------------------------------
Total classified assets 12 $11,147 187 $34,124 5 $1,261
==========================================================================================
Allowance for Losses
The following table sets forth changes in our allowances for losses on loans and
REO for the periods indicated.
At or For the Year Ended December 31,
------------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Allowance for losses on loans:
Balance at beginning of year $83,121 $83,546 $82,285 $79,931 $76,578
Provision charged to operations -- -- 2,307 4,028 4,014
Charge-offs:
One-to-four family (231) (194) (325) (506) (963)
Multi-family -- -- (83) (3) (8)
Commercial real estate -- -- (268) (464) --
Construction -- -- (281) -- --
Consumer and other loans (656) (1,142) (1,251) (1,554) (1,678)
- ----------------------------------------------------------------------------------------------------
Total charge-offs (887) (1,336) (2,208) (2,527) (2,649)
- ----------------------------------------------------------------------------------------------------
Recoveries:
One-to-four family 78 111 241 263 802
Multi-family -- -- 83 -- 136
Commercial real estate -- 20 291 -- 496
Construction -- -- -- 9 79
Consumer and other loans 446 780 547 581 475
- ----------------------------------------------------------------------------------------------------
Total recoveries 524 911 1,162 853 1,988
- ----------------------------------------------------------------------------------------------------
Net charge-offs (363) (425) (1,046) (1,674) (661)
- ----------------------------------------------------------------------------------------------------
Balance at end of year $82,758 $83,121 $83,546 $82,285 $79,931
====================================================================================================
Net charge-offs to average loans outstanding 0.00% 0.00% 0.01% 0.01% 0.01%
Allowance for loan losses to total loans 0.62 0.66 0.69 0.68 0.70
Allowance for loan losses to non-performing loans 254.02 280.10 242.04 221.70 220.88
Allowance for losses on REO:
Balance at beginning of year $ -- $ 4 $ -- $ 3 $ 171
Provision (recovery) recorded to operations -- 4 4 (64) (109)
Charge-offs -- (8) -- (17) (113)
Recoveries -- -- -- 78 54
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ -- $ 4 $ -- $ 3
====================================================================================================
The following table sets forth our allocation of the allowance for loan losses
by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The increases in the reserves allocated to
multi-family and commercial real estate loans reflect the overall increases in
the balances of those portfolios. The portion of the allowance for loan losses
allocated to each loan
65
category does not represent the total available to absorb losses which may
occur within the loan category, since the total allowance is available for
losses applicable to the entire loan portfolio.
At December 31,
---------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
% of Loans % of Loans % of Loans
to to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------
One-to-four family $36,697 68.68% $39,614 71.13% $45,485 76.86%
Multi-family 18,124 19.41 16,440 17.69 12,449 13.35
Commercial real estate 11,785 7.17 11,006 6.98 10,099 6.21
Construction 1,996 0.89 1,695 0.79 786 0.47
Consumer and other loans 14,156 3.85 14,366 3.41 14,727 3.11
- -------------------------------------------------------------------------------------------------------
Total allowance for loan losses $82,758 100.00% $83,121 100.00% $83,546 100.00%
=======================================================================================================
At December 31,
---------------------------------------------
2001 2000
--------------------- ---------------------
% of Loans % of Loans
to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------
One-to-four family $49,122 83.59% $49,826 86.79%
Multi-family 8,612 9.05 6,721 7.07
Commercial real estate 8,529 4.95 7,771 4.23
Construction 1,329 0.42 573 0.30
Consumer and other loans 14,693 1.99 15,040 1.61
- -------------------------------------------------------------------------------
Total allowance for loan losses $82,285 100.00% $79,931 100.00%
===============================================================================
Impact of Accounting Standards and Interpretations
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment,"
or SFAS No. 123(R), which requires public entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (with limited exceptions). The
fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based
method in SFAS No. 123 in most respects. SFAS No. 123(R) is effective as of the
beginning of the first interim or annual reporting period beginning after June
15, 2005 with early adoption encouraged. SFAS No. 123(R) applies to all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. Additionally, beginning on the required effective
date, public entities will recognize compensation cost for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS No. 123
for either recognition or pro forma disclosures. The cumulative effect of
initially applying SFAS No. 123(R), if any, is recognized as of the required
effective date. For periods before the required effective date, public entities
may elect, although they are not required, to retroactively restate financial
statements for prior periods to recognize compensation cost on a basis
consistent with the pro forma disclosures required for those periods by SFAS No.
123. We have not yet determined the transition method we will apply upon our
adoption of SFAS No. 123(R). The impact of our adoption of SFAS No. 123(R) on
our results of operations for 2005 will depend on the transition method we
select. Regardless of the transition method we select upon adoption, the impact
on our results of operations in 2006 is expected to be a reduction in net income
comparable to the reduction shown in the 2004 pro forma disclosures under SFAS
No. 123, which are included in Note 1 of Notes to Consolidated Financial
Statements included in Item 8, "Financial Statements and Supplementary Data."
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
66
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. Subsequent to the issuance of Staff
Position No. EITF Issue 03-1-1, the FASB announced plans for a full
reconsideration of existing authoritative literature concerning
other-than-temporary impairment of securities.
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 was 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 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, which for
us was December 31, 2004. Upon adoption of Staff Position No. 106-2, we
determined our plan to be "actuarially equivalent" and determined the Medicare
Act's effects were not a "significant event." The impact of our adoption of
Staff Position No. 106-2 was not material to our financial condition and results
of operations. See Note 15 of Notes to Consolidated Financial Statements
included in Item 8, "Financial Statements and Supplementary Data," for
additional disclosures regarding the impact of our adoption of Staff Position
No. 106-2.
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 was 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 our two interest rate swap agreements as fair
value hedges of the debt Astoria Financial Corporation issued to Astoria Capital
Trust I. Our prior period consolidated financial statements have been restated
to reflect the deconsolidation.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of our
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
67
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is IRR. Net
interest income is the primary component of our net income. Net interest income
is the difference between the interest earned on our loans, securities and other
interest-earning assets and the interest expense incurred on our deposits and
borrowings. The yields, costs, and volumes of loans, securities, deposits and
borrowings are directly affected by the levels of and changes in market interest
rates. Additionally, changes in interest rates also affect the related cash
flows of our assets and liabilities as the option to prepay assets or withdraw
liabilities remains with our customers, in most cases without penalty. The
objective of our IRR management policy is to maintain an appropriate mix and
level of assets, liabilities and off-balance sheet items to enable us to meet
our growth and/or earnings objectives, while maintaining specified minimum
capital levels as required by the OTS, in the case of Astoria Federal, and as
established by our Board of Directors. We use a variety of analyses to monitor,
control and adjust our asset and liability positions, primarily interest rate
sensitivity gap analysis, or gap analysis, and net interest income sensitivity,
or NII sensitivity, analysis. Additional IRR modeling is done by Astoria Federal
in conformity with OTS requirements. In conjunction with performing these
analyses we also consider related factors including, but not limited to, our
overall credit profile, non-interest income and non-interest expense. We do not
enter into financial transactions or hold financial instruments for trading
purposes.
Gap Analysis
Gap analysis measures the difference between the amount of interest-earning
assets anticipated to mature or reprice within specific time periods and the
amount of interest-bearing liabilities anticipated to mature or reprice within
the same time periods. The table on page 69, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at December 31, 2004 that we anticipate will reprice or mature in
each of the future time periods shown using certain assumptions based on our
historical experience and other market-based data available to us. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. The major factors affecting
mortgage prepayment rates are prevailing interest rates and related mortgage
refinancing opportunities. Prepayment rates will also vary due to a number of
other factors, including the regional economy in the area where the underlying
collateral is located, seasonal factors, demographic variables and the
assumability of the underlying mortgages.
The Gap Table does not indicate the impact of general interest rate movements on
our net interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates are
current trends and historical repricing experience with respect to similar
products. As a result, different assumptions may be used at different points in
time.
The Gap Table includes $2.18 billion of callable borrowings classified according
to their maturity dates, primarily in the more than three years to five years
category, which are callable within one year and at various times thereafter. In
addition, the Gap Table includes callable securities with an amortized cost of
$125.1 million classified according to their maturity dates, of which $108.8
million are callable within one year and at various times thereafter. The
classifications of callable borrowings and securities are consistent with our
experience with these instruments in the current interest rate environment. As
indicated in the Gap Table, our one-year cumulative gap at December 31, 2004 was
68
negative 2.87%. 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 December 31,
2004, as compared to December 31, 2003, as a result of the repayment or
refinancing of $3.44 billion of medium-term borrowings which matured during
2004, of which $2.40 billion were extended through new medium-term borrowings
with a weighted average original term of 3.3 years. Partially offsetting the
impact of the reduction in borrowings due in one year or less is a decrease in
estimated mortgage loan repayments as of December 31, 2004, as compared to
December 31, 2003, as a result of the decrease in refinance activity previously
discussed.
At December 31, 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) $3,127,237 $ 3,293,598 $5,453,229 $ 792,607 $12,666,671
Consumer and other loans (1) 480,545 27,602 -- -- 508,147
Repurchase agreements 267,578 -- -- -- 267,578
Mortgage-backed and other
securities available-for-sale and
FHLB stock 622,797 761,826 427,947 810,897 2,623,467
Mortgage-backed and other securities
held-to-maturity 1,550,612 2,156,144 1,187,294 1,416,741 6,310,791
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,048,769 6,239,170 7,068,470 3,020,245 22,376,654
Net unamortized purchase premiums
and deferred costs (2) 18,495 15,621 30,510 1,635 66,261
- ------------------------------------------------------------------------------------------------------------
Net interest-earning assets (3) 6,067,264 6,254,791 7,098,980 3,021,880 22,442,915
- ------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 161,236 322,472 322,472 2,122,940 2,929,120
Money market 810,586 16,284 16,284 122,134 965,288
NOW and demand deposit 45,039 90,080 90,080 1,355,515 1,580,714
Certificates of deposit 2,572,567 3,387,456 804,952 83,160 6,848,135
Borrowed funds, net (4) 3,149,183 3,292,624 2,648,820 377,843 9,468,470
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,738,611 7,108,916 3,882,608 4,061,592 21,791,727
- ------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (671,347) (854,125) 3,216,372 (1,039,712) $ 651,188
============================================================================================================
Cumulative interest sensitivity gap $ (671,347) $(1,525,472) $1,690,900 $ 651,188
============================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets (2.87)% (6.51)% 7.22% 2.78%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 90.04% 88.98% 109.54% 102.99%
(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
69
remain constant over the projection period. For each alternative interest rate
scenario, corresponding changes in the cash flow and repricing assumptions of
each financial instrument are made to determine the impact on net interest
income.
Assuming the entire yield curve was to increase 200 basis points, through
quarterly parallel increments of 50 basis points and remain at that level
thereafter, our projected net interest income for the twelve month period
beginning January 1, 2005 would decrease by approximately 4.50% 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 January 1, 2005 would decrease by
approximately 1.12% 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 this 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 January 1, 2005 would increase by approximately
$6.3 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 January 1, 2005 would decrease by approximately $5.9 million,
with respect to these items alone.
For information regarding our credit risk, see "Asset Quality," in Item 7,
"MD&A."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For our Consolidated Financial Statements, see the index on page 76.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
70
ITEM 9A. CONTROLS AND PROCEDURES
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of December 31, 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 communicated to our management as
appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting that
occurred during the three months ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
See page 77 for our Management Report on Internal Control Over Financial
Reporting and page 78 for the related Report of Independent Registered Public
Accounting Firm.
The Sarbanes-Oxley Act Section 302 Certifications regarding the quality of our
public disclosures have been filed with the SEC as exhibit 31.1 and exhibit 31.2
to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION
Information regarding directors and executive officers who are not directors of
Astoria Financial Corporation is presented in the tables under the heading
"Board Nominees, Directors and Executive Officers" and under the heading
"Committees and Meetings of the Board" in our definitive Proxy Statement to be
utilized in connection with our Annual Meeting of Shareholders to be held on May
18, 2005, which will be filed with the SEC within 120 days from December 31,
2004, and is incorporated herein by reference.
Audit Committee Financial Expert
Information regarding the audit committee of our Board of Directors, including
information regarding audit committee financial experts serving on the audit
committee, is presented under the heading "Committees and Meetings of the Board"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 18, 2005, which will be filed with the
SEC within 120 days from December 31, 2004, and is incorporated herein by
reference.
The Audit Committee Charter is available on our investor relations website at
http://ir.astoriafederal.com under the heading "Corporate Governance." In
addition, copies of our Audit Committee Charter will be provided to shareholders
upon written request to Astoria Financial Corporation, Investor Relations
Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no
charge.
71
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to
our directors, officers and employees, including our principal executive officer
and principal financial officer, which is available on our investor relations
website at http://ir.astoriafederal.com under the heading "Corporate
Governance." In addition, copies of our code of business conduct and ethics will
be provided to shareholders upon written request to Astoria Financial
Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake
Success, New York 11042 at no charge.
Corporate Governance
Our Corporate Governance Guidelines and Nominating and Corporate Governance
Committee Charter are available on our investor relations website at
http://ir.astoriafederal.com under the heading "Corporate Governance." In
addition, copies of such documents will be provided to shareholders upon written
request to Astoria Financial Corporation, Investor Relations Department, One
Astoria Federal Plaza, Lake Success, New York 11042 at no charge.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive (and director) compensation is included under
the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values,"
"Pension Plans," "Director Compensation," "Employment Agreements," "Incentive
Option Plans," that portion of the "Report of the Compensation Committee on
Executive Compensation" entitled "Long-term Incentive Compensation," and
"Compensation Committee Interlocks and Insider Participation" in our definitive
Proxy Statement to be utilized in connection with our Annual Meeting of
Shareholders to be held on May 18, 2005 which will be filed with the SEC within
120 days from December 31, 2004, and is incorporated herein by reference.
The Compensation Committee Charter is available on our investor relations
website at http://ir.astoriafederal.com under the heading "Corporate
Governance." In addition, copies of our Compensation Committee Charter will be
provided to shareholders upon written request to Astoria Financial Corporation,
Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York
11042 at no charge.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" and information
relating to compensation plans, including individual compensation arrangements,
under which equity securities of Astoria Financial Corporation are authorized
for issuance is included in our definitive Proxy Statement to be utilized in
connection with our Annual Meeting of Shareholders to be held on May 18, 2005,
which will be filed with the SEC within 120 days from December 31, 2004, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is included
under the headings "Transactions with Certain Related Persons" and "Compensation
Committee Interlocks and Insider Participation" in our definitive Proxy
Statement to be utilized in connection with our Annual Meeting of Shareholders
to be held on May 18, 2005, which will be filed with the SEC within 120 days
from December 31, 2004, and is incorporated herein by reference.
72
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is included under
the headings "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 18, 2005, which will be filed with the
SEC within 120 days from December 31, 2004, and is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
See Index to Consolidated Financial Statements on page 76.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto under Item 8, "Financial Statements
and Supplementary Data."
(b) Exhibits
See Index of Exhibits on page 116.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Astoria Financial Corporation
/s/ George L. Engelke, Jr. Date: March 9, 2005
------------------------------------
George L. Engelke, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
NAME DATE
---- ----
/s/ George L. Engelke, Jr. March 9, 2005
------------------------------------
George L. Engelke, Jr.
Chairman, President and
Chief Executive Officer
/s/ Monte N. Redman March 9, 2005
------------------------------------
Monte N. Redman
Executive Vice President and
Chief Financial Officer
/s/ Gerard C. Keegan March 9, 2005
------------------------------------
Gerard C. Keegan
Vice Chairman, Chief Administrative
Officer and Director
/s/ Andrew M. Burger March 9, 2005
------------------------------------
Andrew M. Burger
Director
/s/ John J. Conefry, Jr. March 9, 2005
------------------------------------
John J. Conefry, Jr.
Director
/s/ Denis J. Connors March 9, 2005
------------------------------------
Denis J. Connors
Director
/s/ Robert J. Conway March 9, 2005
------------------------------------
Robert J. Conway
Director
/s/ Thomas J. Donahue March 9, 2005
------------------------------------
Thomas J. Donahue
Director
/s/ Peter C. Haeffner, Jr. March 9, 2005
------------------------------------
Peter C. Haeffner, Jr.
Director
74
/s/ Ralph F. Palleschi March 9, 2005
------------------------------------
Ralph F. Palleschi
Director
/s/ Thomas V. Powderly March 9, 2005
------------------------------------
Thomas V. Powderly
Director
/s/ Leo J. Waters March 9, 2005
------------------------------------
Leo J. Waters
Director
/s/ Donald D. Wenk March 9, 2005
------------------------------------
Donald D. Wenk
Director
75
CONSOLIDATED FINANCIAL STATEMENTS OF
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
----
Management Report on Internal Control Over Financial Reporting................ 77
Reports of Independent Registered Public Accounting Firm...................... 78
Consolidated Statements of Financial Condition at December 31, 2004 and 2003.. 80
Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002................................................................... 81
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002........................................... 82
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002.............................................................. 83
Notes to Consolidated Financial Statements.................................... 84
76
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Astoria Financial Corporation is responsible for establishing
and maintaining adequate internal control over financial reporting. Astoria
Financial Corporation's internal control system is a process designed to provide
reasonable assurance to the company's management and board of directors
regarding the preparation and fair presentation of published financial
statements.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of Astoria Financial Corporation; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of Astoria Financial Corporation's assets that could have a
material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Astoria Financial Corporation management assessed the effectiveness of the
company's internal control over financial reporting as of December 31, 2004. In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on our assessment we believe that, as of
December 31, 2004, the company's internal control over financial reporting is
effective based on those criteria.
Astoria Financial Corporation's independent registered public accounting firm
has issued an audit report on our assessment of, and the effective operation of,
the company's internal control over financial reporting as of December 31, 2004.
This report appears on page 78.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Astoria Financial
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by COSO. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of Astoria Financial Corporation and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2004, and our report dated March 3, 2005
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New York
March 3, 2005
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Astoria Financial Corporation and subsidiaries (the "Company") as of December
31, 2004 and 2003, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Astoria Financial
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 3, 2005 expressed an unqualified opinion on management's assessment
of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New York
March 3, 2005
79
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31,
-------------------------
(In Thousands, Except Share Data) 2004 2003
- --------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 138,809 $ 173,828
Repurchase agreements 267,578 65,926
Available-for-sale securities:
Encumbered 2,104,239 1,997,953
Unencumbered 302,644 657,039
- --------------------------------------------------------------------------------------------------------
2,406,883 2,654,992
Held-to-maturity securities, fair value of $6,306,760 and $5,809,117,
respectively:
Encumbered 5,273,385 5,508,864
Unencumbered 1,029,551 283,863
- --------------------------------------------------------------------------------------------------------
6,302,936 5,792,727
Federal Home Loan Bank of New York stock, at cost 163,700 213,450
Loans held-for-sale, net 23,802 23,023
Loans receivable 13,263,279 12,686,987
Allowance for loan losses (82,758) (83,121)
- --------------------------------------------------------------------------------------------------------
Loans receivable, net 13,180,521 12,603,866
Mortgage servicing rights, net 16,799 17,952
Accrued interest receivable 79,144 77,956
Premises and equipment, net 157,107 160,089
Goodwill 185,151 185,151
Bank owned life insurance 374,719 370,310
Other assets 118,720 122,324
- --------------------------------------------------------------------------------------------------------
Total assets $23,415,869 $22,461,594
========================================================================================================
LIABILITIES:
Deposits $12,323,257 $11,186,594
Reverse repurchase agreements 7,080,000 7,235,000
Federal Home Loan Bank of New York advances 1,934,000 1,924,000
Other borrowings, net 455,835 473,037
Mortgage escrow funds 122,088 108,635
Accrued expenses and other liabilities 130,925 137,797
- --------------------------------------------------------------------------------------------------------
Total liabilities 22,046,105 21,065,063
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,800,000 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; 166,494,888
shares issued; and 110,304,669 and 118,005,381 shares outstanding,
respectively) 1,665 1,665
Additional paid-in capital 811,777 798,583
Retained earnings 1,623,571 1,480,991
Treasury stock (56,190,219 and 48,489,507 shares, at cost, respectively) (1,013,726) (811,993)
Accumulated other comprehensive loss (28,592) (46,489)
Unallocated common stock held by ESOP (6,802,146
and 7,140,081 shares, respectively) (24,931) (26,226)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,369,764 1,396,531
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $23,415,869 $22,461,594
========================================================================================================
All share data has been retroactively adjusted to reflect the three-for-two
common stock split declared in January 2005.
See accompanying Notes to Consolidated Financial Statements.
80
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
------------------------------------------
(In Thousands, Except Share Data) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 428,229 $ 466,544 $ 626,251
Multi-family, commercial real estate and construction 220,703 203,785 162,677
Consumer and other loans 21,312 19,247 17,623
Mortgage-backed securities 358,583 337,222 377,623
Other securities 15,934 28,955 69,211
Federal funds sold and repurchase agreements 1,140 1,538 12,877
- ------------------------------------------------------------------------------------------------------------
Total interest income 1,045,901 1,057,291 1,266,262
- ------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 237,429 225,251 288,000
Borrowed funds 337,906 452,502 513,838
- ------------------------------------------------------------------------------------------------------------
Total interest expense 575,335 677,753 801,838
- ------------------------------------------------------------------------------------------------------------
Net interest income 470,566 379,538 464,424
Provision for loan losses -- -- 2,307
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 470,566 379,538 462,117
- ------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 58,524 59,841 60,190
Other loan fees 4,805 7,556 7,696
Net gain on sales of securities 4,651 7,346 10,772
Other-than-temporary impairment write-down of securities (16,520) -- --
Mortgage banking income (loss), net 4,715 10,291 (2,261)
Income from bank owned life insurance 17,134 19,978 21,398
Other 6,775 14,549 9,612
- ------------------------------------------------------------------------------------------------------------
Total non-interest income 80,084 119,561 107,407
- ------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 118,684 110,349 106,704
Occupancy, equipment and systems 64,592 59,892 53,125
Federal deposit insurance premiums 1,775 1,896 1,996
Advertising 6,583 5,833 4,806
Other 33,377 27,907 29,196
- ------------------------------------------------------------------------------------------------------------
Total general and administrative 225,011 205,877 195,827
Extinguishment of debt -- -- 2,202
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense 225,011 205,877 198,029
- ------------------------------------------------------------------------------------------------------------
Income before income tax expense 325,639 293,222 371,495
Income tax expense 106,102 96,376 123,066
- ------------------------------------------------------------------------------------------------------------
Net income $ 219,537 $ 196,846 $ 248,429
============================================================================================================
Basic earnings per common share $ 2.03 $ 1.68 $ 1.94
============================================================================================================
Diluted earnings per common share $ 2.00 $ 1.66 $ 1.90
============================================================================================================
Basic weighted average common shares 107,930,909 114,574,956 125,272,391
Diluted weighted average common and common equivalent shares 109,806,855 115,942,058 127,379,477
All share and per share data have been retroactively adjusted to reflect the
three-for-two common stock split declared in January 2005.
See accompanying Notes to Consolidated Financial Statements.
81
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
Additional
Preferred Common Paid-in
(In Thousands, Except Share Data) Total Stock Stock Capital
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,542,586 $ 2,000 $1,665 $822,652
Comprehensive income:
Net income 248,429 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities 5,340 -- -- --
Amortization of unrealized loss on securities
transferred to held-to-maturity 8,317 -- -- --
Net unrealized loss on cash flow hedge (1,871) -- -- --
Minimum pension liability adjustment (19) -- -- --
-------
Comprehensive income 260,196
-------
Common stock repurchased (10,925,100 shares) (211,103) -- -- --
Dividends on common and preferred stock
($0.51 per share and $3.00 per share,
respectively) and amortization of
purchase premium (70,160) -- -- (1,304)
Exercise of stock options and related tax benefit
(1,983,710 shares issued) 22,256 -- -- 10,514
Amortization relating to allocation of ESOP stock 10,223 -- -- 8,324
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,553,998 2,000 1,665 840,186
Comprehensive income:
Net income 196,846 -- -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities (57,226) -- -- --
Amortization of unrealized loss on securities
transferred to held-to-maturity 775 -- -- --
Reclassification of net unrealized loss on
cash flow hedge 191 -- -- --
Minimum pension liability adjustment (29) -- -- --
-------
Comprehensive income 140,557
-------
Common stock repurchased (10,610,700 shares) (195,471) -- -- --
Redemption of preferred stock (54,500) (2,000) -- (52,500)
Dividends on common and preferred stock
($0.57 per share and $2.25 per share,
respectively) and amortization of
purchase premium (70,076) -- -- (978)
Exercise of stock options and related tax benefit
(1,407,355 shares issued) 14,851 -- -- 6,058
Amortization relating to allocation of ESOP stock 7,172 -- -- 5,817
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,396,531 -- 1,665 798,583
Comprehensive income:
Net income 219,537 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities 17,748 -- -- --
Reclassification of net unrealized loss
on cash flow hedge 191 -- -- --
Minimum pension liability adjustment (42) -- -- --
-------
Comprehensive income 237,434
-------
Common stock repurchased (9,067,500 shares) (225,052) -- -- --
Dividends on common stock ($0.67 per share) (71,982) -- -- --
Exercise of stock options and related tax benefit
(1,366,788 shares issued) 24,142 -- -- 5,798
Amortization relating to allocation of ESOP stock 8,691 -- -- 7,396
- --------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $1,369,764 $ -- $1,665 $811,777
==================================================================================================
Accumulated Unallocated
Other Common
Retained Treasury Comprehensive Stock Held
(In Thousands, Except Share Data) Earnings Stock (Loss) Income by ESOP
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,207,187 $ (459,471) $(1,967) $(29,480)
Comprehensive income:
Net income 248,429 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities -- -- 5,340 --
Amortization of unrealized loss on securities
transferred to held-to-maturity -- -- 8,317 --
Net unrealized loss on cash flow hedge -- -- (1,871) --
Minimum pension liability adjustment -- -- (19) --
Comprehensive income
Common stock repurchased (10,925,100 shares) -- (211,103) -- --
Dividends on common and preferred stock
($0.51 per share and $3.00 per share,
respectively) and amortization of
purchase premium (68,856) -- -- --
Exercise of stock options and related tax benefit
(1,983,710 shares issued) (19,253) 30,995 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,899
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,367,507 (639,579) 9,800 (27,581)
Comprehensive income:
Net income 196,846 -- -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities -- -- (57,226) --
Amortization of unrealized loss on securities
transferred to held-to-maturity -- -- 775 --
Reclassification of net unrealized loss on
cash flow hedge -- -- 191 --
Minimum pension liability adjustment -- -- (29) --
Comprehensive income
Common stock repurchased (10,610,700 shares) -- (195,471) -- --
Redemption of preferred stock -- -- -- --
Dividends on common and preferred stock
($0.57 per share and $2.25 per share,
respectively) and amortization of
purchase premium (69,098) -- -- --
Exercise of stock options and related tax benefit
(1,407,355 shares issued) (14,264) 23,057 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,355
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,480,991 (811,993) (46,489) (26,226)
Comprehensive income:
Net income 219,537 -- -- --
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities -- -- 17,748 --
Reclassification of net unrealized loss
on cash flow hedge -- -- 191 --
Minimum pension liability adjustment -- -- (42) --
Comprehensive income
Common stock repurchased (9,067,500 shares) -- (225,052) -- --
Dividends on common stock ($0.67 per share) (71,982) -- -- --
Exercise of stock options and related tax benefit
(1,366,788 shares issued) (4,975) 23,319 -- --
Amortization relating to allocation of ESOP stock -- -- -- 1,295
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $1,623,571 $(1,013,726) $(28,592) $(24,931)
============================================================================================================
All share and per share data have been retroactively adjusted to reflect the
three-for-two common stock split declared in January 2005.
See accompanying Notes to Consolidated Financial Statements.
82
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
---------------------------------------
(In Thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 219,537 $ 196,846 $ 248,429
Adjustments to reconcile net income to net
cash provided by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 32,017 113,031 52,602
Net amortization (accretion) on other securities, consumer
and other loans and borrowings 4,066 981 (40,133)
Net provision for loan and real estate losses -- 4 2,311
Depreciation and amortization 13,460 12,474 10,581
Net gain on sales of loans and securities (8,199) (19,482) (17,417)
Other-than-temporary impairment write-down of securities 16,520 -- --
Gain on sale of joint venture real estate investment -- (10,058) --
Originations of loans held-for-sale (326,499) (616,804) (486,516)
Proceeds from sales and principal repayments of loans
held-for-sale 329,268 668,586 473,882
Amortization relating to allocation of ESOP stock 8,691 7,172 10,223
(Increase) decrease in accrued interest receivable (1,188) 10,952 7,365
Mortgage servicing rights amortization and valuation
allowance adjustments, net of capitalized amounts 1,153 2,459 14,884
Income from bank owned life insurance, net of insurance
proceeds received (4,409) (11,412) (16,147)
(Increase) decrease in other assets (6,528) 12,376 15,980
Decrease in accrued expenses and other liabilities (453) (8,929) (118,623)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 277,436 358,196 157,421
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (3,205,083) (5,468,504) (3,870,703)
Loan purchases through third parties (1,171,606) (1,550,100) (1,546,535)
Principal payments on loans receivable 3,769,995 6,344,694 5,478,798
Purchases of mortgage-backed securities held-to-maturity (2,475,096) (5,521,833) (4,608,574)
Purchases of mortgage-backed securities available-for-sale (596,257) (3,780,394) (2,235,329)
Purchases of other securities held-to-maturity -- -- (9,978)
Purchases of other securities available-for-sale (508) (600) (21,022)
Principal payments on mortgage-backed securities
held-to-maturity 1,951,277 4,660,847 3,745,503
Principal payments on mortgage-backed securities
available-for-sale 691,825 2,209,760 2,348,406
Proceeds from calls and maturities of other securities
held-to-maturity 5,971 68,613 316,980
Proceeds from calls and maturities of other securities
available-for-sale 635 133,280 256,211
Proceeds from sales of mortgage-backed securities
available-for-sale 147,497 1,406,954 449,327
Proceeds from sales of other securities available-for-sale 22,692 50,056 --
Net redemptions of FHLB-NY stock 49,750 34,100 2,900
Proceeds from sales of real estate owned, net 2,157 1,528 3,643
Purchases of premises and equipment, net of proceeds from
sales (10,478) (15,266) (18,125)
Net proceeds from sale of joint venture real estate
investment -- 10,140 --
Purchase of bank owned life insurance -- -- (100,000)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (817,229) (1,416,725) 191,502
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 1,136,663 119,398 163,503
Net increase in borrowings with original terms of three
months or less 870,000 810,000 500,000
Net proceeds from borrowings with original terms greater
than three months 2,400,000 1,700,000 496,883
Repayments of borrowings with original terms greater than
three months (3,435,000) (1,700,000) (2,000,450)
Net increase (decrease) in mortgage escrow funds 13,453 4,282 (12,042)
Cash paid for cash flow hedging instrument -- -- (3,297)
Common stock repurchased (225,052) (195,471) (211,103)
Cash dividends paid to stockholders (71,982) (72,076) (70,160)
Redemption of preferred stock -- (54,500) --
Cash received for options exercised 18,344 8,793 11,742
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 706,426 620,426 (1,124,924)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 166,633 (438,103) (776,001)
Cash and cash equivalents at beginning of year 239,754 677,857 1,453,858
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 406,387 $ 239,754 $ 677,857
==========================================================================================================
Supplemental disclosures:
Cash paid during the year:
Interest $ 587,373 $ 680,504 $ 815,627
==========================================================================================================
Income taxes $ 99,892 $ 88,478 $ 112,652
==========================================================================================================
Additions to real estate owned $ 1,443 $ 2,075 $ 1,971
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
83
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following significant accounting and reporting policies of Astoria Financial
Corporation and subsidiaries conform to accounting principles generally accepted
in the United States of America, or GAAP, and are used in preparing and
presenting these consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and 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 annual 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 $3.9 million of common securities and using the
proceeds to acquire $128.9 million of Junior Subordinated Debentures issued by
Astoria Financial Corporation. The impact of this deconsolidation on our
financial statements was 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. See Note 8 for a further discussion of our Junior
Subordinated Debentures.
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The determination of our allowance for loan
losses, the valuation of mortgage servicing rights, or MSR, and judgments
regarding goodwill and securities impairment are particularly critical because
they involve a higher degree of complexity and subjectivity and require
estimates and assumptions about highly uncertain matters. Actual results may
differ from our estimates and assumptions. Certain reclassifications have been
made to prior year amounts to conform to the current year presentation.
All share and per share data included in the consolidated financial statements
and the notes thereto have been retroactively adjusted to reflect the
three-for-two common stock split declared in January 2005. The stock split was
effected in the form of a 50% stock dividend which was distributed on March 1,
2005. A retroactive adjustment of $555,000 was made to increase common stock and
reduce retained earnings to reflect the increase in shares issued.
(b) Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold and repurchase agreements with
original maturities of three months or less. Astoria Federal is required by the
Federal Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement totaled $47.9 million at
December 31, 2004 and $39.3 million at December 31, 2003.
(c) Repurchase Agreements (Securities Purchased Under Agreements to Resell)
We purchase securities under agreements to resell (repurchase agreements). These
agreements represent short-term loans and are reflected as an asset in the
consolidated statements of financial condition. We may sell, loan or otherwise
dispose of such securities to other parties in the normal course of our
operations. The same securities are to be resold at the maturity of the
repurchase agreements.
84
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(d) Securities
Management determines the appropriate classification of securities at the time
of acquisition. Our available-for-sale portfolio is carried at estimated fair
value, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders' equity. Debt
securities which we have the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost. Premiums and
discounts are recognized as adjustments to interest income using the interest
method over the remaining period to contractual maturity, adjusted for estimated
prepayments when applicable. Gains and losses on the sale of all securities are
determined using the specific identification method and are reflected in
earnings when realized. For the years ended December 31, 2004, 2003 and 2002, we
did not maintain a trading portfolio. We conduct a periodic review and
evaluation of the securities portfolio to determine if the fair value of any
security has declined below its carrying value and whether such decline is
other-than-temporary. If such decline is deemed other-than-temporary, the
security is written down to a new cost basis and the resulting loss is charged
to earnings.
(e) Loans Held-for-Sale
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various government-sponsored enterprises, or
GSEs, or other investors on a servicing released or retained basis. Generally,
the sale of such loans is arranged through a master commitment on a mandatory
delivery or best efforts basis. In addition, student loans are sold to the
Student Loan Marketing Association generally before repayment begins during the
grace period of the loan.
Loans held-for-sale are carried at the lower of cost or estimated fair value, as
determined on an aggregate basis. Net unrealized losses, if any, are recognized
in a valuation allowance through charges to earnings. Premiums and discounts and
origination fees and costs on loans held-for-sale are deferred and recognized as
a component of the gain or loss on sale. Gains and losses on sales of loans
held-for-sale are recognized on settlement dates and are determined by the
difference between the sale proceeds and the allocated cost basis of the loans.
(f) Loans Receivable
Loans receivable are carried at the unpaid principal balances, net of
unamortized premiums and discounts and deferred loan origination costs and fees,
which are recognized as yield adjustments using the interest method. We
generally amortize these amounts over the contractual life of the related loans,
adjusted for estimated prepayments when applicable.
We discontinue accruing interest on mortgage loans when such loans become 90
days delinquent as to their interest due. We discontinue accruing interest on
consumer and other loans when such loans become 90 days delinquent as to their
payment due. In addition, we reverse all previously accrued and uncollected
interest through a charge to interest income. While loans are in non-accrual
status, interest due is monitored and income is recognized only to the extent
cash is received until a return to accrual status is warranted. In some
circumstances, we continue to accrue interest on mortgage loans delinquent 90
days or more as to their maturity date but not their interest due.
The allowance for loan losses is increased by charges to earnings and decreased
by charge-offs, net of recoveries. Pursuant to our policy, loan losses are
charged-off in the period the loans, or portions thereof, are deemed
uncollectible. Our periodic evaluation of the adequacy of the allowance is based
on our past loan loss experience, trends in portfolio volume, quality, maturity
and composition, the status and amount of impaired and other non-performing and
past-due loans, known and inherent risks in the portfolio, adverse situations
that may affect a borrower's ability to repay, the estimated fair value of any
underlying collateral and current and prospective, as well as specific and
general, economic conditions.
We review certain loans for individual impairment and groups of smaller balance
loans based on homogeneous pools. Loans we individually review for impairment
are limited to multi-family mortgage loans, commercial real estate loans,
construction loans, loans modified in a troubled debt restructuring and selected
large one-to-four family mortgage loans. A loan is considered impaired when,
based upon current information and events, it is probable that we will be unable
to collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Impaired loans are principally measured
using the market price of the loan, if one exists, the estimated fair value of
the
85
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
collateral, for collateral dependent loans, or the present value of expected
future cash flows. Interest income on impaired non-accrual loans is recognized
on a cash basis, while interest income on all other impaired loans is
recognized on an accrual basis.
(g) Mortgage Servicing Rights, or MSR
We recognize as separate assets the rights to service mortgage loans. The right
to service loans for others is generally obtained through the sale of loans with
servicing retained. The initial recognition of originated MSR is based upon an
allocation of the total cost of the related loans between the loans and the
servicing rights based on their relative estimated fair values. The estimated
fair value of MSR is based upon quoted market prices of similar loans which we
sell servicing released. The cost of MSR is amortized over the estimated
remaining lives of the loans serviced. MSR are carried at cost, and impairment,
if any, is recognized through a valuation allowance. Fees earned for servicing
loans are reported as income when the related mortgage loan payments are
collected.
We assess impairment of our MSR based on the estimated fair value of those
rights on a stratum-by-stratum basis with any impairment recognized through a
valuation allowance for each impaired stratum. We stratify our MSR by underlying
loan type (primarily fixed and adjustable) and interest rate. The estimated fair
values of each MSR stratum are obtained through independent third party
valuations through an analysis of future cash flows, incorporating numerous
assumptions including servicing income, servicing costs, market discount rates,
prepayment speeds, default rates and other market driven data. Individual
allowances for each stratum are then adjusted in subsequent periods to reflect
changes in the measurement of impairment. Increases in the fair value of
impaired MSR are recognized only up to the amount of the previously recognized
valuation allowance.
(h) Premises and Equipment
Land is carried at cost. Buildings and improvements, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and improvements and furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the term of the related leases or
the estimated useful lives of the improved property.
(i) Goodwill
Goodwill is presumed to have an indefinite useful life and is not amortized, but
rather is tested, at least annually, for impairment at the reporting unit level.
For purposes of our goodwill impairment testing, we have identified a single
reporting unit. We use the quoted market price of our common stock on our
impairment testing date as the basis for determining the fair value of our
reporting unit. If the fair value of our reporting unit exceeds its carrying
amount, further evaluation is not necessary. However, if the fair value of our
reporting unit is less than its carrying amount, further evaluation is required
to compare the implied fair value of the reporting unit's goodwill to its
carrying amount to determine if a write-down of goodwill is required.
As of December 31, 2004, the carrying value of our goodwill totaled $185.2
million. On September 30, 2004, we performed our annual goodwill impairment test
and determined the fair value of our reporting unit to be in excess of its
carrying value by $1.27 billion. Accordingly, as of our annual impairment test
date, there was no indication of goodwill impairment. We would test our goodwill
for impairment between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of our reporting unit
below its carrying amount. No events have occurred and no circumstances have
changed since our annual impairment test date that would more likely than not
reduce the fair value of our reporting unit below its carrying amount.
(j) Bank Owned Life Insurance, or BOLI
BOLI is carried at its cash surrender value and is classified as a non-interest
earning asset. Increases in the cash surrender value are recorded as
non-interest income in the consolidated statements of income and insurance
proceeds received are recorded as a reduction of the cash surrender value.
86
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(k) Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure is
initially recorded at the lower of cost or fair value, less estimated selling
costs. Thereafter, we maintain an allowance for decreases in value which are
charged to income along with any additional expenses incurred on the property.
Fair value is estimated through current appraisals. Write-downs required at the
time of acquisition are charged to the allowance for loan losses. Real estate
owned, net, which is included in other assets, amounted to $920,000 at December
31, 2004 and $1.6 million at December 31, 2003.
(l) Reverse Repurchase Agreements (Securities Sold Under Agreements to
Repurchase)
We enter into sales of securities under agreements to repurchase with selected
dealers and banks. Such agreements are accounted for as secured financing
transactions since we maintain effective control over the transferred securities
and the transfer meets the other criteria for such accounting. Obligations to
repurchase securities sold are reflected as a liability in our consolidated
statements of financial condition. The securities underlying the agreements are
delivered to a custodial account for the benefit of the dealer or bank with whom
each transaction is executed. The dealers or banks, who may sell, loan or
otherwise dispose of such securities to other parties in the normal course of
their operations, agree to resell us the same securities at the maturities of
the agreements. We retain the right of substitution of collateral throughout the
terms of the agreements. The securities underlying the agreements are classified
as encumbered securities in our consolidated statements of financial condition.
(m) Derivative Instruments
As part of our asset/liability management program, we utilize, from
time-to-time, interest rate caps, floors, locks or swaps to reduce our
sensitivity to interest rate fluctuations. These agreements are derivative
instruments which are recorded as either assets or liabilities in the
consolidated statements of financial condition at fair value. Changes in the
fair values of derivatives are reported in our results of operations or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in those fair values or cash flows that are attributable to the hedged
risk, both at inception of the hedge and on an ongoing basis.
Derivatives that qualify for hedge accounting treatment are designated as either
a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (a cash flow hedge). For fair value hedges,
changes in the fair values of the derivative instruments and the assets or
liabilities being hedged are recognized in our results of operations. For cash
flow hedges, changes in the fair values of the derivative instruments are
reported in other comprehensive income. The gains and losses on derivative
instruments that are reported in other comprehensive income are reflected in the
results of operations in the periods in which the results of operations are
impacted by the variability of the cash flows of the hedged item. We establish,
at the inception of the hedge, the method we will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge (the amount by which hedge gains
or losses differ from the corresponding losses or gains on the hedged item). The
ineffective portion of any hedge is recognized in our results of operations.
We also have derivative instruments with no hedging designations. Changes in the
fair values of these derivatives that do not qualify for hedge accounting
treatment are recognized as income or expense in our results of operations. We
do not use derivatives for trading purposes.
Net interest income is increased or decreased by amounts receivable or payable
with respect to our derivatives. Other non-interest expense is increased or
decreased by changes in the fair values of our derivatives.
(n) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date. Tax benefits attributable to stock
option exercises are credited to additional paid-in capital.
87
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(o) Earnings Per Common Share, or EPS
Basic EPS is computed by dividing net income less preferred dividends by the
weighted-average common shares outstanding during the year. The weighted-average
common shares outstanding includes the average number of shares of common stock
outstanding less the weighted average number of unallocated shares held by the
Employee Stock Ownership Plan, or ESOP.
Diluted EPS is computed using the same method as basic EPS, but reflects the
potential dilution that would occur if stock options were exercised and
converted into common stock. The dilutive effect of unexercised stock options is
calculated using the treasury stock method. When applying the treasury stock
method, our average stock price is utilized, and we add to the proceeds of
assumed option exercises the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
(p) Employee Benefits
Astoria Federal has a qualified, non-contributory defined benefit pension plan,
or the Astoria Federal Pension Plan, covering employees meeting specified
eligibility criteria. Astoria Federal's policy is to fund pension costs in
accordance with the minimum funding requirement. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. In addition, Astoria Federal has
non-qualified and unfunded supplemental retirement plans covering certain
officers and directors.
We also sponsor a defined benefit health care plan that provides for
postretirement medical and dental coverage to select individuals. The costs of
postretirement benefits are accrued during an employee's active working career.
We record compensation expense related to the ESOP at an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the reporting period, plus cash contributions made to participant
accounts. For EPS disclosures, ESOP shares that have been committed to be
released are considered outstanding. ESOP shares that have not been committed to
be released are excluded from outstanding shares on a weighted average basis for
EPS calculations. The difference between the fair value of shares for the period
and the cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in capital.
(q) Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans 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 Year Ended December 31,
-------------------------------
(In Thousands, Except Per Share Data) 2004 2003 2002
- -----------------------------------------------------------------------------------
Net income:
As reported $219,537 $196,846 $248,429
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects 5,072 5,417 4,338
-------- -------- --------
Pro forma $214,465 $191,429 $244,091
======== ======== ========
Basic earnings per common share:
As reported $ 2.03 $ 1.68 $ 1.94
======== ======== ========
Pro forma $ 1.99 $ 1.63 $ 1.90
======== ======== ========
Diluted earnings per common share:
As reported $ 2.00 $ 1.66 $ 1.90
======== ======== ========
Pro forma $ 1.95 $ 1.61 $ 1.87
======== ======== ========
88
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment,"
or SFAS No. 123(R), which requires public entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (with limited exceptions). The
fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based
method in SFAS No. 123 in most respects. SFAS No. 123(R) is effective as of the
beginning of the first interim or annual reporting period beginning after June
15, 2005 with early adoption encouraged. SFAS No. 123(R) applies to all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. Additionally, beginning on the required effective
date, public entities will recognize compensation cost for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS No. 123
for either recognition or pro forma disclosures. The cumulative effect of
initially applying SFAS No. 123(R), if any, is recognized as of the required
effective date. For periods before the required effective date, public entities
may elect, although they are not required, to retroactively restate financial
statements for prior periods to recognize compensation cost on a basis
consistent with the pro forma disclosures required for those periods by SFAS No.
123. We have not yet determined the transition method we will apply upon our
adoption of SFAS No. 123(R). The impact of our adoption of SFAS No. 123(R) on
our results of operations for 2005 will depend on the transition method we
select. Regardless of the transition method we select upon adoption, the impact
on our results of operations in 2006 is expected to be a reduction in net income
comparable to the reduction shown in the 2004 pro forma disclosures under SFAS
No. 123 on the previous page.
(r) Segment Reporting
As a community-oriented financial institution, substantially all of our
operations involve the delivery of loan and deposit products to customers. We
make operating decisions and assess performance based on an ongoing review of
these community banking operations, which constitute our only operating segment
for financial reporting purposes.
(2) Repurchase Agreements
Repurchase agreements averaged $85.8 million during the year ended December 31,
2004 and $132.6 million during the year ended December 31, 2003. The maximum
amount of such agreements outstanding at any month end was $267.6 million during
the year ended December 31, 2004 and $272.3 million during the year ended
December 31, 2003. As of December 31, 2004, three repurchase agreements totaling
$267.6 million were outstanding. As of December 31, 2003, three repurchase
agreements totaling $65.9 million were outstanding. The fair value of the
securities held under these agreements was $273.8 million as of December 31,
2004 and $68.4 million as of December 31, 2003. None of the securities held
under repurchase agreements were sold or repledged during the years ended
December 31, 2004 and 2003.
89
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) Securities
The amortized cost and estimated fair value of securities available-for-sale and
held-to-maturity at December 31, 2004 and 2003 are as follows:
At December 31, 2004
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
GSE pass-through certificates $ 123,029 $ 3,628 $ (87) $ 126,570
REMICs and CMOs:
GSE issuance 2,125,549 605 (48,252) 2,077,902
Non-GSE issuance 78,974 39 (3,298) 75,715
- ----------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,327,552 4,272 (51,637) 2,280,187
- ----------------------------------------------------------------------------------------------------
Other securities:
FNMA and FHLMC preferred stock 123,495 53 -- 123,548
Other securities 3,152 10 (14) 3,148
- ----------------------------------------------------------------------------------------------------
Total other securities 126,647 63 (14) 126,696
- ----------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,454,199 $ 4,335 $(51,651) $2,406,883
====================================================================================================
Held-to-maturity:
Mortgage-backed securities:
GSE pass-through certificates $ 9,154 $ 537 $ -- $ 9,691
REMICs and CMOs:
GSE issuance 5,772,676 25,353 (19,144) 5,778,885
Non-GSE issuance 480,053 1,128 (4,474) 476,707
- ----------------------------------------------------------------------------------------------------
Total mortgage-backed securities 6,261,883 27,018 (23,618) 6,265,283
Obligations of states and political
subdivisions and corporate debt securities 41,053 424 -- 41,477
- ----------------------------------------------------------------------------------------------------
Total securities held-to-maturity $6,302,936 $27,442 $(23,618) $6,306,760
====================================================================================================
At December 31, 2003
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
GSE pass-through certificates $ 161,199 $ 5,575 $ (50) $ 166,724
REMICs and CMOs:
GSE issuance 2,297,884 610 (70,643) 2,227,851
Non-GSE issuance 109,669 170 (6,099) 103,740
- ----------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,568,752 6,355 (76,792) 2,498,315
- ----------------------------------------------------------------------------------------------------
Other securities:
FNMA and FHLMC preferred stock 140,015 96 (8,750) 131,361
Corporate debt and other securities 23,729 1,598 (11) 25,316
- ----------------------------------------------------------------------------------------------------
Total other securities 163,744 1,694 (8,761) 156,677
- ----------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,732,496 $ 8,049 $(85,553) $2,654,992
====================================================================================================
Held-to-maturity:
Mortgage-backed securities:
GSE pass-through certificates $ 14,345 $ 984 $ -- $ 15,329
REMICs and CMOs:
GSE issuance 4,958,633 30,955 (15,272) 4,974,316
Non-GSE issuance 772,728 4,436 (5,143) 772,021
- ----------------------------------------------------------------------------------------------------
Total mortgage-backed securities 5,745,706 36,375 (20,415) 5,761,666
Obligations of states and political
subdivisions and corporate debt securities 47,021 430 -- 47,451
- ----------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,792,727 $36,805 $(20,415) $5,809,117
====================================================================================================
90
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The tables below set forth the estimated fair values of securities with gross
unrealized losses at December 31, 2004 and 2003, segregated between securities
that have been in a continuous unrealized loss position for less than twelve
months at the respective dates and those that have been in a continuous
unrealized loss position for twelve months or longer.
At December 31, 2004
---------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Longer Total
----------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- -----------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
GSE pass-through certificates $ 3,956 $ (46) $ 1,650 $ (41) $ 5,606 $ (87)
REMICs and CMOs:
GSE issuance 1,031,174 (6,691) 888,198 (41,561) 1,919,372 (48,252)
Non-GSE issuance 4,741 (15) 67,567 (3,283) 72,308 (3,298)
Other securities 1,093 (12) 414 (2) 1,507 (14)
- -----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
available-for-sale $1,040,964 $ (6,764) $957,829 $(44,887) $1,998,793 $(51,651)
=======================================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $2,239,767 $(17,025) $ 93,244 $ (2,119) $2,333,011 $(19,144)
Non-GSE issuance 341,904 (4,474) -- -- 341,904 (4,474)
- ----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
held-to-maturity $2,581,671 $(21,499) $ 93,244 $ (2,119) $2,674,915 $(23,618)
=======================================================================================================================
At December 31, 2003
---------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Longer Total
----------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- -----------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
GSE pass-through certificates $ 1,437 $ (10) $2,264 $(40) $ 3,701 $ (50)
REMICs and CMOs:
GSE issuance 2,101,805 (70,643) -- -- 2,101,805 (70,643)
Non-GSE issuance 93,059 (6,095) 655 (4) 93,714 (6,099)
Other securities:
FNMA and FHLMC preferred stock 91,250 (8,750) -- -- 91,250 (8,750)
Corporate debt and other securities 593 (7) 550 (4) 1,143 (11)
- -----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
available-for-sale $2,288,144 $(85,505) $3,469 $(48) $2,291,613 $(85,553)
=======================================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $1,523,519 $(15,272) $ -- $ -- $1,523,519 $(15,272)
Non-GSE issuance 447,004 (5,143) -- -- 447,004 (5,143)
- -----------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
held-to-maturity $1,970,523 $(20,415) $ -- $ -- $1,970,523 $(20,415)
=======================================================================================================================
The number of securities which had an unrealized loss totaled 142 at December
31, 2004 and 120 at December 31, 2003. Of the securities in an unrealized loss
position, 91.1% at December 31, 2004 and 87.3% at December 31, 2003, based on
estimated fair value, are obligations of GSEs. At December 31, 2004 and 2003,
substantially all of the securities in an unrealized loss position had a fixed
interest rate and the cause of the temporary impairment is directly related to
the change in interest rates. In general, as interest rates rise, the fair value
of fixed rate securities will decrease; as interest rates fall, the fair value
of fixed rate securities will increase. We generally view changes in fair value
caused by changes in interest rates as temporary, which is consistent with our
experience, therefore, the impairments are deemed temporary based on the direct
relationship of the decline in fair value to movements in interest rates, the
life of the investments and the high credit quality.
91
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
Subsequent to the issuance of Staff Position No. EITF Issue 03-1-1, the FASB
announced plans for a full reconsideration of existing authoritative literature
concerning other-than-temporary impairment of securities.
During the year ended December 31, 2004, we recorded a $16.5 million
other-than-temporary impairment write-down on $120.0 million of FHLMC perpetual
preferred securities which is included as a component of non-interest income.
There were no security write-downs recorded for the years ended December 31,
2003 and 2002.
Sales of securities from the available-for-sale portfolio are summarized as
follows:
For the Year Ended December 31,
--------------------------------
(In Thousands) 2004 2003 2002
- ------------------------------------------------------
Proceeds from sales $170,189 $1,457,010 $449,327
Gross gains 4,651 14,665 10,772
Gross losses -- 7,319 --
The amortized cost and estimated fair value of debt securities at December 31,
2004, by contractual maturity, excluding mortgage-backed securities, are
summarized in the following table. Actual maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties. In addition, issuers of
certain securities have the right to call obligations with or without prepayment
penalties. As of December 31, 2004, the amortized cost of the callable
securities in our portfolio totaled $125.1 million, of which $108.8 million are
callable within one year and at various times thereafter.
At December 31, 2004
---------------------
Estimated
Amortized Fair
(In Thousands) Cost Value
- ----------------------------------------------------------------
Available-for-sale:
Due in one year or less $ 251 $ 251
Due after one year through five years 2,485 2,483
Due after ten years 416 414
- ----------------------------------------------------------------
Total available-for-sale $ 3,152 $ 3,148
================================================================
Held-to-maturity:
Due after one year through five years $ 9,987 $10,411
Due after ten years 31,066 31,066
- ----------------------------------------------------------------
Total held-to-maturity $41,053 $41,477
================================================================
The balance of accrued interest receivable for mortgage-backed securities
totaled $31.2 million at December 31, 2004 and $30.7 million at December 31,
2003. The balance of accrued interest receivable for other securities totaled
$444,000 at December 31, 2004 and $656,000 at December 31, 2003.
92
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Loans Receivable, net
Loans receivable, net are summarized as follows:
At December 31,
-------------------------
(In Thousands) 2004 2003
- ------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 9,054,747 $ 8,971,048
Multi-family 2,558,935 2,230,414
Commercial real estate 944,859 880,296
Construction 117,766 99,046
- ------------------------------------------------------------------
12,676,307 12,180,804
Net deferred loan origination costs 3,400 2,315
Net unamortized premiums 66,427 65,653
- ------------------------------------------------------------------
Total mortgage loans, net 12,746,134 12,248,772
- ------------------------------------------------------------------
Consumer and other loans:
Home equity 466,087 386,846
Commercial 21,819 21,937
Other 19,382 21,363
- ------------------------------------------------------------------
507,288 430,146
Net deferred loan origination costs 9,180 7,433
Net unamortized premiums 677 636
- ------------------------------------------------------------------
Total consumer and other loans, net 517,145 438,215
- ------------------------------------------------------------------
Total loans 13,263,279 12,686,987
Allowance for loan losses (82,758) (83,121)
- ------------------------------------------------------------------
Loans receivable, net $13,180,521 $12,603,866
==================================================================
Accrued interest receivable on all loans totaled $47.4 million at December 31,
2004 and $46.6 million at December 31, 2003.
Included in loans receivable were non-accrual loans totaling $32.0 million at
December 31, 2004 and $29.1 million at December 31, 2003. 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 $1.8 million for the
year ended December 31, 2004, $1.9 million for the year ended December 31, 2003
and $2.3 million for the year ended December 31, 2002. This compares to actual
payments recorded as interest income, with respect to such loans, of $1.0
million for the year ended December 31, 2004, $1.2 million for the year ended
December 31, 2003, and $1.6 million for the year ended December 31, 2002. Loans
delinquent 90 days or more and still accruing interest totaled $573,000 at
December 31, 2004 and $563,000 at December 31, 2003. These loans are delinquent
90 days or more as to their maturity date but not their interest due.
The following table summarizes information regarding our impaired mortgage
loans:
At December 31, 2004
-----------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------
One-to-four family $ 5,703 $ (398) $ 5,305
Multi-family, commercial real estate
and construction 12,371 (1,824) 10,547
- --------------------------------------------------------------------------
Total impaired mortgage loans $18,074 $(2,222) $15,852
==========================================================================
93
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2003
-----------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------
One-to-four family $ 3,796 $ (198) $ 3,598
Multi-family, commercial real estate
and construction 7,794 (1,157) 6,637
- --------------------------------------------------------------------------
Total impaired mortgage loans $11,590 $(1,355) $10,235
==========================================================================
Our average recorded investment in impaired loans was $12.9 million for the year
ended December 31, 2004, $15.4 million for the year ended December 31, 2003 and
$15.7 million for the year ended December 31, 2002. Interest income recognized
on impaired loans, which was not materially different from cash-basis interest
income, amounted to $616,000 for the year ended December 31, 2004, $597,000 for
the year ended December 31, 2003 and $1.3 million for the year ended December
31, 2002.
(5) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31,
-----------------------------
(In Thousands) 2004 2003 2002
- -----------------------------------------------------------------------
Balance at beginning of year $83,121 $83,546 $82,285
Provision charged to operations -- -- 2,307
Charge-offs (net of recoveries of $524,
$911 and $1,162, respectively) (363) (425) (1,046)
- -----------------------------------------------------------------------
Balance at end of year $82,758 $83,121 $83,546
=======================================================================
(6) Mortgage Servicing Rights
We service mortgage loans for investors with aggregate unpaid principal balances
of $1.67 billion at December 31, 2004 and $1.90 billion at December 31, 2003,
which are not reflected in the accompanying consolidated statements of financial
condition.
MSR activity is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------
Amortized cost at beginning of year $29,552 $ 35,093 $ 39,196
Additions 3,409 7,225 6,090
Amortization (6,772) (12,766) (10,193)
- ---------------------------------------------------------------------
Amortized cost at end of year 26,189 29,552 35,093
Valuation allowance (9,390) (11,600) (14,682)
- --------------------------------------------------------------------
MSR, net $16,799 $ 17,952 $ 20,411
=====================================================================
At December 31, 2004, our MSR, net, had an estimated fair value of $16.8 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.10%, a weighted average constant prepayment rate on
mortgages of 15.33% and a weighted average life of 4.8 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. As of December 31, 2004, estimated future
MSR amortization through 2009, based on the prepayment assumptions utilized in
the December 31, 2004 MSR valuation, is as follows: $5.4 million for 2005, $4.4
million for 2006, $3.4 million for 2007, $2.7 million for 2008 and $2.1 million
for 2009. Actual results will vary depending upon the level of repayments on the
loans currently serviced.
94
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Mortgage banking income (loss), net, is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------------
Loan servicing fees $ 5,768 $ 7,851 $ 12,068
Net gain on sales of loans 3,509 12,124 6,645
Amortization of MSR (6,772) (12,766) (10,193)
Recovery of (provision for) valuation
allowance on MSR 2,210 3,082 (10,781)
- --------------------------------------------------------------------------
Total mortgage banking income (loss), net $ 4,715 $ 10,291 $ (2,261)
===========================================================================
(7) Deposits
Deposits are summarized as follows:
At December 31,
---------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------
Weighted Weighted
Average Percent Average Percent
(Dollars in Thousands) Rate Balance of Total Rate Balance of Total
- ------------------------------------------------------------------------------------------------
Core deposits:
Savings 0.40% $ 2,929,120 23.78% 0.40% $ 2,959,015 26.45%
Money market 0.80 965,288 7.83 0.55 1,232,771 11.02
NOW 0.10 961,497 7.80 0.10 914,423 8.17
Non-interest bearing
NOW and demand
deposit -- 619,217 5.02 -- 578,987 5.18
--------- ----- --------- -----
Total core deposits 0.37 5,475,122 44.43 0.34 5,685,196 50.82
Certificates of deposit 3.46 6,848,135 55.57 3.55 5,501,398 49.18
- ------------------------------------------------------------------------------------------------
Total deposits 2.09% $12,323,257 100.00% 1.92% $11,186,594 100.00%
================================================================================================
The aggregate amount of certificates of deposit with balances equal to or
greater than $100,000 was $1.58 billion at December 31, 2004 and $1.06 billion
at December 31, 2003.
Certificates of deposit at December 31, 2004 have scheduled maturities as
follows:
Weighted Percent
Average of
Year Rate Balance Total
- ---------------------------------------------------------------
(In Thousands)
2005 2.90% $2,572,567 37.56%
2006 3.49 2,212,463 32.31
2007 4.19 1,174,993 17.16
2008 3.87 464,825 6.79
2009 4.17 340,127 4.97
2010 and thereafter 4.87 83,160 1.21
- ---------------------------------------------------------------
Total certificates of deposit 3.46% $6,848,135 100.00%
===============================================================
Interest expense on deposits is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------
Savings $ 11,920 $ 13,198 $ 29,096
Money market 6,379 9,934 32,512
Interest-bearing NOW 921 1,526 3,176
Certificates of deposit 218,209 200,593 223,216
- --------------------------------------------------------------------
Total interest expense on deposits $237,429 $225,251 $288,000
====================================================================
95
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(8) Borrowed Funds
Borrowed funds are summarized as follows:
At December 31,
---------------------------------------------
2004 2003
---------------------------------------------
Weighted Weighted
Average Average
(Dollars in Thousands) Amount Rate Amount Rate
- -----------------------------------------------------------------------------
Reverse repurchase agreements $7,080,000 3.54% $7,235,000 4.62%
FHLB-NY advances 1,934,000 2.81 1,924,000 2.32
Other borrowings, net 455,835 7.21 473,037 7.23
- -----------------------------------------------------------------------------
Total borrowed funds, net $9,469,835 3.57% $9,632,037 4.29%
=============================================================================
Reverse Repurchase Agreements
At December 31, 2004 and 2003, substantially all of the outstanding reverse
repurchase agreements had original contractual maturities between one and ten
years and were primarily secured by mortgage-backed securities. Reverse
repurchase agreements with the Federal Home Loan Bank of New York, or FHLB-NY,
may also be secured by certain qualifying mortgage loans pursuant to a blanket
collateral agreement with the FHLB-NY. The following is a summary of information
relating to reverse repurchase agreements:
At December 31,
-----------------------
(In Thousands) 2004 2003
- ------------------------------------------------------------------------------------------
Amortized cost of collateral (including accrued interest):
Mortgage-backed securities $7,480,040 $7,624,752
Mortgage loans 77,123 151,268
Estimated fair value of collateral (including accrued interest):
Mortgage-backed securities 7,430,135 7,573,095
Mortgage loans 78,184 155,377
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------
Average balance during the year $6,904,483 $6,642,945 $6,840,342
Maximum balance at any month end during the year 7,085,000 7,235,000 7,285,000
Balance outstanding at end of the year 7,080,000 7,235,000 6,285,000
Weighted average interest rate during the year 3.81% 5.01% 5.47%
Weighted average interest rate at end of the year 3.54 4.62 5.39
Reverse repurchase agreements at December 31, 2004 have contractual maturities
as follows:
Year Amount
- ----------------------
(In Thousands)
2005 $1,300,000
2006 1,400,000
2007 1,750,000
2008 2,430,000
2009 200,000
- ----------------------
Total $7,080,000
- ----------------------
Of the $1.30 billion of reverse repurchase agreements maturing in 2005, $400.0
million are due in less than 30 days, $500.0 million are due in 30 to 90 days
and $400.0 million are due after 90 days. At December 31, 2004, $2.18 billion of
reverse repurchase agreements which mature after December 31, 2005 are callable
in 2005 and at various times thereafter.
96
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FHLB-NY Advances
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are
secured by all of our stock in the FHLB-NY, certain qualifying mortgage loans
and mortgage-backed and other securities not otherwise pledged in an amount at
least equal to 110% of the advances outstanding. The following is a summary of
information relating to FHLB-NY advances:
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------
Average balance during the year $1,816,197 $2,574,091 $1,853,534
Maximum balance at any month end during the year 3,134,000 3,517,000 2,364,000
Balance outstanding at end of the year 1,934,000 1,924,000 2,064,000
Weighted average interest rate during the year 2.24% 3.30% 5.54%
Weighted average interest rate at end of the year 2.81 2.32 4.42
FHLB-NY advances at December 31, 2004 have contractual maturities as follows:
Year Amount
- ----------------------
(In Thousands)
2005 $1,830,000
2006 4,000
2007 100,000
- ----------------------
Total $1,934,000
======================
Of the $1.83 billion of FHLB-NY advances maturing in 2005, $1.58 billion are due
in less than 30 days, and $250.0 million are due after 90 days.
At December 31, 2004, we had a 12-month commitment for overnight and one month
lines of credit with the FHLB-NY totaling $100.0 million, of which $50.0 million
was outstanding under the one month line of credit. Both lines of credit are
priced at the federal funds rate plus a spread (generally between 10 and 15
basis points) and reprice daily.
Other Borrowings, net
During the quarter ended December 31, 2002, we issued $250.0 million of senior
unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes,
which are designated as our 5.75% Senior Notes due 2012, Series B, are
registered with the Securities and Exchange Commission, or SEC. We may redeem
all or part of the notes at any time at a "make-whole" redemption price,
together with accrued interest to the redemption date. The carrying amount of
the 5.75% senior unsecured notes, net of deferred costs, was $247.1 million at
December 31, 2004 and $246.8 million at December 31, 2003.
On July 3, 2001, we issued $100.0 million of senior unsecured notes. The notes,
which were issued in a private placement, mature in 2008, bear a fixed interest
rate of 7.67%, were placed with a limited number of institutional investors and
are not registered with the SEC. The notes require annual principal payments of
$20.0 million per year which began in 2004. The carrying amount of the 7.67%
senior unsecured notes, net of deferred costs, was $79.6 million at December 31,
2004 and $99.4 million at December 31, 2003.
On October 28, 1999, our finance subsidiary, Astoria Capital Trust I, issued
$125.0 million aggregate liquidation amount of 9.75% Capital Securities due
November 1, 2029, or Capital Securities, in a private placement, and $3.9
million of common securities (which are the only voting securities of Astoria
Capital Trust I), which are 100% owned by Astoria Financial Corporation, and
used the proceeds to acquire Junior Subordinated Debentures issued by Astoria
Financial Corporation. 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. The Capital Securities have
substantially identical prepayment provisions as the Junior Subordinated
Debentures. Astoria Financial Corporation has fully and unconditionally
guaranteed the Capital Securities along with all obligations of Astoria Capital
Trust I under the trust agreement relating to the Capital Securities.
97
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As previously discussed, effective January 1, 2004, we adopted FIN 46(R) which
required us to deconsolidate our subsidiary Astoria Capital Trust I. The impact
of this deconsolidation on our financial statements was to increase consolidated
total assets by $3.9 million and increase consolidated total borrowings by $3.9
million. Additionally, we redesignated our two interest rate swap agreements as
fair value hedges of the debt Astoria Financial Corporation issued to Astoria
Capital Trust I as discussed further in Note 10.
We have two interest rate swap agreements, designated as fair value hedges, that
have the effect of converting $125.0 million of the Junior Subordinated
Debentures from a 9.75% fixed rate instrument into a variable rate, LIBOR-based
instrument. The carrying amount of the Junior Subordinated Debentures has been
adjusted for changes in estimated fair value to satisfy hedge accounting
requirements. See Note 10 for additional information on the interest rate swap
agreements. The carrying amount of the Junior Subordinated Debentures, net of
deferred costs and including fair value hedge adjustments, was $129.1 million at
December 31, 2004 and $126.9 million at December 31, 2003.
Other borrowings at December 31, 2004 have contractual maturities as follows:
Year Amount
- ------------------------------------
(In Thousands)
2005 $ 20,000
2006 20,000
2007 20,000
2008 20,000
2009 --
2010 and thereafter 378,866
- ------------------------------------
Total $458,866
====================================
Interest expense on borrowed funds is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------------
Reverse repurchase agreements $267,527 $337,057 $379,377
FHLB-NY advances 41,016 85,629 103,232
Other borrowings 29,363 29,816 31,229
- --------------------------------------------------------------------------
Total interest expense on borrowed funds $337,906 $452,502 $513,838
==========================================================================
(9) Stockholders' Equity
During the year ended December 31, 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 15,000,000 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 12,000,000 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 2004, we
repurchased 9,067,500 shares of our common stock at an aggregate cost of $225.1
million, of which 5,155,200 shares of our common stock, at an aggregate cost of
$127.6 million, were repurchased pursuant to our tenth stock repurchase plan.
On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of 12%
Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred Stock,
at a redemption price of $27.25 per share, plus $1.00 per share in accrued and
unpaid dividends, for an aggregate redemption price of $28.25 per share. Accrued
and unpaid dividends covered the period from June 1, 2003 through September 30,
2003. These shares were issued in 1997 in connection with the acquisition of The
Greater New York Savings Bank. The Series B Preferred Stock had a par value of
$1.00 per share and a liquidation preference of $25.00 per share.
In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared
a dividend of one preferred share purchase right, or Right, for each outstanding
share of our common stock. Each Right, initially, will entitle stockholders to
buy a one one-hundredth interest in a share of a new series of our preferred
stock at an exercise price of $100.00 upon the occurrence of certain events
described in the Rights Plan. We have reserved 1,800,000 shares of our Series A
Preferred Stock for the Rights Plan.
98
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant
to the Plan, which became effective on December 1, 1995, 300,000 shares of
authorized and unissued common shares are reserved for use by the Plan, should
the need arise. To date, all shares required by the Plan have been acquired in
open market purchases.
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. Our ability to pay dividends, service our debt
obligations and repurchase our common stock is dependent primarily upon receipt
of dividend payments from Astoria Federal. The Office of Thrift Supervision, or
OTS, regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. Astoria Federal must file an
application to receive the approval of the OTS for a proposed capital
distribution if the total amount of all capital distributions (including each
proposed capital distribution) for the applicable calendar year exceeds net
income for that year to date plus the retained net income for the preceding two
years. Astoria Federal may not pay dividends to us if: (1) after paying those
dividends, it would fail to meet applicable regulatory capital requirements; (2)
the OTS notified Astoria Federal that it was in need of more than normal
supervision; or (3) after making such distribution, the institution would become
"undercapitalized" (as such term is used in the Federal Deposit Insurance Act).
Payment of dividends by Astoria Federal also may be restricted at any time at
the discretion of the appropriate regulator if it deems the payment to
constitute an unsafe and unsound banking practice.
(10) Derivative Instruments
As further discussed below, we use a variety of derivative instruments in
connection with our overall interest rate risk management strategy. We are
exposed to credit risk in the event of non-performance by counterparties to
derivative instruments. In the event of default by a counterparty, we would be
subject to an economic loss that corresponds to the cost to replace the
agreement. We control the credit risk associated with our derivative instruments
through dealing only with counterparties with the highest credit ratings,
establishing counterparty exposure limits and monitoring procedures.
Fair Value Hedges
We have two interest swap agreements designated and accounted for as fair value
hedges aggregating $125.0 million (notional amount) to effectively convert
$125.0 million of our Junior Subordinated Debentures from a fixed to a variable
rate instrument to protect the fair value of our Junior Subordinated Debentures
due to changes in interest rates. These two interest rate swap agreements were
entered into in 2002 as fair value hedges of the $125.0 million Capital
Securities issued by Astoria Capital Trust I. As a result of our adoption of FIN
46(R) effective January 1, 2004, we redesignated these interest rate swap
agreements as fair value hedges of the debt Astoria Financial Corporation issued
to Astoria Capital Trust I. Under these agreements, we receive a fixed interest
rate of 9.75% and pay a floating interest rate which is tied to the three-month
LIBOR plus 400 basis points. The maturity dates, call features and other
critical terms of these derivative instruments match the terms of both the
Capital Securities and the Junior Subordinated Debentures and as such, at
inception and going forward, we assume no ineffectiveness in accounting for
these hedges. As a result, no net gains or losses have been recognized in
earnings with respect to these hedges. A $1.4 million asset was recorded at
December 31, 2004 and a $621,000 liability was recorded at December 31, 2003,
which represent the fair value of the interest rate swap agreements as of those
dates. A corresponding adjustment was made to the carrying amount of the Junior
Subordinated Debentures to recognize the change in their fair value. See Note 8
for additional information regarding our Junior Subordinated Debentures.
Cash Flow Hedges
In September of 2002, in connection with our issuance of the 5.75% senior
unsecured notes, we entered into an interest rate lock agreement designated and
accounted for as a cash flow hedge of a forecasted transaction to fix the U.S.
treasury benchmark component of the eventual pricing on the notes. The 5.75%
senior unsecured notes were priced based on the prevailing applicable treasury
rate plus a spread, which were determined at the time the offering was
finalized. The critical terms of the agreement were negotiated to match the
terms of the forecasted transaction and as such, at inception and through the
date the note pricing was finalized, we assumed no ineffectiveness. Changes in
the fair value of the agreement were recorded in accumulated other comprehensive
loss/income. The agreement was settled at the same time as the notes and the
unrealized loss, net of taxes, which is included in accumulated other
comprehensive loss/income, is being reclassified into interest expense as a
yield adjustment in the same periods in which the related interest on the 5.75%
senior unsecured notes affects earnings. The unrealized
99
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
loss, net of taxes, in accumulated other comprehensive loss/income totaled $1.5
million at December 31, 2004 and $1.7 million at December 31, 2003. The
unrealized loss, net of tax, to be reclassified to our results of operations
during 2005 totals $191,000. See Note 8 for additional information regarding our
5.75% senior unsecured notes.
Free-Standing Derivative Instruments
In 2002 and 2001 we purchased interest rate cap agreements to provide a global
hedge against rising interest rates and subsequent increases in our cost of
funds. In an interest rate cap agreement, we receive the excess of a designated
market interest rate (three-month LIBOR) over a specified strike rate, as
applied to the specified notional amount, in exchange for the payment of a
premium to a counterparty. The interest rate cap agreements, which did not
qualify for hedge accounting treatment, are included in other assets at their
fair values. Changes in the fair values of the agreements are included in
non-interest expense. The agreements had various maturity dates from July 2004
to January 2005. The following is a summary of information relating to the
interest rate cap agreements:
At or For the Year Ended December 31,
-------------------------------------
(Dollars in Thousands) 2004 2003 2002
- -----------------------------------------------------------------
Notional amount $50,000 $300,000 $300,000
Estimated fair value -- -- 95
Non-interest expense -- 95 3,824
Weighted average cap rate 5.50% 5.25% 5.25%
In connection with our mortgage banking activities, we had certain free-standing
derivative instruments at December 31, 2004 and 2003. We had commitments to fund
loans held-for-sale and commitments to sell loans which are considered
derivative instruments under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The fair values of these derivative
instruments are immaterial to our financial condition and results of operations.
(11) Commitments and Contingencies
Lease Commitments
At December 31, 2004, we were obligated through 2035 under various
non-cancelable operating leases on buildings and land used for office space and
banking purposes. These operating leases contain escalation clauses which
provide for increased rental expense, based primarily on increases in real
estate taxes and cost-of-living indices. Rent expense under the operating leases
totaled $7.5 million for the year ended December 31, 2004, $7.2 million for the
year ended December 31, 2003 and $5.6 million for the year ended December 31,
2002.
The minimum rental payments due under the terms of the non-cancelable operating
leases as of December 31, 2004, which have not been reduced by minimum sublease
rentals of $31.2 million due in the future under non-cancelable subleases, are
summarized below:
Year Amount
- ------------------------------------
(In Thousands)
2005 $ 6,957
2006 7,096
2007 6,798
2008 6,384
2009 5,165
2010 and thereafter 47,538
- ------------------------------------
$79,938
====================================
100
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Outstanding Commitments
We had outstanding commitments as follows:
At December 31,
-------------------
(In Thousands) 2004 2003
- ----------------------------------------------------------------------------
Mortgage loans - commitments to extend credit (1) $553,061 $520,743
Mortgage loans - commitments to purchase 63,223 51,664
Home equity loans - unused lines of credit 328,510 268,555
Consumer and commercial loans - unused lines of credit 68,484 67,085
Commitments to sell loans 56,034 48,568
Commitments to purchase securities -- 99,969
Forward borrowing commitments -- 500,000
(1) Includes commitments to originate loans held-for-sale.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate creditworthiness on a
case-by-case basis. Our maximum exposure to credit risk is represented by the
contractual amount of the instruments. Forward borrowing commitments represent
commitments to enter into borrowings at predetermined amounts, interest rates
and maturity and settlement dates.
Assets Sold with Recourse
We are obligated under various recourse provisions associated with certain first
mortgage loans we sold in the secondary market. The principal balance of loans
sold with recourse amounted to $565.8 million at December 31, 2004 and $640.7
million at December 31, 2003. The carrying amount of our liability for loans
sold with recourse totaled $276,000 at December 31, 2004 and $534,000 at
December 31, 2003. 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 do not believe that our recourse obligations subject us to risk of
material loss.
We have two collateralized repurchase obligations due to the sale of certain
long-term fixed rate municipal revenue bonds and Federal Housing Administration
project loans to investment trust funds for proceeds that approximated par
value. The trust funds have put options that require us to repurchase the
securities or loans for specified amounts prior to maturity under certain
specified circumstances, as defined in the agreements. The outstanding option
balance on the two agreements totaled $34.9 million at December 31, 2004 and
$46.3 million at December 31, 2003. Various agency mortgage-backed securities,
with an amortized cost of $50.0 million and a fair value of $51.2 million at
December 31, 2004, have been pledged as collateral.
Guarantees
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$5.2 million at December 31, 2004 and $4.4 million at December 31, 2003. The
fair value of these obligations is immaterial at December 31, 2004 and 2003.
Litigation
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse effect on
our financial condition, results of operations or liquidity.
101
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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
trial for the suit entitled The Long Island Savings Bank, FSB, et al. vs. The
United States commenced on January 18, 2005. The ultimate outcomes of such
actions are uncertain and there can be no assurance that we will benefit
financially from such litigation.
(12) Income Taxes
Income tax expense is summarized as follows:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Current
Federal $103,276 $93,383 $104,401
State and local 6,688 5,107 6,273
- --------------------------------------------------------------------------------
Total current 109,964 98,490 110,674
- --------------------------------------------------------------------------------
Deferred
Federal (1,899) (547) 11,126
State and local (1,963) (1,567) 1,266
- --------------------------------------------------------------------------------
Total deferred (3,862) (2,114) 12,392
- --------------------------------------------------------------------------------
Total income tax expense $106,102 $96,376 $123,066
================================================================================
Total income tax expense differed from the amounts computed by applying the
federal income tax rate to income before income tax expense as a result of the
following:
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------
Expected income tax expense at statutory federal rate $113,974 $102,628 $130,023
State and local taxes, net of federal tax benefit 3,071 2,301 4,901
Tax exempt income (principally on bank owned life insurance) (6,791) (7,889) (8,451)
Reversal of deferred tax valuation allowance -- (3,396) --
Other, net (4,152) 2,732 (3,407)
- ----------------------------------------------------------------------------------------------
Total income tax expense $106,102 $ 96,376 $123,066
==============================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
At December 31,
--------------------
(In Thousands) 2004 2003
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowances and tax reserves $ 20,732 $ 21,296
Compensation and benefits 6,417 10,468
Tax credits 3,129 3,129
Net operating loss carryforward -- 4,698
Mark-to-market elected for tax purposes 1,476 1,865
Net unrealized loss on securities available-for-sale 19,594 32,470
Unrealized loss on security impairment write-down 6,895 --
Other 3,478 3,722
- --------------------------------------------------------------------------------
Total gross deferred tax assets 61,721 77,648
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage loans (14,974) (16,535)
Premises and equipment (7,016) (6,686)
Mortgage servicing rights (1,285) (894)
Book premiums in excess of tax -- (6,090)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (23,275) (30,205)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 38,446 $ 47,443
================================================================================
102
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We believe that our future results of operations and tax planning strategies
will enable us to generate sufficient taxable income to enable us to realize our
deferred tax assets. At December 31, 2004, we had alternative minimum tax credit
carryforwards for federal tax purposes of approximately $3.1 million.
Astoria Federal's retained earnings at December 31, 2004 and 2003 include base
year bad debt reserves, which amounted to approximately $159.1 million, for
which no federal income tax liability has been recognized. This represents the
balance of the bad debt reserves created for tax purposes as of December 31,
1987. These amounts are subject to recapture in the unlikely event that Astoria
Federal (1) makes distributions in excess of current and accumulated earnings
and profits, as calculated for federal income tax purposes, (2) redeems its
stock, or (3) liquidates.
(13) Earnings Per Common Share
The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31,
----------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3)
- --------------------------------------------------------------------------------------------------------------
Net income $219,537 $219,537 $196,846 $196,846 $248,429 $248,429
Preferred dividends declared -- -- (4,500) (4,500) (6,000) (6,000)
- --------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $219,537 $219,537 $192,346 $192,346 $242,429 $242,429
==============================================================================================================
Total weighted average basic
common shares outstanding 107,931 107,931 114,575 114,575 125,272 125,272
Effect of dilutive securities:
Options -- 1,876 -- 1,367 -- 2,107
- --------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 107,931 109,807 114,575 115,942 125,272 127,379
==============================================================================================================
Net earnings per common share $ 2.03 $ 2.00 $ 1.68 $ 1.66 $ 1.94 $ 1.90
==============================================================================================================
(1) Options to purchase 1,948,800 shares of common stock at $26.63 per share
were outstanding as of December 31, 2004, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2004.
(2) Options to purchase 1,501,200 shares of common stock at prices between
$19.92 per share and $24.40 per share were outstanding as of December 31,
2003, but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the year ended December 31, 2003.
(3) Options to purchase 45,000 shares of common stock at $19.92 per share were
outstanding as of December 31, 2002, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2002.
(14) Comprehensive Income
The components of accumulated other comprehensive loss at December 31, 2004 and
2003 and the changes during the year ended December 31, 2004 are as follows:
At Current At
December 31, Period December 31,
(In Thousands) 2003 Change 2004
- --------------------------------------------------------------------------------------------
Net unrealized loss on securities available-for-sale $(44,761) $17,748 $(27,013)
Net unrealized loss on cash flow hedge (1,680) 191 (1,489)
Minimum pension liability adjustment (48) (42) (90)
- --------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(46,489) $17,897 $(28,592)
============================================================================================
103
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The components of other comprehensive income, other than net income, are as
follows:
Before Tax Tax After Tax
(In Thousands) Amount (Expense) Benefit Amount
- ------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2004
Net unrealized gains on securities available-for-sale:
Net unrealized holding gains on securities arising
during the year $ 18,755 $ (7,468) $ 11,287
Reclassification adjustment for net losses included in
net income 11,869 (5,408) 6,461
------------------------------------------
30,624 (12,876) 17,748
Reclassification adjustment for losses included in net
income from net unrealized loss on cash flow hedge 329 (138) 191
Minimum pension liability adjustment (73) 31 (42)
- ------------------------------------------------------------------------------------------------------
Other comprehensive income $ 30,880 $(12,983) $ 17,897
======================================================================================================
For the Year Ended December 31, 2003
Net unrealized losses on securities available-for-sale:
Net unrealized holding losses on securities arising
during the year $(91,405) $ 39,111 $(52,294)
Reclassification adjustment for net gains included in
net income (7,346) 2,414 (4,932)
------------------------------------------
(98,751) 41,525 (57,226)
Amortization of net unrealized loss on securities
transferred to held-to-maturity 1,337 (562) 775
Reclassification adjustment for losses included in net
income from net unrealized loss on cash flow hedge 330 (139) 191
Minimum pension liability adjustment (50) 21 (29)
- ------------------------------------------------------------------------------------------------------
Other comprehensive loss $(97,134) $ 40,845 $(56,289)
======================================================================================================
For the Year Ended December 31, 2002
Net unrealized gains on securities available-for-sale:
Net unrealized holding gains on securities arising
during the year $ 20,002 $ (7,459) $ 12,543
Reclassification adjustment for gains included in net
income (10,772) 3,569 (7,203)
------------------------------------------
9,230 (3,890) 5,340
Amortization of net unrealized loss on securities
transferred to held-to-maturity 14,350 (6,033) 8,317
Net unrealized loss on cash flow hedge:
Unrealized loss arising during the year (3,297) 1,386 (1,911)
Reclassification adjustment for losses included in net
income 69 (29) 40
------------------------------------------
(3,228) 1,357 (1,871)
Minimum pension liability adjustment (32) 13 (19)
- ------------------------------------------------------------------------------------------------------
Other comprehensive income $ 20,320 $ (8,553) $ 11,767
======================================================================================================
104
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(15) Benefit Plans
Pension Plans and Other Postretirement Benefits
The following tables set forth information regarding our defined benefit pension
plans and other postretirement benefit plan.
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
At or For the Year Ended At or For The Year Ended
December 31, December 31,
------------------------ ------------------------
(In Thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $165,494 $145,136 $ 16,386 $ 15,520
Service cost 3,265 2,700 512 360
Interest cost 9,786 9,570 1,087 995
Actuarial loss 6,866 16,774 2,170 1,064
Benefits paid (8,860) (8,686) (1,477) (1,553)
- ----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 176,551 165,494 18,678 16,386
- ----------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 149,944 128,893 -- --
Actual return on plan assets 12,304 29,128 -- --
Employer contribution 683 609 1,477 1,553
Benefits paid (8,860) (8,686) (1,477) (1,553)
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 154,071 149,944 -- --
- ----------------------------------------------------------------------------------------------------------
Funded status (22,480) (15,550) (18,678) (16,386)
Unrecognized net actuarial loss (gain) 42,255 38,585 (356) (2,526)
Unrecognized prior service cost 694 855 124 165
Unrecognized transition asset - (35) -- --
- ----------------------------------------------------------------------------------------------------------
Net amount recognized $ 20,469 $ 23,855 $(18,910) $(18,747)
==========================================================================================================
Amounts recognized in the consolidated
statements of financial condition consist of:
Prepaid benefit cost $ 36,796 $ 38,981 $ -- $ --
Accrued benefit liability (16,620) (15,330) (18,910) (18,747)
Intangible asset 138 122 -- --
Accumulated other comprehensive loss (pre-tax basis) 155 82 -- --
- ----------------------------------------------------------------------------------------------------------
Net amount recognized $ 20,469 $ 23,855 $(18,910) $(18,747)
==========================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was
$158.5 million at December 31, 2004 and $149.5 million at December 31, 2003. The
measurement dates for our defined benefit pension plans and other postretirement
benefit plan were December 31.
Assumptions used to determine Rate of
the benefit obligation: Discount Rate Compensation Increase
------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Pension Benefit Plans:
Astoria Federal Pension Plan 5.75% 6.00% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 5.75 6.00 N/A N/A
105
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The components of net periodic cost (benefit) are as follows:
Other Postretirement
Pension Benefits Benefits
------------------------------- -------------------------------
For the Year Ended December 31, For the Year Ended December 31,
------------------------------- -------------------------------
(In Thousands) 2004 2003 2002 2004 2003 2002
- ---------------------------------------------------------------------- -------------------------------
Service cost $ 3,265 $ 2,700 $ 2,142 $ 512 $ 360 $ 305
Interest cost 9,786 9,570 9,263 1,087 995 1,031
Expected return on plan assets (11,648) (9,956) (11,866) -- -- --
Amortization of prior service cost 161 160 161 41 40 41
Recognized net actuarial loss (gain) 2,540 3,368 46 -- (152) (219)
Amortization of transition asset (35) (104) (104) -- -- --
- --------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 4,069 $ 5,738 $ (358) $1,640 $1,243 $1,158
========================================================================================================
Expected Return Rate of
Discount Rate on Plan Assets Compensation Increase
Assumptions used to determine ------------- --------------- ---------------------
the net periodic cost: 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Pension Benefit Plans:
Astoria Federal Pension Plan 6.00% 6.75% 8.00% 8.00% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 N/A N/A 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 N/A N/A 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 6.00 6.75 N/A N/A N/A N/A
To determine the expected return on plan assets, we consider the long-term
historical return information on plan assets, the mix of investments that
comprise plan assets and the historical returns on indices comparable to the
fund classes in which the plan invests.
The assumed health care cost trend rates are as follows:
At December 31,
---------------
2004 2003
- ------------------------------------------------------------
Health care cost trend rate assumed
for next year 7.50% 8.00%
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate
trend rate 2009 2009
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One Percentage One Percentage
(In Thousands) Point Increase Point Decrease
- --------------------------------------------------------------------------------------
Effect on total service and interest cost components $ 270 $ (208)
Effect on the postretirement benefit obligation 2,173 (1,708)
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 was 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
106
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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, which for
us was December 31, 2004. Upon adoption of Staff Position No. 106-2, we
determined our plan to be "actuarially equivalent" and determined the Medicare
Act's effects were not a "significant event." The impact of our adoption of
Staff Position No. 106-2 was a reduction of $850,000 in the accumulated
postretirement benefit obligation at December 31, 2004. There was no impact on
other post-retirement benefit expense for the year ended December 31, 2004.
Included in the tables of Pension Benefits on pages 105 and 106 are the Astoria
Federal Excess Benefit and Supplemental Benefit Plans, Astoria Federal
Directors' Retirement Plan, The Greater Directors' Retirement Plan and the LIB
Directors' Retirement Plan, which are unfunded plans. The projected benefit
obligation and accumulated benefit obligation for these plans are as follows:
At December 31,
-----------------
(In Thousands) 2004 2003
- --------------------------------------------------------------------------------
Projected benefit obligation $18,685 $17,884
Accumulated benefit obligation 13,891 12,907
The following table sets forth the asset allocations, by asset category, for the
Astoria Federal Pension Plan:
Plan Assets
At December 31,
----------------
2004 2003
- --------------------------------------------------------------------------------
Asset Category:
Equity securities (1) 13.39% 12.96%
Other (2) 86.61 87.04
- --------------------------------------------------------------------------------
Total 100.00% 100.00%
================================================================================
(1) Equity securities include Astoria Financial Corporation common stock with a
fair value of $20.6 million, or 13.4% of total plan assets, at December 31,
2004 and $19.2 million, or 12.8% of total plan assets, at December 31,
2003.
(2) Primarily comprised of investments in various insurance company pooled
separate accounts and trust company trust funds.
The overall strategy of the Astoria Federal Pension Plan Investment Policy is to
have a diverse portfolio that reasonably spans established risk/return levels,
preserves liquidity and achieves the rate of return specified in the actuarial
valuation. The strategy allows for a moderate risk approach in order to achieve
greater long-term asset growth. The asset mix within the various insurance
company pooled separate accounts and trust company trust funds can vary but
should not be more than 80% in equity securities, 50% in debt securities, 25% in
liquidity funds, and 15% in Astoria Financial Corporation common stock. The
Astoria Federal Pension Plan will not acquire Astoria Financial Corporation
common stock to the extent that, after the acquisition, such common stock would
represent more than 10% of total plan assets. Within equity securities, the mix
is further clarified to have ranges not to exceed 10% in any one company, 30% in
any one industry, 50% in funds that mirror the S&P 500, 50% in large-cap equity
securities, 20% in mid-cap equity securities, 20% in small-cap equity
securities, and 10% in international equities.
We expect to contribute $666,000 to our unfunded defined benefit pension plans
and $1.5 million to our other postretirement benefit plan to cover expected
benefit payments in 2005.
107
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Total benefits expected to be paid under our defined benefit pension plans and
other postretirement benefit plan as of December 31, 2004, which reflect
expected future service, as appropriate, are as follows:
Pension Other Postretirement
Year Benefits Benefits (1)
- -------------------------------------------
(In Thousands)
2005 $ 8,991 $1,413
2006 9,190 1,353
2007 9,281 1,319
2008 9,524 1,231
2009 9,983 1,234
2010-2014 54,661 5,994
(1) Excludes estimated Medicare Act subsidy reimbursements totaling $263,000.
Incentive Savings Plan
Astoria Federal maintains a 401(k) incentive savings plan, or the 401(k) Plan,
which provides for contributions by both Astoria Federal and its participating
employees. Under the 401(k) Plan, which is a qualified, defined contribution
pension plan, participants may contribute up to 15% of their pre-tax base
salary, generally not to exceed $13,000 for the calendar year ended December 31,
2004. Matching contributions, if any, may be made at the discretion of Astoria
Federal. No such contributions were made for 2004, 2003 and 2002. Participants
vest immediately in their own contributions and after a period of five years for
Astoria Federal contributions.
Employee Stock Ownership Plan
Astoria Federal maintains an ESOP for its eligible employees, which is also a
defined contribution pension plan. To fund the purchase of the ESOP shares, the
ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%,
mature on December 31, 2029 and are collateralized by our common stock purchased
with the loan proceeds. Astoria Federal makes scheduled discretionary
contributions to fund debt service. Astoria Federal's contributions, prior to
2010, may be reduced by dividends paid on unallocated shares and investment
earnings realized on such dividends. Dividends paid on unallocated shares, which
reduced Astoria Federal's contribution to the ESOP, totaled $4.8 million for the
year ended December 31, 2004 and $4.3 million for the year ended December 31,
2003. The ESOP loans had an aggregate outstanding principal balance of $33.8
million at December 31, 2004 and $34.7 million at December 31, 2003.
Shares purchased by the ESOP are held in trust for allocation among participants
as the loans are repaid. Pursuant to the loan agreements, the number of shares
released annually is based upon a specified percentage of aggregate eligible
payroll for our covered employees. Shares allocated to participants totaled
337,935 for the year ended December 31, 2004, 387,657 for the year ended
December 31, 2003 and 518,277 for the year ended December 31, 2002. As of
December 31, 2004, 6,802,146 shares which had a fair value of $181.3 million
remain unallocated. In addition to shares allocated, Astoria Federal makes an
annual cash contribution to participant accounts. This cash contribution totaled
$1.9 million for the year ended December 31, 2004, $1.6 million for the year
ended December 31, 2003 and $1.4 million for the year ended December 31, 2002,
and will total not less than $1.2 million each year through 2009. After 2009, an
annual cash contribution equal to all dividends paid on unallocated shares
remaining will be made through the maturity or repayment of the loans.
We recorded compensation expense relating to the ESOP of $10.6 million for the
year ended December 31, 2004, $8.8 million for the year ended December 31, 2003
and $11.7 million for the year ended December 31, 2002, which was equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the year of allocation, plus the cash contribution made to
participant accounts.
(16) Stock Option Plans
In 2003, we adopted the 2003 Stock Option Plan for Officers and Employees of
Astoria Financial Corporation, or the 2003 Employee Option Plan. In 1999, we
adopted the 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, or the 1999 Directors' Option Plan. As a result of the adoption of
these option plans, all previous employee and director option plans were frozen
and no further option grants were made pursuant to those plans. The number of
shares reserved for option grants was 4,875,000 under the 2003 Employee Option
Plan and
108
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
525,000 under the 1999 Directors' Option Plan. Remaining shares available for
issuance of future grants under the 1999 Directors Option Plan and the 2003
Employee Option Plan totaled 1,670,400 at December 31, 2004 and 3,667,800 at
December 31, 2003. Remaining shares available for issuance of future grants
under the 1999 Directors Option Plan and the 1999 Stock Option Plan for Officers
and Employees of Astoria Financial Corporation totaled 780,600 at December 31,
2002.
Options granted under the 2003 Employee Option Plan have a maximum term of ten
years and vest three years after the grant date. Under option plans involving
grants to employees, in the event the optionee terminates his/her employment due
to death, disability, retirement or in the event we experience a change in
control, or a threatened change in control, as defined and specified in such
plans, all options granted immediately vest and are exercisable. Under option
plans involving grants to outside directors, all options granted have a maximum
term of ten years and are exercisable immediately on their grant date. Options
granted under all plans were granted in tandem with limited stock appreciation
rights exercisable only in the event we experience a change in control, as
defined by the plans.
Activity in our option plans is summarized as follows:
For the Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year: 10,345,493 $ 16.83 10,262,826 $ 14.32 10,340,925 $ 11.73
Granted 2,014,800 26.55 1,529,700 24.10 2,143,650 18.02
Forfeited (47,400) (20.07) (8,190) (17.56) (4,200) (16.56)
Expired -- -- -- -- (227,703) (4.61)
Exercised (1,390,760) (13.62) (1,438,843) (6.60) (1,989,846) (5.96)
---------- ---------- ----------
Outstanding at end of year 10,922,133 19.02 10,345,493 16.83 10,262,826 14.32
========== ========== ==========
Options exercisable at end of year 4,182,633 14.85 4,007,393 13.63 3,676,926 11.77
The following table summarizes information about our stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price
- ------------------------------------------------------------------------------------------------
$ 4.64 to $16.42 2,069,469 4.29 years $12.05 2,069,469 $12.05
16.56 to 16.83 2,819,328 6.40 16.70 1,381,428 16.57
16.96 to 24.17 2,645,736 6.93 18.42 731,736 19.52
24.40 1,438,800 8.96 24.40 -- --
26.63 1,948,800 9.96 26.63 -- --
---------- ---------
$ 4.64 to $26.63 10,922,133 7.10 19.02 4,182,633 14.85
========== =========
The following table summarizes the per share weighted-average fair value of
stock options granted. The per share weighted-average fair value of options was
calculated to determine the effect on net income and EPS if we had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation. See Note 1(q) for an illustration of the effect on net income and
EPS of the provisions of SFAS No. 123.
For the Year Ended December 31,
------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
Granted Fair Value Granted Fair Value Granted Fair Value
- --------------------------------------------------------------------------------------------
Employees 1,948,800 1,463,700 2,077,650
Outside directors 66,000 66,000 66,000
--------- --------- ---------
2,014,800 $6.11 1,529,700 $6.06 2,143,650 $3.90
========= ===== ========= ===== ========= =====
109
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The per share weighted-average fair value of option grants was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
For the Year Ended December 31,
---------------------------------------
2004 2003 2002
---------------------------------------
Dividend yield 2.50% 2.43% 2.94%
Expected stock price volatility 25.17 28.81 26.21
Risk-free interest rate based
upon equivalent-term U.S.
Treasury rates 3.66 3.16 3.29
Expected option lives 5.97 years 5.96 years 5.97 years
The per share weighted-average fair value of options was calculated using the
above assumptions, based on our judgments regarding future option exercise
experience and market conditions. These assumptions are subjective in nature,
involve uncertainties and, therefore, cannot be determined with precision. The
Black-Scholes option pricing model also contains certain inherent limitations
when applied to options which are not immediately exercisable and are not traded
on public markets.
(17) Regulatory Matters
Federal law requires that savings associations, such as Astoria Federal,
maintain minimum capital requirements. These capital standards are required to
be no less stringent than standards applicable to national banks. At December
31, 2004 and 2003, Astoria Federal was in compliance with all regulatory capital
requirements.
The following table sets forth the regulatory capital calculations for Astoria
Federal.
At December 31, 2004
-----------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- ------------------------------------------------------------------------------------
Tangible $345,326 1.50% $1,379,088 5.99% $1,033,762 4.49%
Leverage 920,869 4.00 1,379,088 5.99 458,219 1.99
Risk-based 939,958 8.00 1,461,870 12.44 521,912 4.44
At December 31, 2003
-----------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- ------------------------------------------------------------------------------------
Tangible $334,495 1.50% $1,643,540 7.37% $1,309,045 5.87%
Leverage 891,986 4.00 1,643,540 7.37 751,554 3.37
Risk-based 897,770 8.00 1,726,661 15.39 828,891 7.39
Astoria Federal's Tier I risked-based capital ratio was 11.74% at December 31,
2004 and 14.65% at December 31, 2003.
The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The regulators adopted rules which require them
to take action against undercapitalized institutions, based upon the five
categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose total risk-based capital ratio is 10% or greater, Tier
1 risk-based capital ratio is 6% or greater, leverage capital ratio is 5% or
greater and is not subject to any written agreement, order, capital directive or
prompt corrective action directive issued by the Federal Deposit Insurance
Corporation shall be considered a "well capitalized" institution. As of December
31, 2004 and 2003, Astoria Federal was a "well capitalized" institution.
(18) Fair Value of Financial Instruments
Estimated fair values of certain types of financial instruments are most
commonly derived from quoted market prices available in formal trading
marketplaces. In many cases, financial instruments we hold are not bought or
sold in formal trading marketplaces. Accordingly, in cases where quoted market
prices are not available, fair values are
110
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
derived or estimated based on a variety of valuation techniques. Fair value
estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates do not reflect any
possible tax ramifications, estimated transaction costs, or any premium or
discount that could result from offering for sale at one time our entire
holdings of a particular financial instrument. Because no market exists for a
certain portion of our financial instruments, fair value estimates are based on
judgments regarding future loss experience, current economic conditions, risk
characteristics, and other such factors. These estimates are subjective in
nature, involve uncertainties and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. For
these reasons and others, the estimated fair value disclosures presented herein
do not represent our entire underlying value. As such, readers are cautioned in
using this information for purposes of evaluating our financial condition and/or
value either alone or in comparison with any other company.
The following table summarizes the carrying amounts and estimated fair values of
our financial instruments.
At December 31,
-----------------------------------------------------
2004 2003
-----------------------------------------------------
Carrying Estimated Carrying Estimated
(In Thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------
Financial Assets:
Repurchase agreements $ 267,578 $ 267,578 $ 65,926 $ 65,926
Securities available-for-sale 2,406,883 2,406,883 2,654,992 2,654,992
Securities held-to-maturity 6,302,936 6,306,760 5,792,727 5,809,117
FHLB-NY stock 163,700 163,700 213,450 213,450
Loans held-for-sale, net 23,802 23,813 23,023 23,517
Loans receivable, net 13,180,521 13,362,582 12,603,866 12,947,778
MSR, net 16,799 16,799 17,952 17,981
Interest rate swaps 1,365 1,365 -- --
Financial Liabilities:
Deposits 12,323,257 12,378,720 11,186,594 11,341,683
Borrowed funds, net 9,469,835 9,652,910 9,632,037 10,056,589
Interest rate swaps -- -- 621 621
Methods and assumptions used to estimate fair values are as follows:
Repurchase agreements
The carrying amounts of repurchase agreements approximate fair values since all
mature in one month or less.
Securities available-for-sale and held-to-maturity
Fair values for securities are based on published or securities dealers'
estimated market values.
FHLB-NY stock
The carrying amount of FHLB-NY stock equals cost. The fair value of FHLB-NY
stock approximates the carrying amount.
Loans held-for-sale, net
Fair values of loans held-for-sale were estimated based on current secondary
market prices for loans with similar terms.
Loans receivable, net
Fair values of loans are calculated by discounting the expected future cash
flows of pools of loans with similar characteristics. The loans are first
segregated by type, such as one-to-four family, multi-family, commercial real
estate, construction and consumer and other, and then further segregated into
fixed and adjustable rate and seasoned and nonseasoned categories. Expected
future cash flows are then projected based on contractual cash flows, adjusted
for prepayments. Prepayment estimates are based on a variety of factors
including our experience with respect to each loan category, the effect of
current economic and lending conditions and regional statistics for each loan
category, if available. The discount rates used are based on market rates for
new loans of similar type and purpose, adjusted, when necessary, for factors
such as servicing cost, credit risk and term.
111
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As mentioned previously, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While we have attempted to use
assumptions and estimates which are the most reflective of the loan portfolio
and the current market, a greater degree of subjectivity is inherent in
determining these fair values than those fair values obtained from formal
trading marketplaces.
MSR, net
The fair value of MSR is obtained through independent third party valuations
through an analysis of future cash flows, incorporating numerous assumptions
including servicing income, servicing costs, market discount rates, prepayment
speeds, default rates and other market driven data.
Interest rate swaps
Fair values for interest rate swaps are based on securities dealers' estimated
market values.
Deposits
The fair values of deposits with no stated maturity, such as savings accounts,
NOW accounts, money market accounts and demand deposits, are equal to the amount
payable on demand. The fair values of certificates of deposit are based on
discounted contractual cash flows using rates which approximate the rates we
offer for deposits of similar remaining maturities.
Borrowed funds, net
Fair value estimates are based on securities dealers' estimated market values,
when available, or discounted contractual cash flows using rates which
approximate the rates offered for borrowings of similar remaining maturities.
Outstanding commitments
Outstanding commitments include (1) commitments to extend credit and unadvanced
lines of credit for which fair values were estimated based on an analysis of the
interest rates and fees currently charged to enter into similar transactions,
considering the remaining terms of the commitments and the creditworthiness of
the potential borrowers and (2) commitments to sell residential mortgage loans
for which fair values were estimated based on current secondary market prices
for commitments with similar terms. Due to the short-term nature of our
outstanding commitments, the fair values of these commitments are immaterial to
our financial condition.
(19) Condensed Parent Company Only Financial Statements
The following condensed parent company only financial statements reflect our
investments in our wholly-owned consolidated subsidiaries, Astoria Federal and
AF Insurance Agency, Inc., using the equity method of accounting:
Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31,
-----------------------
(In Thousands) 2004 2003
- --------------------------------------------------------------------
Assets:
Cash $ 1 $ --
Repurchase agreements 267,578 65,926
Other securities available-for-sale 133 139
ESOP loans receivable 33,796 34,720
Accrued interest receivable 78 9
Other assets 2,662 1,741
Investment in Astoria Federal 1,548,005 1,796,233
Investment in AF Insurance Agency, Inc. 2,641 1,885
Investment in Astoria Capital Trust I 3,929 3,929
- --------------------------------------------------------------------
Total assets $1,858,823 $1,904,582
====================================================================
Liabilities and stockholders' equity:
Other borrowings $ 455,835 $ 473,037
Other liabilities 6,161 6,118
Amounts due to subsidiaries 27,063 28,896
Stockholders' equity 1,369,764 1,396,531
- --------------------------------------------------------------------
Total liabilities and stockholders' equity $1,858,823 $1,904,582
====================================================================
112
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Astoria Financial Corporation - Condensed Statements of Income
For the Year Ended December 31,
-------------------------------
(In Thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------
Interest income:
Repurchase agreements and other securities $ 1,139 $ 1,500 $ 2,990
ESOP loans receivable 2,079 2,140 2,226
- --------------------------------------------------------------------------------------------
Total interest income 3,218 3,640 5,216
Interest expense on borrowed funds 29,363 29,816 22,267
- --------------------------------------------------------------------------------------------
Net interest expense 26,145 26,176 17,051
- --------------------------------------------------------------------------------------------
Non-interest income 1,307 (1,074) 1,330
Cash dividends from subsidiaries 522,470 120,000 60,000
- --------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 1,878 1,736 1,521
Other 7,132 2,323 1,721
- --------------------------------------------------------------------------------------------
Total non-interest expense 9,010 4,059 3,242
- --------------------------------------------------------------------------------------------
Income before income taxes and equity in (overdistributed)
undistributed earnings of subsidiaries 488,622 88,691 41,037
Income tax benefit 14,028 12,970 7,885
- --------------------------------------------------------------------------------------------
Income before equity in (overdistributed) undistributed
earnings of subsidiaries 502,650 101,661 48,922
Equity in (overdistributed) undistributed earnings of
subsidiaries (1) (283,113) 95,185 199,507
- --------------------------------------------------------------------------------------------
Net income $ 219,537 $196,846 $248,429
============================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended
December 31, 2004 represents dividends paid to us in excess of our
subsidiaries' current year earnings.
113
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Astoria Financial Corporation - Condensed Statements of Cash Flows
For the Year Ended December 31,
---------------------------------
(In Thousands) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 219,537 $ 196,846 $ 248,429
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in overdistributed (undistributed) earnings of
subsidiaries 283,113 (95,185) (199,507)
(Increase) decrease in accrued interest receivable (69) 13 62
Amortization of premiums and deferred costs 1,142 1,070 512
Decrease (increase) in other assets, net of other liabilities
and amounts due to subsidiaries 434 (82) 7,654
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 504,157 102,662 57,150
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal payments on ESOP loans receivable 924 942 1,514
- -------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 924 942 1,514
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings with original terms greater than three
months -- -- 246,433
Repayments of borrowings with original terms greater than three
months (20,000) -- --
Cash paid for cash flow hedging instrument -- -- (3,297)
Common stock repurchased (225,052) (195,471) (211,103)
Cash dividends paid to stockholders (76,720) (76,370) (74,258)
Redemption of preferred stock -- (54,500) --
Cash received for options exercised 18,344 8,793 11,742
- -------------------------------------------------------------------------------------------------------
Net cash used in financing activities (303,428) (317,548) (30,483)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 201,653 (213,944) 28,181
Cash and cash equivalents at beginning of the year 65,926 279,870 251,689
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 267,579 $ 65,926 $ 279,870
=======================================================================================================
114
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
For the Year Ended December 31, 2004
-----------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
Interest income $261,094 $252,563 $264,080 $268,164
Interest expense 146,581 139,247 142,222 147,285
- ----------------------------------------------------------------------------------------
Net interest income 114,513 113,316 121,858 120,879
Provision for loan losses -- -- -- --
- ----------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 114,513 113,316 121,858 120,879
Non-interest income 22,139 27,866 24,036 6,043(1)
- ----------------------------------------------------------------------------------------
Total income 136,652 141,182 145,894 126,922
General and administrative expense 57,043 55,360 59,168 53,440
- ----------------------------------------------------------------------------------------
Income before income tax expense 79,609 85,822 86,726 73,482
Income tax expense 26,196 28,321 28,619 22,966
- ----------------------------------------------------------------------------------------
Net income $ 53,413 $ 57,501 $ 58,107 $ 50,516
========================================================================================
Basic earnings per common share $ 0.48 $ 0.53 $ 0.54 $ 0.48
Diluted earnings per common share $ 0.47 $ 0.52 $ 0.53 $ 0.48
(1) Includes a $16.5 million charge for an other-than-temporary securities
impairment write-down.
For the Year Ended December 31, 2003
-----------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
Interest income $282,566 $269,233 $247,255 $258,237
Interest expense 173,558 172,982 167,623 163,590
- ----------------------------------------------------------------------------------------
Net interest income 109,008 96,251 79,632 94,647
Provision for loan losses -- -- -- --
- ----------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 109,008 96,251 79,632 94,647
Non-interest income 25,895 31,543 33,880 28,243
- ----------------------------------------------------------------------------------------
Total income 134,903 127,794 113,512 122,890
General and administrative expense 51,966 51,840 51,408 50,663
- ----------------------------------------------------------------------------------------
Income before income tax expense 82,937 75,954 62,104 72,227
Income tax expense 26,540 25,065 20,503 24,268
- ----------------------------------------------------------------------------------------
Net income $ 56,397 $ 50,889 $ 41,601 $ 47,959
========================================================================================
Basic earnings per common share $ 0.46 $ 0.43 $ 0.35 $ 0.43
Diluted earnings per common share $ 0.46 $ 0.43 $ 0.35 $ 0.42
115
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit
- ----------- -------------------------
3.1 Certificate of Incorporation of Astoria Financial Corporation, as
amended effective as of June 3, 1998. (1)
3.2 Bylaws of Astoria Financial Corporation, as amended May 19, 2004. (2)
4.1 Astoria Financial Corporation Specimen Stock Certificate. (3)
4.2 Federal Stock Charter of Astoria Federal Savings and Loan
Association. (4)
4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended
effective November 17, 2004. (*)
4.4 Bylaws of Astoria Federal Savings and Loan Association, as amended
effective upon the retirement of Donald D. Wenk from the Board of
Directors of Astoria Federal Savings and Loan Association, on or
about May 18, 2005. (*)
4.5 Amended and Restated Certificate of Designations, Preferences and
Rights of Series A Junior Participating Preferred Stock. (5)
4.6 Rights Agreement between Astoria Financial Corporation and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated
as of July 17, 1996, as amended. (6)
4.7 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by
and between Astoria Financial Corporation and ChaseMellon
Shareholder Services L.L.C. (7)
4.8 Amendment No. 2 to Rights Agreement, dated as of September 15,
1999 by and between Astoria Financial Corporation and ChaseMellon
Shareholder Services L.L.C., as Rights Agent. (8)
4.9 Form of Rights Certificate. (6)
4.10 Indenture, dated as of October 28, 1999, between Astoria Financial
Corporation and Wilmington Trust Company, as Debenture Trustee,
including as Exhibit A thereto the Form of Certificate of Exchange
Junior Subordinated Debentures. (9)
4.11 Form of Certificate of Junior Subordinated Debenture. (9)
4.12 Form of Certificate of Exchange Junior Subordinated Debenture. (9)
4.13 Amended and Restated Declaration of Trust of Astoria Capital Trust
I, dated as of October 28, 1999. (9)
116
Exhibit No. Identification of Exhibit
- ----------- -------------------------
4.14 Common Securities Guarantee Agreement of Astoria Financial
Corporation, dated as of October 28, 1999. (9)
4.15 Form of Certificate Evidencing Common Securities of Astoria
Capital Trust I. (9)
4.16 Form of Exchange Capital Security Certificate for Astoria Capital
Trust I. (9)
4.17 Series A Capital Securities Guarantee Agreement of Astoria
Financial Corporation, dated as of October 28, 1999. (9)
4.18 Form of Series B Capital Securities Guarantee Agreement of Astoria
Financial Corporation. (9)
4.19 Form of Capital Security Certificate of Astoria Capital Trust I. (9)
4.20 Indenture between Astoria Financial Corporation and Wilmington
Trust Company, as Debenture Trustee, dated as of October 16, 2002,
relating to the Senior Notes due 2012. (10)
4.21 Form of 5.75% Senior Note due 2012, Series B. (10)
4.22 Astoria Financial Corporation Automatic Dividend Reinvestment and
Stock Purchase Plan. (11)
10.1 Agreement dated as of December 28, 2000 by and between Astoria
Federal Savings and Loan Association, Astoria Financial
Corporation, the Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust and The Long Island Savings
Bank FSB Employee Stock Ownership Plan Trust. (4)
10.2 Amended and Restated Loan Agreement by and between Astoria Federal
Savings and Loan Association Employee Stock Ownership Plan Trust
and Astoria Financial Corporation made and entered into as of
January 1, 2000. (4)
10.3 Promissory Note of Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust dated January 1, 2000. (4)
10.4 Pledge Agreement made as of January 1, 2000 by and between Astoria
Federal Savings and Loan Association Employee Stock Ownership Plan
Trust and Astoria Financial Corporation. (4)
10.5 Amended and Restated Loan Agreement by and between The Long Island
Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria
Financial Corporation made and entered into as of January 1, 2000. (4)
10.6 Promissory Note of The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust dated January 1, 2000. (4)
117
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.7 Pledge Agreement made as of January 1, 2000 by and between The
Long Island Savings Bank FSB Employee Stock Ownership Plan Trust
and Astoria Financial Corporation. (4)
Exhibits 10.8 through 10.43 are management contracts or
compensatory plans or arrangements required to be filed as
exhibits to this Form 10-K pursuant to Item 15(c) of this report.
10.8 Astoria Federal Savings and Loan Association and Astoria Financial
Corporation Directors' Retirement Plan, as amended and restated
effective February 21, 1996. (3)
10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement
Benefit Plan, as amended. (12)
10.10 Astoria Financial Corporation Death Benefit Plan for Outside
Directors. (3)
10.11 Deferred Compensation Plan for Directors of Astoria Financial
Corporation. (3)
10.12 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as
amended. (13)
10.13 1996 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation, as amended. (13)
10.14 1996 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, as amended. (13)
10.15 1999 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation. (14)
10.16 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation. (14)
10.17 Amendment to Section 4.5 of the 1999 Stock Option Plan for Outside
Directors of Astoria Financial Corporation. (4)
10.18 2003 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation. (15)
10.19 Astoria Federal Savings and Loan Association Annual Incentive Plan
for Select Executives. (12)
10.20 Astoria Financial Corporation Executive Officer Annual Incentive
Plan, as amended. (16)
10.21 Astoria Financial Corporation Amended and Restated Employment
Agreement with George L. Engelke, Jr., dated as of January 1,
2000. (17)
118
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.22 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with George L. Engelke, Jr., dated as of
January 1, 2000. (17)
10.23 Astoria Financial Corporation Amended and Restated Employment
Agreement with Gerard C. Keegan, dated as of January 1, 2000. (17)
10.24 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Gerard C. Keegan, dated as of January 1,
2000. (17)
10.25 Employment Termination and Release Agreement by and among John J.
Conefry, Jr., Astoria Federal Savings and Loan Association and
Astoria Financial Corporation. (4)
10.26 Astoria Financial Corporation Amended and Restated Employment
Agreement with Arnold K. Greenberg dated as of January 1, 2000.
(17)
10.27 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Arnold K. Greenberg, dated as of January
1, 2000. (17)
10.28 Astoria Financial Corporation Employment Agreement with Gary T.
McCann, dated as of December 1, 2003. (3)
10.29 Astoria Federal Savings and Loan Association Employment Agreement
with Gary T. McCann, dated as of December 1, 2003. (3)
10.30 Astoria Financial Corporation Amended and Restated Employment
Agreement with Monte N. Redman dated as of January 1, 2000. (17)
10.31 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Monte N. Redman, dated as of January 1,
2000. (17)
10.32 Astoria Financial Corporation Amended and Restated Employment
Agreement with Alan P. Eggleston dated as of January 1, 2000. (17)
10.33 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Alan P. Eggleston, dated as of January
1, 2000. (17)
10.34 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Josie Callari. (17)
10.35 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Robert J. DeStefano. (17)
119
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.36 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Frank E. Fusco. (17)
10.37 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Robert T. Volk. (17)
10.38 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Ira M. Yourman. (17)
10.39 Change of Control Severance Agreement, dated as of December 20,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Brian T. Edwards. (4)
10.40 Retirement Medical and Dental Benefit Policy for Senior Officers. (13)
10.41 Form of Option Conversion Agreement by and between Astoria
Financial Corporation and Former Officer or Director of Long
Island Bancorp, Inc. dated September 30, 1998. (18)
10.42 Option Conversion Certificates of Robert J. Conway, Leo J. Waters
and Donald D. Wenk. (12)
10.43 Trust Agreement, dated as of January 31, 1995 between Astoria
Financial Corporation and State Street Bank and Trust Company. (3)
12.1 Statement regarding computation of ratios. (*)
21.1 Subsidiaries of Astoria Financial Corporation. (*)
23.1 Consent of Independent Registered Public Accounting Firm. (*)
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. (*)
120
Exhibit No. Identification of Exhibit
- ----------- -------------------------
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held
on May 18, 2005, which will be filed with the SEC within 120 days
from December 31, 2004, is incorporated herein by reference.
- ----------
* Filed herewith. Copies of exhibits will be provided to shareholders upon
written request to Astoria Financial Corporation, Investor Relations
Department, One Astoria Federal Plaza, Lake Success, New York 11042 at a
charge of $0.10 per page. Copies are also available at no charge through
the SEC website at www.sec.gov/edgar/searchedgar/webusers.htm.
(1) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with the
Securities and Exchange Commission on September 10, 1998 (File Number
000-22228).
(2) Incorporated by reference to Astoria Financial Corporation's Current Report
on Form 8-K, dated May 19, 2004, filed with the Securities and Exchange
Commission on May 19, 2004 (File Number 001-11967).
(3) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 12, 2004 (File Number
001-11967).
(4) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 26, 2001 (File Number
000-22228).
(5) Incorporated by reference to Astoria Financial Corporation's Current Report
on Form 8-K, dated February 9, 2005, filed with the Securities and Exchange
Commission on February 10, 2005 (File Number 001-11967).
(6) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form 8-K/A dated July 17, 1996, filed with the Securities and
Exchange Commission on July 23, 1996.
(7) Incorporated by reference to Astoria Financial Corporation's Current Report
on Form 8-K/A, dated April 2, 1998, filed with the Securities and Exchange
Commission on April 10, 1998 (File Number 000-22228), as amended by the
First Amendment, incorporated by reference to the Registrant's Current
Report on Form 8-K, dated May 29, 1998 (File Number 000-22228) and the
Second Amendment, incorporated by reference to the Registrant's Current
Report on Form 8-K, dated July 10, 1998 (File Number 000-22228).
(8) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed with
the Securities and Exchange Commission on November 12, 1999 (File Number
000-22228).
(9) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on February 18, 2000.
121
(10) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on December 6, 2002.
(11) Incorporated by reference to Form 424B3 Prospectus Supplement, filed with
the Securities and Exchange Commission on February 1, 2000.
(12) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 24, 1999 (File Number
000-22228).
(13) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 25, 1998 (File Number
000-22228).
(14) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 8, 1999 (File Number 000-22228).
(15) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 8, 2003 (File Number 001-11967).
(16) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 16, 2004 (File Number 001-11967).
(17) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 24, 2000 (File Number
000-22228).
(18) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form S-8, dated September 30, 1998, filed with the Securities
and Exchange Commission on September 30, 1998.
122