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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
(Address of principal executive offices) (Zip Code)
(516) 327-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, October 31, 2002
- ----------------------- ----------------------------------------------
.01 Par Value 87,063,906
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page
----
Consolidated Statements of Financial Condition at September 30, 2002 2
and December 31, 2001
Consolidated Statements of Income for the Three and Nine Months 3
Ended September 30, 2002 and September 30, 2001
Consolidated Statement of Changes in Stockholders' Equity for the 4
Nine Months Ended September 30, 2002
Consolidated Statements of Cash Flows for the Nine Months Ended 5
September 30, 2002 and September 30, 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 39
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
Certifications 42
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AT AT
SEPTEMBER 30, DECEMBER 31,
(In Thousands, Except Share Data) 2002 2001
------------ ------------
ASSETS:
Cash and due from banks $ 144,601 $ 144,694
Federal funds sold and repurchase agreements 843,883 1,309,164
Available-for-sale securities:
Encumbered 2,366,426 3,176,977
Unencumbered 536,322 372,206
------------ ------------
2,902,748 3,549,183
Held-to-maturity securities, fair value of $4,543,619 and $4,468,200,
respectively:
Encumbered 4,368,910 4,201,503
Unencumbered 117,341 262,425
------------ ------------
4,486,251 4,463,928
Federal Home Loan Bank of New York stock, at cost 225,473 250,450
Loans held-for-sale 32,348 43,390
Loans receivable:
Mortgage loans, net 12,067,433 11,924,134
Consumer and other loans, net 353,349 243,127
------------ ------------
12,420,782 12,167,261
Allowance for loan losses (83,648) (82,285)
------------ ------------
Total loans receivable, net 12,337,134 12,084,976
Mortgage servicing rights, net 22,399 35,295
Accrued interest receivable 95,197 96,273
Premises and equipment, net 155,600 149,753
Goodwill 185,151 185,151
Bank owned life insurance 357,669 242,751
Other assets 115,822 112,698
------------ ------------
Total assets $ 21,904,276 $ 22,667,706
============ ============
LIABILITIES:
Deposits:
Savings $ 2,818,078 $ 2,588,143
Money market 1,816,859 1,955,286
NOW 1,306,178 1,199,966
Certificates of deposit 5,239,463 5,160,298
------------ ------------
Total deposits 11,180,578 10,903,693
Reverse repurchase agreements 6,585,000 7,385,000
Federal Home Loan Bank of New York advances 1,964,450 1,914,000
Other borrowings, net 99,203 399,587
Mortgage escrow funds 149,772 116,395
Accrued expenses and other liabilities 215,539 281,445
------------ ------------
Total liabilities 20,194,542 21,000,120
Guaranteed preferred beneficial interest in junior subordinated debentures (capital
trust securities) 125,000 125,000
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,225,000 shares authorized and -0- shares issued and outstanding) -- --
Series B (2,000,000 shares authorized, issued and outstanding) 2,000 2,000
Common stock, $.01 par value; (200,000,000 shares authorized; 110,996,592
shares issued; and 87,690,468 and 90,766,744 shares
outstanding, respectively) 1,110 1,110
Additional paid-in capital 836,525 822,652
Retained earnings 1,327,038 1,207,742
Treasury stock (23,306,124 and 20,229,848 shares, at cost, respectively) (563,559) (459,471)
Accumulated other comprehensive income (loss) 9,797 (1,967)
Unallocated common stock held by ESOP (28,177) (29,480)
------------ ------------
Total stockholders' equity 1,584,734 1,542,586
------------ ------------
Total liabilities and stockholders' equity $ 21,904,276 $ 22,667,706
============ ============
See accompanying notes to consolidated financial statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(In Thousands, Except Share Data) 2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Mortgage loans $ 196,836 $ 207,014 $ 601,864 $ 613,897
Consumer and other loans 4,792 4,364 12,711 13,713
Mortgage-backed securities 91,552 109,556 289,273 355,001
Other securities 16,629 25,705 55,734 86,292
Federal funds sold and repurchase agreements 3,571 12,082 10,963 25,360
------------ ------------ ------------ ------------
Total interest income 313,380 358,721 970,545 1,094,263
------------ ------------ ------------ ------------
Interest expense:
Deposits 71,702 101,687 225,472 311,831
Borrowed funds 122,451 142,809 382,341 426,733
------------ ------------ ------------ ------------
Total interest expense 194,153 244,496 607,813 738,564
------------ ------------ ------------ ------------
Net interest income 119,227 114,225 362,732 355,699
Provision for loan losses 301 1,001 2,307 3,026
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 118,926 113,224 360,425 352,673
------------ ------------ ------------ ------------
Non-interest income:
Customer service fees 15,640 13,533 44,918 38,095
Other loan fees 2,242 1,596 5,922 4,630
Loan servicing fees 3,169 3,595 9,472 11,595
Net gain on sales of securities 8,489 -- 8,489 --
Net gain on sales of loans 1,056 877 3,902 2,602
Income from bank owned life insurance 5,683 4,098 15,927 12,584
Other 729 3,216 4,787 5,743
------------ ------------ ------------ ------------
Total non-interest income 37,008 26,915 93,417 75,249
------------ ------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 26,645 22,466 79,002 68,044
Occupancy, equipment and systems 13,373 13,371 39,600 39,323
Federal deposit insurance premiums 492 503 1,496 1,493
Advertising 997 730 3,555 4,259
Other 6,866 6,292 22,564 19,338
------------ ------------ ------------ ------------
Total general and administrative 48,373 43,362 146,217 132,457
Net amortization of mortgage servicing rights 11,796 2,825 16,917 7,776
Goodwill litigation 209 243 769 2,116
Capital trust securities 3,103 3,104 9,312 9,312
Amortization of goodwill -- 4,811 -- 14,432
------------ ------------ ------------ ------------
Total non-interest expense 63,481 54,345 173,215 166,093
------------ ------------ ------------ ------------
Income before income tax expense and cumulative effect
of accounting change 92,453 85,794 280,627 261,829
Income tax expense 30,237 29,342 93,262 91,482
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change 62,216 56,452 187,365 170,347
Cumulative effect of accounting change, net of tax -- -- -- (2,294)
------------ ------------ ------------ ------------
Net income 62,216 56,452 187,365 168,053
Preferred dividends declared (1,500) (1,500) (4,500) (4,500)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 60,716 $ 54,952 $ 182,865 $ 163,553
============ ============ ============ ============
Basic earnings per common share:
Income before accounting change $ 0.73 $ 0.61 $ 2.17 $ 1.81
Cumulative effect of accounting change, net of tax -- -- -- (0.03)
------------ ------------ ------------ ------------
Net basic earnings per common share $ 0.73 $ 0.61 $ 2.17 $ 1.78
============ ============ ============ ============
Diluted earnings per common share:
Income before accounting change $ 0.72 $ 0.60 $ 2.13 $ 1.78
Cumulative effect of accounting change, net of tax -- -- -- (0.03)
------------ ------------ ------------ ------------
Net diluted earnings per common share $ 0.72 $ 0.60 $ 2.13 $ 1.75
============ ============ ============ ============
Dividends per common share $ 0.20 $ 0.16 $ 0.57 $ 0.44
============ ============ ============ ============
Basic weighted average common shares 83,329,044 90,123,032 84,333,207 91,851,854
Diluted weighted average common and common equivalent shares 84,795,336 91,869,188 85,920,019 93,661,896
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
(In Thousands, Except Share Data) TOTAL STOCK STOCK CAPITAL EARNINGS
- --------------------------------- ----- ----- ----- ------- --------
Balance at December 31, 2001 $ 1,542,586 $ 2,000 $ 1,110 $ 822,652 $ 1,207,742
Comprehensive income:
Net income 187,365 -- -- -- 187,365
Other comprehensive income,
net of tax:
Net unrealized gain on securities 8,534 -- -- -- --
Net unrealized loss on cash flow
hedging instruments (1,970) -- -- -- --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 5,200 -- -- -- --
-----------
Comprehensive income 199,129
-----------
Common stock repurchased
(4,180,400 shares) (129,795) -- -- -- --
Dividends on common and preferred
stock and amortization of purchase
premium (53,607) -- -- (978) (52,629)
Exercise of stock options and
related tax benefit
(1,104,124 shares issued) 19,111 -- -- 8,844 (15,440)
Amortization relating to allocation
of ESOP stock 7,310 -- -- 6,007 --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2002 $ 1,584,734 $ 2,000 $ 1,110 $ 836,525 $ 1,327,038
=========== =========== =========== =========== ===========
UNALLOCATED
ACCUMULATED COMMON
OTHER STOCK
TREASURY COMPREHENSIVE HELD
(In Thousands, Except Share Data) STOCK (LOSS) INCOME BY ESOP
- --------------------------------- ----- ------------- -------
Balance at December 31, 2001 $ (459,471) $ (1,967) $ (29,480)
Comprehensive income:
Net income -- -- --
Other comprehensive income,
net of tax:
Net unrealized gain on securities -- 8,534 --
Net unrealized loss on cash flow
hedging instruments -- (1,970) --
Amortization of unrealized loss
on securities transferred to
held-to-maturity -- 5,200 --
Comprehensive income
Common stock repurchased
(4,180,400 shares) (129,795) -- --
Dividends on common and preferred
stock and amortization of purchase
premium -- -- --
Exercise of stock options and
related tax benefit
(1,104,124 shares issued) 25,707 -- --
Amortization relating to allocation
of ESOP stock -- -- 1,303
----------- ----------- -----------
Balance at September 30, 2002 $ (563,559) $ 9,797 $ (28,177)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(In Thousands) 2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 187,365 $ 168,053
Adjustments to reconcile net income to net cash provided
by operating activities:
Net amortization (accretion) of premiums, discounts and deferred loan costs 1,324 (29,397)
Net provision for loan and real estate losses 2,311 2,962
Depreciation and amortization 8,003 9,708
Net gain on sales of loans and securities (12,391) (2,602)
Proceeds from sales of loans held-for-sale, net of originations 14,944 (6,412)
Amortization of goodwill -- 14,432
Cumulative effect of accounting change, net of tax -- 2,294
Amortization of allocated ESOP stock 7,310 4,874
Decrease in accrued interest receivable 1,076 3,718
Mortgage servicing rights amortization and valuation
allowance, net of capitalized amounts 12,896 4,045
Income from bank owned life insurance, net of insurance
proceeds received (14,918) 8,818
(Increase) decrease in other assets (19,446) 15,826
Decrease in accrued expenses and other liabilities (57,062) (79,519)
----------- -----------
Net cash provided by operating activities 131,412 116,800
----------- -----------
Cash flows from investing activities:
Origination of loans held-for-investment (2,796,246) (1,897,874)
Loan purchases through third parties (1,113,285) (1,072,123)
Principal payments on loans held-for-investment 3,623,342 2,379,478
Principal payments on mortgage-backed securities held-to-maturity 2,260,068 880,382
Principal payments on mortgage-backed securities available-for-sale 1,490,987 983,368
Purchases of mortgage-backed securities held-to-maturity (2,578,324) (650,927)
Purchases of mortgage-backed securities available-for-sale (1,263,783) (288,811)
Purchases of other securities available-for-sale (502) (2,005)
Proceeds from maturities of other securities available-for-sale 77,923 69,868
Proceeds from maturities of other securities held-to-maturity 316,649 421,048
Redemption of FHLB stock 24,977 34,800
Proceeds from sale of securities available-for-sale 384,250 --
Proceeds from sales of real estate owned, net 3,431 4,367
Net purchases of premises and equipment (13,850) (5,567)
Purchase of bank owned life insurance (100,000) --
----------- -----------
Net cash provided by investing activities 315,637 856,004
----------- -----------
Cash flows from financing activities:
Net increase in deposits 276,885 721,758
Net decrease in reverse repurchase agreements (800,000) (400,000)
Net increase in FHLB of New York advances 50,450 154,000
Net decrease in other borrowings (300,000) (104,092)
Increase in mortgage escrow funds 33,377 35,300
Cost to repurchase common stock (129,795) (249,698)
Cash dividends paid to stockholders (53,607) (47,603)
Cash received for options exercised 10,267 18,400
----------- -----------
Net cash (used in) provided by financing activities (912,423) 128,065
----------- -----------
Net (decrease) increase in cash and cash equivalents (465,374) 1,100,869
Cash and cash equivalents at beginning of period 1,453,858 307,251
----------- -----------
Cash and cash equivalents at end of period $ 988,484 $ 1,408,120
=========== ===========
Supplemental disclosures:
Cash paid during the period:
Interest $ 622,823 $ 742,913
=========== ===========
Income taxes $ 83,302 $ 47,153
=========== ===========
Additions to real estate owned $ 1,518 $ 4,077
=========== ===========
Securities transferred from available-for-sale to
held-to-maturity $ -- $ 2,878,767
=========== ===========
See accompanying notes to consolidated financial statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal; Astoria Capital Trust I; and AF Insurance Agency, Inc. As used in this
quarterly report, "we," "us" and "our" refer to Astoria Financial Corporation
and its consolidated subsidiaries, including Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., depending on the context. All significant
inter-company accounts and transactions have been eliminated in consolidation.
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of September 30, 2002 and
December 31, 2001, our results of operations for the three and nine months ended
September 30, 2002 and 2001, changes in our stockholders' equity for the nine
months ended September 30, 2002 and our cash flows for the nine months ended
September 30, 2002 and 2001. In preparing the consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities for the consolidated statements of financial
condition as of September 30, 2002 and December 31, 2001, and amounts of
revenues and expenses in the consolidated statements of income for the three and
nine months ended September 30, 2002 and 2001. The results of operations for the
three and nine months ended September 30, 2002 are not necessarily indicative of
the results of operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission, or SEC.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2001 audited consolidated financial statements and related notes
included in our 2001 Annual Report on Form 10-K.
6
2. EARNINGS PER SHARE, OR EPS
The following table is a reconciliation of basic and diluted EPS.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2002 2001
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (1)
- ------------------------------------- -------- -------- -------- --------
Net income $ 62,216 $ 62,216 $ 56,452 $ 56,452
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
-------- -------- -------- --------
Net income available to common shareholders $ 60,716 $ 60,716 $ 54,952 $ 54,952
======== ======== ======== ========
Total weighted average basic
common shares outstanding 83,329 83,329 90,123 90,123
Effect of dilutive securities:
Options -- 1,466 -- 1,746
-------- -------- -------- --------
Total weighted average diluted
common shares outstanding 83,329 84,795 90,123 91,869
======== ======== ======== ========
Net earnings per common share $ 0.73 $ 0.72 $ 0.61 $ 0.60
======== ======== ======== ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2002 2001
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (2)
- ------------------------------------- -------- -------- -------- --------
Income before cumulative
effect of accounting change $187,365 $ 187,365 $ 170,347 $ 170,347
Preferred dividends declared (4,500) (4,500) (4,500) ( 4,500)
-------- -------- -------- --------
182,865 182,865 165,847 165,847
Cumulative effect of accounting
change, net of tax -- -- (2,294) (2,294)
-------- -------- -------- --------
Net income available to common shareholders $182,865 $ 182,865 $ 163,553 $ 163,553
======== ======== ======== ========
Total weighted average basic
common shares outstanding 84,333 84,333 91,852 91,852
Effect of dilutive securities:
Options -- 1,587 -- 1,810
-------- -------- -------- --------
Total weighted average diluted
common shares outstanding 84,333 85,920 91,852 93,662
======== ======== ======== ========
Earnings per common share:
Income before cumulative effect
of accounting change $ 2.17 $ 2.13 $ 1.81 $ 1.78
Cumulative effect of accounting
change, net of tax -- -- (0.03) (0.03)
-------- -------- -------- --------
Net earnings per common share $ 2.17 $ 2.13 $ 1.78 $ 1.75
======== ======== ======== ========
(1) Options to purchase 30,000 shares of common stock at $29.88 per share were
outstanding as of September 30, 2001, 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 three months
ended September 30, 2001.
(2) Options to purchase 514,304 shares of common stock at prices between
$28.31 per share and $29.88 per share were outstanding as of September 30,
2001, but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the nine months ended September 30, 2001.
7
3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations in the scope of SFAS No. 141 are
to be accounted for using one method, the purchase method, and that goodwill and
other intangible assets acquired in a business combination shall be accounted
for in accordance with the provisions of SFAS No. 142. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. Previously, goodwill and other intangible assets were amortized in
determining net income. SFAS No. 142 assumes goodwill has an indefinite useful
life and should not be amortized, but rather tested, at least annually, for
impairment. SFAS No. 142 also provides specific guidance for testing goodwill
for impairment.
Effective January 1, 2002, we ceased recording goodwill amortization amounting
to approximately $19.1 million annually, or approximately $0.21 per diluted
common share, based on diluted weighted average common and common equivalent
shares outstanding for the year ended December 31, 2001. Upon adoption of SFAS
No. 142, we performed a transitional goodwill impairment evaluation. For
purposes of our goodwill impairment testing, we identified a single reporting
unit and determined the fair value of this reporting unit to be in excess of its
carrying value. Additionally, on September 30, 2002 we performed our first
annual goodwill impairment test and determined the fair value of our one
reporting unit to be in excess of its carrying value. Accordingly, both at the
date of our adoption of SFAS No. 142 and as of September 30, 2002, there was no
indication of goodwill impairment.
The following table reconciles reported net income and earnings per share to net
income and earnings per share excluding the amortization of goodwill.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
(In Thousands, Except Per Share Data) 2002 2001 2002 2001
------- ------- -------- --------
Net income:
Reported net income $62,216 $56,452 $187,365 $168,053
Add back: goodwill amortization - 4,769 - 14,308
------- ------- -------- --------
Adjusted net income $62,216 $61,221 $187,365 $182,361
======= ======= ======== ========
Basic earnings per common share:
Reported net income $ 0.73 $ 0.61 $ 2.17 $ 1.78
Goodwill amortization - 0.05 - 0.16
------- ------- -------- --------
Adjusted net income $ 0.73 $ 0.66 $ 2.17 $ 1.94
======= ======= ======== ========
Diluted earnings per common share:
Reported net income $ 0.72 $ 0.60 $ 2.13 $ 1.75
Goodwill amortization - 0.05 - 0.15
------- ------- -------- --------
Adjusted net income $ 0.72 $ 0.65 $ 2.13 $ 1.90
======= ======= ======== ========
In addition to the changes in the accounting and disclosure requirements for
goodwill, SFAS No. 142 also requires additional disclosures related to other
intangible assets, including mortgage servicing rights, or MSR. MSR are carried
at amortized cost, and impairment, if any, is recognized through a valuation
allowance. MSR, at amortized cost, totaled $36.5 million at September 30, 2002
and $39.2 million at December 31, 2001. The valuation allowance totaled $14.1
million at September 30, 2002 and $3.9 million at December 31,
8
2001. The cost of MSR are amortized over the estimated remaining lives of the
loans serviced. MSR amortization totaled $2.7 million for the three months ended
September 30, 2002 and $6.7 million for the nine months ended September 30,
2002. As of September 30, 2002, estimated future MSR amortization through 2007
is as follows: $3.0 million for the remainder of 2002, $11.2 million for 2003,
$7.6 million for 2004, $4.9 million for 2005, $3.2 million for 2006 and $2.1
million for 2007. Actual results may vary depending upon the level of repayments
on the loans currently serviced.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaced SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 144 established a single accounting model for long-lived assets to be
disposed of by sale based upon the framework established in SFAS No. 121. SFAS
No. 144 also resolved various implementation issues related to SFAS No. 121. The
provisions of SFAS No. 144 were effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, were to be
applied prospectively. The adoption of SFAS No. 144 did not have a material
impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board, or APB, Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification of gains
and losses resulting from the extinguishment of debt. Upon adoption, companies
must reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. All other provisions of SFAS No.
145 are effective for transactions occurring and/or financial statements issued
on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which
were effective May 15, 2002, did not have a material impact on our financial
condition or results of operations. The implementation of the remaining
provisions is not expected to have a material impact on our financial condition
or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." SFAS No. 147 removes acquisitions of financial
institutions, except for transactions between two or more mutual enterprises,
from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions" and FASB Interpretation No. 9, "Applying APB Opinions
No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase Method," and
requires that those transactions be accounted for in accordance with SFAS No.
141 and SFAS No. 142. In addition, this Statement amends SFAS No. 144 to include
in its scope long-term customer-relationship intangible assets of financial
institutions, such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. Consequently,
9
those intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement provisions
that SFAS No. 144 requires for other long-lived assets that are held and used.
The provisions of SFAS No. 147 related to the purchase method of accounting are
effective for acquisitions occurring on or after October 1, 2002. The provisions
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
are effective on October 1, 2002, with earlier application permitted. The
adoption of SFAS No. 147 did not have a material impact on our financial
condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements may be identified by the use of the words "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "outlook," "plan,"
"potential," "predict," "project," "should," "will," "would" and similar terms
and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate under the circumstances. These statements
are not guarantees of future performance and are subject to risks, uncertainties
and other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
- the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
- there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
- changes in the interest rate environment may reduce interest margins;
- changes in deposit flows, loan demand or real estate values may
adversely affect our business;
- changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
- 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;
- legislation or regulatory changes may adversely affect our business;
- technological changes may be more difficult or expensive than we
anticipate;
- success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
- 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.
10
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year ended
December 31, 2001 included in our Annual Report on Form 10-K for the year ended
December 31, 2001, as supplemented by our Quarterly Reports on Form 10-Q for the
quarters ended June 30, 2002 and March 31, 2002 and this report, contains a
summary of our significant accounting policies. Various elements of our
accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. Our policies
with respect to the methodologies used to determine the allowance for loan
losses, the valuation of mortgage servicing rights and asset impairment
judgments, including the value of goodwill and other than temporary declines in
the value of our securities, are our most critical accounting policies because
they are important to the presentation of our financial condition and results of
operations and they involve a higher degree of complexity and require management
to make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. The use of different judgments,
assumptions and estimates could result in material differences in our results of
operations or financial condition.
Following is a description of our critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical 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 testing under SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance. Pursuant to our
policy, loan losses must be 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 assets. The determination of the adequacy of the valuation
allowance is a multidimensional process which takes into consideration a variety
of factors. We segment our loan portfolio into like categories by composition
and size and
11
perform a variety of analyses against each category. These include,
but are not limited to, historical loss experience, delinquency levels and
trends and migration analysis. We also consider the growth in the portfolio as
well as our credit administration and asset management philosophies and
procedures. In addition, we evaluate and consider the impact that existing and
projected economic and market conditions may have on the portfolio as well as
known and inherent risks in the portfolio. Finally, we evaluate and consider the
allowance ratios and coverage percentages of both peer group and regulatory
agency data. After evaluating these variables, we determine appropriate
allowance coverage percentages for each of our portfolio segments and the
appropriate level of our provision for loan losses.
These evaluations are inherently subjective because, even though they are based
on objective data, it is management's interpretation of that data that
determines the amount of the appropriate allowance. Therefore, from time to
time, we review the actual performance and charge-off history of our portfolio
and compare that to our previously determined allowance coverage percentages. In
doing so, we evaluate the impact the previously mentioned variables may have had
on the portfolio to determine which changes, if any, should be made to our
assumptions and analyses. Our most recent analysis has indicated that our
projection of estimated losses inherent in our portfolio has exceeded our actual
charge-off history during the recent economic downturn. In response to the
results of this analysis, we have lowered our projections of estimated future
losses inherent in our portfolio and we have adjusted our allowance coverage
percentages for our portfolio segments accordingly.
As indicated above, actual results could differ from our estimate as a result of
changes in economic or market conditions. Changes in estimates could result in a
material change in the allowance. While we believe that the allowance for loan
losses has been established and maintained at levels adequate to reflect the
risks inherent in our loan portfolio, future increases may be necessary if
economic or market conditions decline substantially from the conditions that
existed at the time of the initial determinations.
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses," "Asset Quality," "Non-Performing Assets" and
"Allowance for Loan Losses" in this document and "Asset Quality" under Item 1,
"Business," and "Provision for Loan Losses" and "Asset Quality" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in our Annual Report on Form 10-K for the year ended December 31,
2001.
VALUATION OF MSR. MSR are carried at cost, and impairment, if any, is recognized
through a valuation allowance. 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 our 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 the
measurement of impairment. The estimated fair value of each MSR stratum is
determined through analyses of future cash flows, incorporating numerous
assumptions including servicing income, servicing costs, market discount rates,
prepayment speeds and other market driven data.
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, prepayments accelerate due to
increased refinance activity, which results in a decrease in the fair value of
MSR. As interest rates rise, prepayments slow down,
12
which results in an increase in the fair value of MSR. We obtain independent
appraisals in determining our MSR valuation. All assumptions are reviewed for
reasonableness on a quarterly basis and adjusted as necessary to reflect current
and anticipated market conditions. 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.
ASSET IMPAIRMENT JUDGMENTS. Certain of our assets are carried in our
consolidated statements of financial condition at fair value or at the lower of
cost or fair value. Valuation allowances are established when necessary to
recognize impairment of such assets. We periodically perform analyses to test
for impairment of various assets. In addition to our impairment analyses related
to loans and MSR discussed above, two other significant impairment analyses
relate to the value of goodwill and other than temporary declines in the value
of our securities.
Goodwill is accounted for in accordance with SFAS No. 142, which was effective
January 1, 2002. Under the provisions of SFAS No. 142, goodwill is assumed to
have an indefinite useful life and is no longer amortized, but rather tested, at
least annually, for impairment at the reporting unit level. Impairment exists
when the carrying amount of goodwill exceeds its implied fair value. When
performing the impairment test, if the fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not considered impaired.
We performed a transitional goodwill impairment test upon adoption of SFAS No.
142 and our first annual impairment test on September 30, 2002. For purposes of
our goodwill impairment testing, we identified a single reporting unit. We used
the quoted market price of our common stock on the dates of our testing as the
basis for determining the fair value of the reporting unit. On both test dates
we determined the fair value of our one reporting unit to be in excess of its
carrying value and, as such, there was no indication of goodwill impairment.
While quoted market prices in active markets are considered the best evidence of
fair value, other acceptable valuation methods include present value measurement
or measurements based on multiples of earnings or revenue or similar performance
measures. Differences in the identification of reporting units and the use of
valuation techniques can result in materially different evaluations of
impairment.
Our available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains and losses, net of taxes reported as accumulated other
comprehensive income in stockholders' equity. The securities which we have the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. We conduct a periodic review
and evaluation of the securities portfolio to determine if the 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, we would adjust
the carrying amount of the security through a valuation allowance. The market
values of our securities, particularly our fixed rate mortgage-backed securities
which comprise 84.3% of our total securities portfolio, are significantly
affected by changes in interest rates. In general, as interest rates rise, the
market value of fixed rate securities will decrease; as interest rates fall, the
market value of fixed rate securities will increase. Estimated fair values for
securities are based on published or securities dealers' market values.
GENERAL
We are a Delaware corporation organized as the unitary savings and loan
association holding
13
company of Astoria Federal. We are headquartered in Lake Success, New York and
our primary business is the operation of our wholly-owned subsidiary, Astoria
Federal. Astoria Federal's principal business is attracting retail deposits from
the general public and investing those deposits, together with funds generated
from operations, principal repayments on loans and securities, and borrowed
funds, primarily in one-to-four family mortgage loans and mortgage-backed
securities, and, to a lesser extent, multi-family mortgage loans and commercial
real estate loans. To a much smaller degree, we also invest in construction
loans and consumer and other loans. In addition, Astoria Federal invests in U.S.
Government and federal agency securities and other investments permitted by
federal laws and regulations.
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. 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 consists of net
amortization of mortgage servicing rights, goodwill litigation expense, capital
trust securities expense and, prior to January 1, 2002, amortization of
goodwill. Our earnings are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates and U.S.
Treasury yield curves, government policies and actions of regulatory
authorities.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and variable annuity agent and property and casualty insurance
broker. Through contractual agreements with The Treiber Group LLC and IFS
Agencies, Inc., AF Insurance Agency, Inc. provides insurance products to the
customers of Astoria Federal. Astoria Capital Trust I was formed in 1999 for the
purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital
Securities due November 1, 2029 and prepayable at our option on or after
November 1, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is cash provided by principal and interest payments
on loans and mortgage-backed and other securities. Principal payments on loans
and mortgage-backed securities and proceeds from maturities of other securities
totaled $7.77 billion for the nine months ended September 30, 2002 and $4.73
billion for the nine months ended September 30, 2001. During the year ended
December 31, 2001, the Federal Open Market Committee, or FOMC, reduced the
federal funds rate on eleven separate occasions by a total of 475 basis points,
resulting in a lower interest rate environment during the nine months ended
September 30, 2002 compared to the same period in 2001. In addition, during the
nine months ended September 30, 2002, medium- and long-term interest rates (two
to ten years) declined on average approximately 150 basis points. The increase
in loan and security repayments was primarily the result of the increase in
mortgage loan refinance activity caused by this lower interest rate environment.
Net cash provided by operating activities totaled $131.4 million during the nine
months ended September 30, 2002 and $116.8 million during the nine months ended
September 30, 2001. During the nine months ended September 30, 2002, net
borrowings decreased $1.05 billion, while net deposits increased $276.9 million.
During the
14
nine months ended September 30, 2001, net borrowings decreased $348.6 million,
while net deposits increased $721.8 million. The changes in borrowings and
deposits are consistent with our strategy of repositioning the balance sheet
through, in part, a shift in our liability mix toward lower costing and less
interest rate sensitive core deposits, consisting of savings, money market and
NOW accounts. The net increases in deposits for the nine months ended September
30, 2002 and 2001 reflect our continued emphasis on attracting customer deposits
through competitive rates, extensive product offerings and quality service.
Despite increased local competition for checking accounts, we have been
successful in increasing the number of NOW accounts opened in 2002 due in large
part to an integrated checking account promotion initiated in the second quarter
of 2002 and our "PEAK Process," an interactive, disciplined sales and service
approach, which we introduced in the first quarter of 2002.
Our primary use of funds is for the origination and purchase of mortgage loans.
During the nine months ended September 30, 2002, our gross originations and
purchases of mortgage loans totaled $3.98 billion, compared to $3.06 billion
during the nine months ended September 30, 2001. This increase was primarily
attributable to the lower interest rate environment during the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001, which
resulted in an increase in mortgage refinance activity. Our loan originations
and purchases have outpaced the increased level of repayments during the nine
months ended September 30, 2002.
For the nine months ended September 30, 2002, cash flow in excess of mortgage
and other loan fundings and excess liquidity were primarily utilized for the
purchase of mortgage-backed securities and the repayment of borrowings.
Purchases of mortgage-backed securities totaled $3.84 billion and purchases of
other securities totaled $502,000 during the nine months ended September 30,
2002. In addition, we paid off $1.05 billion of borrowings during the same
period. During the nine months ended September 30, 2001, purchases of
mortgage-backed securities totaled $939.7 million, purchases of other securities
totaled $2.0 million and net borrowings decreased by $348.6 million.
The rapid decline in interest rates in 2001 resulted in a significant increase
in loan and mortgage-backed securities repayments which have further increased
during the nine months ended September 30, 2002. Should the pace of repayment
activity remain at its recent levels and cash inflows continue to exceed
mortgage and other loan fundings, we will continue to purchase mortgage-backed
securities and consider a further reduction in our borrowings outstanding, as we
have done in the latter half of 2001 and through the nine months ended September
30, 2002. If repayment activity declines in the future, we will likely reduce
our purchases of mortgage-backed securities and/or reduce the repayment of
borrowings. This activity is consistent with our strategy of repositioning the
balance sheet with an emphasis on mortgage lending and utilization of core
deposits to fund our investing activities.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, our most liquid
assets, totaled $988.5 million at September 30, 2002, compared to $1.45 billion
at December 31, 2001. The decrease in our liquidity was primarily the result of
the repayment of $1.05 billion of borrowings, with a weighted average rate of
7.01%, which matured during the nine months ended September 30, 2002, partially
offset by the increase in cash flow due to the high level of refinance activity
we have experienced during the nine months ended September 30, 2002,
particularly in the third quarter. Borrowings maturing over the next twelve
months total $1.60 billion with a weighted
15
average rate of 6.28%. We have the flexibility to either repay or rollover such
borrowings as they mature. In addition, we have $2.37 billion in certificates of
deposit with a weighted average rate of 3.02% maturing over the next twelve
months. We expect to retain or replace a significant portion of such deposits
based on our competitive pricing and historical experience. Retained or replaced
deposits and refinanced borrowings during the next twelve months should carry
lower weighted average rates than those they replace, assuming that interest
rates remain at or near their current levels.
The most significant liquidity challenge we face is the variability in cash
flows as a result of mortgage refinance activity. As mortgage interest rates
decline, customers' refinance activities tend to accelerate, causing the cash
flow from both our mortgage loan portfolio and our mortgage-backed securities
portfolio to accelerate. When mortgage interest rates increase, the opposite
effect tends to occur. In addition, as mortgage interest rates decrease,
customers generally tend to prefer fixed rate mortgage loan products over
variable rate products. Since we generally sell our fifteen year and thirty year
fixed rate loan production into the secondary mortgage market, the origination
of such products for sale does not significantly reduce our liquidity.
Stockholders' equity increased to $1.58 billion at September 30, 2002 from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $187.4 million, the effect of stock options exercised
and related tax benefit of $19.1 million, other comprehensive income, net of
tax, of $11.8 million, and the amortization of the allocated portion of shares
held by the employee stock ownership plan, or ESOP, of $7.3 million. These
increases were partially offset by repurchases of our common stock of $129.8
million and dividends declared of $53.6 million.
On September 3, 2002, we paid a quarterly cash dividend of $0.20 per share on
shares of our common stock outstanding as of the close of business on August 15,
2002, totaling $17.7 million. During the three months ended September 30, 2002,
we declared a cash dividend on our Series B Preferred Stock aggregating $1.5
million. On October 16, 2002, we declared a quarterly cash dividend of $0.20 per
share on shares of our common stock payable on December 2, 2002 to stockholders
of record as of the close of business on November 15, 2002.
During the nine months ended September 30, 2002, we repurchased 4,180,400 shares
of our common stock at an aggregate cost of $129.8 million under our eighth
stock repurchase plan. This stock repurchase plan, which was approved by our
Board of Directors on September 17, 2001, authorized the purchase, at
management's discretion, of 10,000,000 shares, or approximately 11% of our
common stock then outstanding, over a two year period in open-market or
privately negotiated transactions. In total, 7,215,000 shares have been
purchased under the eighth stock repurchase plan.
On October 16, 2002, our Board of Directors approved our ninth stock repurchase
plan authorizing the purchase, at management's discretion, of an additional
10,000,000 shares, or approximately 11% of our common stock outstanding, in
open-market or privately negotiated transactions over a two year period. Stock
repurchases under our ninth stock repurchase plan are expected to commence
immediately following the completion of the eighth stock repurchase program.
At September 30, 2002, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.04%, leverage
capital ratio of 7.04% and risk-
16
based capital ratio of 15.14%. The minimum regulatory requirements are a
tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and risk-based
capital ratio of 8.00%.
On October 16, 2002, we completed the private placement of $200.0 million of
senior unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. 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 notes were
placed with a limited number of institutional investors under Rule 144A of the
Securities Act of 1933, or the Securities Act. The notes have not been
registered under the Securities Act. We have agreed with the investors to file
an exchange offer registration statement with the SEC no later than February 13,
2003 to allow the note holders to exchange the notes for a new issue of
substantially identical notes registered under the Securities Act. The net
proceeds from the note placement will be used for general corporate purposes,
including stock repurchases. Additionally, we may also use the proceeds for
repaying, reducing or refinancing outstanding indebtedness or preferred stock,
financing possible acquisitions of branches or other financial institutions or
financial service companies and extending credit to or funding investments in
our subsidiaries, including possible capital contributions to Astoria Federal.
LOAN PORTFOLIO
The following table sets forth the composition of our loans receivable and loans
held-for-sale portfolios at September 30, 2002 and December 31, 2001.
AT SEPTEMBER 30, 2002 AT DECEMBER 31, 2001
------------------------ ----------------------------
PERCENT PERCENT
(Dollars in Thousands) AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- -------- ------------ -----------
MORTGAGE LOANS (1):
One-to-four family $ 9,771,310 78.97% $10,146,555 83.63%
Multi-family 1,489,612 12.04 1,094,312 9.02
Commercial real estate 710,189 5.74 598,334 4.93
Construction 54,072 0.43 50,739 0.42
----------- ------- ------------ ---------
Total mortgage loans 12,025,183 97.18 11,889,940 98.00
----------- ------- ------------ ---------
CONSUMER AND OTHER LOANS (2):
Home equity 299,197 2.42 189,259 1.56
Passbook 7,870 0.06 9,012 0.07
Other 41,538 0.34 43,821 0.37
----------- ------- ------------ ---------
Total consumer and other loans 348,605 2.82 242,092 2.00
----------- ------- ------------ ---------
TOTAL LOANS 12,373,788 100.00% 12,132,032 100.00%
Net unamortized premiums and
deferred loan costs 79,342 78,619
Allowance for loan losses (83,648) (82,285)
----------- ------------
TOTAL LOANS, NET $12,369,482 $12,128,366
=========== ============
(1) Includes loans classified as held-for-sale totaling $31.1 million at
September 30, 2002 and $41.5 million at December 31, 2001.
(2) Includes loans classified as held-for-sale totaling $1.2 million at
September 30, 2002 and $1.9 million at December 31, 2001.
17
SECURITIES PORTFOLIO
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed and other securities available-for-sale and held-to-maturity at
September 30, 2002 and December 31, 2001.
AT SEPTEMBER 30, 2002 AT DECEMBER 31, 2001
--------------------- --------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
(In Thousands) COST VALUE COST VALUE
- -------------- ---- ----- ---- -----
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Agency pass-through certificates .. $ 335,856 $ 347,675 $ 450,742 $ 462,748
REMICs and CMOs:
Agency issuance ................ 1,039,360 1,050,105 1,402,241 1,402,093
Non-agency issuance ............ 1,007,425 1,010,875 1,132,384 1,150,122
---------- ---------- ---------- ----------
Total mortgage-backed securities ...... 2,382,641 2,408,655 2,985,367 3,014,963
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies .......... 305,049 309,948 362,888 359,561
FNMA and FHLMC preferred stock .... 120,015 116,138 120,015 111,276
Corporate debt and other securities 67,932 68,007 68,292 63,383
---------- ---------- ---------- ----------
Total other securities ................ 492,996 494,093 551,195 534,220
---------- ---------- ---------- ----------
Total securities available-for-sale ...... $2,875,637 $2,902,748 $3,536,562 $3,549,183
========== ========== ========== ==========
HELD-TO-MATURITY:
Mortgage-backed securities:
Agency pass-through certificates .. $ 27,349 $ 29,068 $ 36,620 $ 37,543
REMICs and CMOs:
Agency issuance ................ 2,858,552 2,893,616 2,979,357 2,975,780
Non-agency issuance ............ 1,495,850 1,515,593 1,043,110 1,049,426
---------- ---------- ---------- ----------
Total mortgage-backed securities ...... 4,381,751 4,438,277 4,059,087 4,062,749
---------- ---------- ---------- ----------
Other securities:
Obligations of the U.S.
Government and agencies .......... 64,557 65,399 362,034 362,628
Obligations of states and
political subdivisions ........... 39,943 39,943 42,807 42,823
---------- ---------- ---------- ----------
Total other securities ................ 104,500 105,342 404,841 405,451
---------- ---------- ---------- ----------
Total securities held-to-maturity ........ $4,486,251 $4,543,619 $4,463,928 $4,468,200
========== ========== ========== ==========
18
COMPARISON OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
AND OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
FINANCIAL CONDITION
Total assets decreased $763.4 million to $21.90 billion at September 30, 2002,
from $22.67 billion at December 31, 2001. The primary reasons for the decrease
in total assets were the decrease in securities and the decrease in federal
funds sold and repurchase agreements, which were utilized for the repayment of
various borrowings which matured during the nine months ended September 30,
2002. We continued our strategy of repositioning the balance sheet through
increases in deposits and loans and decreases in securities and borrowings.
Mortgage loans, net, including mortgage loans held-for-sale, increased $133.0
million to $12.10 billion at September 30, 2002, from $11.97 billion at December
31, 2001. However, despite strong loan originations, our mortgage loan portfolio
decreased during the quarter ended September 30, 2002 due to the extraordinarily
high level of repayment activity. Gross mortgage loans originated and purchased
during the nine months ended September 30, 2002 totaled $3.98 billion, of which
$2.88 billion were originations and $1.10 billion were purchases. This compares
to $2.04 billion of originations and $1.02 billion of purchases for a total of
$3.06 billion during the nine months ended September 30, 2001. The increase in
mortgage loan originations and purchases was primarily a result of the lower
interest rate environment during the nine months ended September 30, 2002
compared to the nine months ended September 30, 2001, which has increased the
level of mortgage refinance activity. The increase in originations and purchases
was offset by an increase in mortgage loan repayments to $3.53 billion for the
nine months ended September 30, 2002, from $2.29 billion for the nine months
ended September 30, 2001, which was also primarily a result of the lower
interest rates in the nine months ended September 30, 2002 over the comparable
2001 period.
Our loan portfolio, as well as our originations and purchases, continue to
consist primarily of one-to-four family mortgage loans. Our one-to-four family
mortgage loans, which represent 79.0% of our total loan portfolio at September
30, 2002, decreased $375.2 million to $9.77 billion at September 30, 2002, from
$10.15 billion at December 31, 2001. This decrease was due primarily to the high
level of loan repayments as a result of refinance activity in the prevailing
interest rate environment, despite strong loan originations. Our multi-family
mortgage loans, which tend to be less susceptible to prepayment, increased
$395.3 million to $1.49 billion at September 30, 2002, from $1.09 billion at
December 31, 2001. Similarly, our commercial real estate loans increased $111.9
million to $710.2 million at September 30, 2002, from $598.3 million at December
31, 2001. 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 new multi-family and commercial real estate loan
originations continue to be similar in size and type to the loans currently in
our portfolio and we have not changed our underwriting standards with respect to
such loans.
Mortgage-backed securities decreased $283.6 million to $6.79 billion at
September 30, 2002, from $7.07 billion at December 31, 2001. This decrease was
primarily the result of principal payments received of $3.75 billion and sales
of $375.8 million, partially offset by purchases of $3.84 billion of REMICs and
CMOs.
19
In addition to the changes noted in the mortgage loan and mortgage-backed
securities portfolios, other securities decreased $340.5 million to $598.6
million at September 30, 2002, from $939.1 million at December 31, 2001,
primarily due to $394.6 million in securities which were called or matured,
partially offset by the net accretion of discounts of $35.5 million and a
decrease of $18.1 million in the net unrealized loss on securities
available-for-sale. The improvement in the market value of our other securities
available-for-sale portfolio was related to the decrease in medium term market
interest rates that occurred from December 31, 2001 to September 30, 2002.
Federal funds sold and repurchase agreements decreased $465.3 million to $843.9
million at September 30, 2002, from $1.31 billion at December 31, 2001. This
decrease was primarily attributable to the repayment of $1.05 billion of
borrowings which matured during the nine months ended September 30, 2002,
partially offset by the increase in cash flow due to the high level of refinance
activity we have experienced during the nine months ended September 30, 2002,
particularly in the third quarter. In addition, Bank Owned Life Insurance, or
BOLI, increased $114.9 million to $357.7 million at September 30, 2002, from
$242.8 million at December 31, 2001, primarily as a result of an additional
$100.0 million purchase made in the first quarter of 2002. The BOLI is
classified as a non-interest earning asset.
Consistent with our strategy of repositioning the balance sheet, we also
continued shifting our liability emphasis from borrowings to deposits,
particularly lower costing core deposits. Deposits increased $276.9 million to
$11.18 billion at September 30, 2002, from $10.90 billion at December 31, 2001.
The increase in deposits was primarily due to an increase of $197.7 million in
core deposits to $5.94 billion at September 30, 2002, from $5.74 billion at
December 31, 2001, which was attributable to our continued emphasis on deposit
generation through competitive rates, extensive product offerings and quality
service. While total core deposits increased, our money market accounts, which
are a component of core deposits, decreased $138.4 million to $1.82 billion at
September 30, 2002. Our certificates of deposit also increased $79.2 million to
$5.24 billion at September 30, 2002, from $5.16 billion at December 31, 2001.
Reverse repurchase agreements decreased $800.0 million to $6.59 billion at
September 30, 2002, from $7.39 billion at December 31, 2001. Federal Home Loan
Bank of New York advances increased $50.5 million to $1.96 billion at September
30, 2002, from $1.91 billion at December 31, 2001. Other borrowings, net,
decreased $300.4 million to $99.2 million at September 30, 2002, from $399.6
million at December 31, 2001. The decreases in borrowings reflect management's
decision to utilize excess cash flows to repay various borrowings which matured
during the nine months ended September 30, 2002.
Stockholders' equity increased to $1.58 billion at September 30, 2002, from
$1.54 billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $187.4 million, the effect of stock options exercised
and related tax benefit of $19.1 million, other comprehensive income, net of
tax, of $11.8 million and the amortization of the allocated portion of shares
held by the ESOP of $7.3 million. These increases were partially offset by
repurchases of our common stock of $129.8 million and dividends declared of
$53.6 million.
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended September 30, 2002 increased $5.7 million
to $62.2 million, from $56.5 million for the three months ended September 30,
2001. For the three
20
months ended September 30, 2002, diluted earnings per common share increased to
$0.72 per share, as compared to $0.60 per share for the three months ended
September 30, 2001. Return on average assets increased to 1.14% for the three
months ended September 30, 2002, from 1.00% for the three months ended September
30, 2001. Return on average stockholders' equity increased to 15.72% for the
three months ended September 30, 2002, from 14.17% for the three months ended
September 30, 2001. Return on average tangible stockholders' equity increased to
17.81% for the three months ended September 30, 2002, from 16.12% for the three
months ended September 30, 2001.
Net income for the nine months ended September 30, 2002 increased $19.3 million
to $187.4 million, from $168.1 million for the nine months ended September 30,
2001. For the nine months ended September 30, 2002, diluted earnings per common
share increased to $2.13 per share, as compared to $1.75 per share for the nine
months ended September 30, 2001. Return on average assets increased to 1.13% for
the nine months ended September 30, 2002, from 1.00% for the nine months ended
September 30, 2001. Return on average stockholders' equity increased to 15.92%
for the nine months ended September 30, 2002, from 14.15% for the nine months
ended September 30, 2001. Return on average tangible stockholders' equity
increased to 18.05% for the nine months ended September 30, 2002, from 16.18%
for the nine months ended September 30, 2001.
The results of operations for the three and nine months ended September 30, 2002
include the benefit derived from the adoption of SFAS No. 142. SFAS No. 142
eliminated goodwill amortization, which totaled $4.8 million, or $0.05 per
diluted common share, for the three months ended September 30, 2001 and $14.3
million, or $0.15 per diluted common share, for the nine months ended September
30, 2001. The results of operations for the nine months ended September 30, 2001
also include a $2.3 million, after tax, charge for the cumulative effect of
accounting change related to the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133," effective January 1, 2001.
NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
primarily upon the volume of interest-earning assets and interest-bearing
liabilities and the corresponding interest rates earned or paid. Our net
interest income can be significantly impacted by changes in interest rates and
market yield curves. See Item 3, "Quantitative and Qualitative Disclosures About
Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the three months ended September 30, 2002, net interest income increased
$5.0 million to $119.2 million, from $114.2 million for the three months ended
September 30, 2001. This increase was primarily attributable to an increase in
the net interest margin to 2.31% for the three months ended September 30, 2002,
from 2.12% for the three months ended September 30, 2001, partially offset by a
decrease of $286.8 million in the average balance of net interest-earning assets
to $776.9 million for the three months ended September 30, 2002, from $1.06
billion for the three months ended September 30, 2001. The increase in the net
interest margin is primarily due to the decrease in the cost of funds due to the
downward repricing of deposits as a result of the lower interest rate
environment which has persisted since June of 2001, along
21
with the repayment of various higher cost borrowings. The decrease in the
average balance of net interest-earning assets was the result of a $967.4
million decrease in the average balance of total interest-earning assets to
$20.63 billion for the three months ended September 30, 2002, from $21.60
billion for the three months ended September 30, 2001, partially offset by a
$680.6 million decrease in the average balance of total interest-bearing
liabilities to $19.86 billion for the three months ended September 30, 2002,
from $20.54 billion for the three months ended September 30, 2001. The net
interest rate spread increased to 2.16% for the three months ended September 30,
2002, from 1.88% for the three months ended September 30, 2001. The change in
the net interest rate spread was the result of a decrease in the average cost of
interest-bearing liabilities to 3.91% for the three months ended September 30,
2002, from 4.76% for the three months ended September 30, 2001, partially offset
by a decrease in the average yield on interest-earning assets to 6.07% for the
three months ended September 30, 2002, from 6.64% for the three months ended
September 30, 2001. The changes in such costs and yields were a result of the
lower interest rate environment noted above.
For the nine months ended September 30, 2002, net interest income increased $7.0
million to $362.7 million, from $355.7 million for the nine months ended
September 30, 2001. This increase was primarily the result of an increase in the
net interest margin to 2.31% for the nine months ended September 30, 2002, from
2.21% for the nine months ended September 30, 2001, partially offset by a
decrease of $287.8 million in the average balance of net interest-earning assets
to $835.5 million for the nine months ended September 30, 2002, from $1.12
billion for the nine months ended September 30, 2001. The increase in the net
interest margin is primarily due to the decrease in the cost of funds, as
previously discussed. The decrease in the average balance of net
interest-earning assets was the result of a $535.7 million decrease in the
average balance of total interest-earning assets to $20.94 billion for the nine
months ended September 30, 2002, from $21.48 billion for the nine months ended
September 30, 2001, partially offset by a $247.9 million decrease in the average
balance of total interest-bearing liabilities to $20.11 billion for the nine
months ended September 30, 2002, from $20.36 billion for the nine months ended
September 30, 2001. The net interest rate spread increased to 2.15% for the nine
months ended September 30, 2002, from 1.95% for the nine months ended September
30, 2001. The change in the net interest rate spread was the result of a
decrease in the average cost of interest-bearing liabilities to 4.03% for the
nine months ended September 30, 2002, from 4.84% for the nine months ended
September 30, 2001, partially offset by a decrease in the average yield on
interest-earning assets to 6.18% for the nine months ended September 30, 2002,
from 6.79% for the nine months ended September 30, 2001. The changes in such
costs and yields were a result of the lower interest rate environment noted
above.
The changes in average interest-earning assets and interest-bearing liabilities
and their related yields and costs are discussed in greater detail under
"Interest Income" and "Interest Expense."
ANALYSIS OF NET INTEREST INCOME
The following tables set forth certain information about the average balances of
our assets and liabilities and the related yields and costs for the three and
nine month periods ended September 30, 2002 and 2001. Average yields are derived
by dividing income by the average balance of the related assets and average
costs are derived by dividing expense by the average balance of the related
liabilities, for the periods shown. Average balances are derived primarily from
average daily balances. The average balance of loans receivable includes loans
22
on which we have discontinued accruing interest. The yields and costs include
amortization of fees, costs, premiums and discounts which are considered
adjustments to interest rates.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2002 2001
---- ----
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST BALANCE INTEREST COST
- ---------------------- ------- -------- ---- ------- -------- ----
ASSETS: (ANNUALIZED) (ANNUALIZED)
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 10,012,425 $ 154,192 6.16% $ 10,088,518 $ 174,641 6.92%
Multi-family, commercial
and construction 2,166,118 42,644 7.87 1,540,679 32,373 8.40
Consumer and other loans (1) 323,195 4,792 5.93 208,686 4,364 8.36
------------ --------- ------------ ---------
Total loans 12,501,738 201,628 6.45 11,837,883 211,378 7.14
Mortgage-backed securities (2) 6,376,544 91,552 5.74 6,935,545 109,556 6.32
Other securities (2)(3) ` 927,940 16,629 7.17 1,458,258 25,705 7.05
Federal funds sold and
repurchase agreements 827,857 3,571 1.73 1,369,769 12,082 3.53
------------ --------- ------------ ---------
Total interest-earning assets 20,634,079 313,380 6.07 21,601,455 358,721 6.64
--------- ---------
Non-interest-earning assets 1,286,755 1,033,327
------------ ------------
Total assets $ 21,920,834 $ 22,634,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,810,974 7,938 1.13 $ 2,507,045 12,537 2.00
Certificates of deposit 5,253,760 55,056 4.19 5,284,102 71,149 5.39
NOW 1,273,066 931 0.29 1,081,815 1,446 0.53
Money market 1,870,756 7,777 1.66 1,817,718 16,555 3.64
------------ --------- ------------ ---------
Total deposits 11,208,556 71,702 2.56 10,690,680 101,687 3.80
Borrowed funds 8,648,634 122,451 5.66 9,847,116 142,809 5.80
------------ --------- ------------ ---------
Total interest-bearing liabilities 19,857,190 194,153 3.91 20,537,796 244,496 4.76
--------- ---------
Non-interest-bearing liabilities 480,880 503,401
------------ ------------
Total liabilities 20,338,070 21,041,197
Stockholders' equity 1,582,764 1,593,585
------------ ------------
Total liabilities and stockholders'
equity $ 21,920,834 $ 22,634,782
============ ============
Net interest income/net interest
rate spread $ 119,227 2.16% $ 114,225 1.88%
========= ==== ========= ====
Net interest-earning assets/net
interest margin $ 776,889 2.31% $ 1,063,659 2.12%
============ ==== ============ ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.04x 1.05x
===== =====
(1) Mortgage loans and consumer and other loans include non-performing
loans and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized
cost.
(3) Other securities include Federal Home Loan Bank of New York stock.
23
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2002 2001
---- ----
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST BALANCE INTEREST COST
- ---------------------- ------- -------- ---- ------- -------- ----
ASSETS: (ANNUALIZED) (ANNUALIZED)
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 10,221,945 $ 484,150 6.32% $ 10,017,683 $ 524,333 6.98%
Multi-family, commercial
and construction 1,982,618 117,714 7.92 1,427,729 89,564 8.36
Consumer and other loans (1) 287,169 12,711 5.90 197,681 13,713 9.25
----------- --------- ------------ ----------
Total loans 12,491,732 614,575 6.56 11,643,093 627,610 7.19
Mortgage-backed securities (2) 6,503,436 289,273 5.93 7,370,584 355,001 6.42
Other securities (2)(3) 1,092,241 55,734 6.80 1,623,044 86,292 7.09
Federal funds sold and
repurchase agreements 857,510 10,963 1.70 843,876 25,360 4.01
----------- --------- ------------ ----------
Total interest-earning assets 20,944,919 970,545 6.18 21,480,597 1,094,263 6.79
--------- ----------
Non-interest-earning assets 1,228,557 975,791
----------- ------------
Total assets $ 22,173,476 $ 22,456,388
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,732,395 24,607 1.20 $ 2,474,209 37,169 2.00
Certificates of deposit 5,209,688 170,583 4.37 5,226,746 217,544 5.55
NOW 1,239,817 2,650 0.28 1,055,295 4,301 0.54
Money market 1,920,586 27,632 1.92 1,669,733 52,817 4.22
----------- --------- ------------ ----------
Total deposits 11,102,486 225,472 2.71 10,425,983 311,831 3.99
Borrowed funds 9,006,959 382,341 5.66 9,931,390 426,733 5.73
----------- --------- ------------ ----------
Total interest-bearing liabilities 20,109,445 607,813 4.03 20,357,373 738,564 4.84
--------- ----------
Non-interest-bearing liabilities 495,098 515,969
----------- ------------
Total liabilities 20,604,543 20,873,342
Stockholders' equity 1,568,933 1,583,046
----------- ------------
Total liabilities and stockholders'
equity $ 22,173,476 $ 22,456,388
============ ============
Net interest income/net interest
rate spread $ 362,732 2.15% $ 355,699 1.95%
======== ==== ========== ====
Net interest-earning assets/net
interest margin $ 835,474 2.31% $ 1,123,224 2.21%
============ ==== ============ ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.04x 1.06x
===== =====
(1) Mortgage loans and consumer and other loans include non-performing
loans and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized
cost.
(3) Other securities include Federal Home Loan Bank of New York stock.
24
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001
------------------------------------- ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
(In Thousands) VOLUME RATE NET VOLUME RATE NET
- -------------- ------ ---- --- ------ ---- ---
Interest-earning assets:
One-to-four family loans $ (1,314) $ (19,135) $ (20,449) $ 10,465 $ (50,648) $ (40,183)
Multi-family, commercial and
construction loans 12,423 (2,152) 10,271 33,092 (4,942) 28,150
Consumer and other loans 1,937 (1,509) 428 4,962 (5,964) (1,002)
Mortgage-backed securities (8,418) (9,586) (18,004) (39,866) (25,862) (65,728)
Other securities (9,506) 430 (9,076) (27,161) (3,397) (30,558)
Federal funds sold and repurchase
agreements (3,718) (4,793) (8,511) 405 (14,802) (14,397)
---------- ---------- ---------- ---------- ---------- ----------
Total (8,596) (36,745) (45,341) (18,103) (105,615) (123,718)
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings 1,375 (5,974) (4,599) 3,544 (16,106) (12,562)
Certificates of deposit (405) (15,688) (16,093) (710) (46,251) (46,961)
NOW 220 (735) (515) 656 (2,307) (1,651)
Money market 470 (9,248) (8,778) 7,005 (32,190) (25,185)
Borrowed funds (16,989) (3,369) (20,358) (39,242) (5,150) (44,392)
---------- ---------- ---------- ---------- ---------- ----------
Total (15,329) (35,014) (50,343) (28,747) (102,004) (130,751)
---------- ---------- ---------- ---------- ---------- ----------
Net change in net interest income $ 6,733 $ (1,731) $ 5,002 $ 10,644 $ (3,611) $ 7,033
========== ========== ========== ========== ========== ==========
INTEREST INCOME
Interest income for the three months ended September 30, 2002 decreased $45.3
million to $313.4 million, from $358.7 million for the three months ended
September 30, 2001. This decrease was the result of a decrease in the average
yield on interest-earning assets to 6.07% for the three months ended September
30, 2002, from 6.64% for the three months ended September 30, 2001, coupled with
a decrease of $967.4 million in the average balance of interest-earning assets
to $20.63 billion for the three months ended September 30, 2002, from $21.60
billion for the three months ended September 30, 2001. The decrease in the
average yield on interest-earning assets was due to the decreases in the average
yields on substantially all asset categories, which reflects the lower interest
rate environment during the third quarter of 2002 compared to the third quarter
of 2001. The decrease in the average balance of interest-earning assets was
primarily due to decreases in the average balances of mortgage-backed and other
securities, resulting from principal repayments, maturities, calls and sales,
federal funds sold and repurchase agreements and one-to-four family mortgage
loans, partially offset by increases in the average balances of multi-family,
commercial and construction mortgage loans and consumer and other loans. Also
contributing to the decrease in the average balance of interest-earning assets
was the purchase of an additional $100.0 million of
25
BOLI in the first quarter of 2002. The shift in the average balances of
interest-earning assets reflects our decision over the past several years to
reposition the balance sheet while continuing to emphasize mortgage lending.
Interest income on one-to-four family mortgage loans decreased $20.4 million to
$154.2 million for the three months ended September 30, 2002, from $174.6
million for the three months ended September 30, 2001, which was primarily the
result of a decrease in the average yield to 6.16% for the three months ended
September 30, 2002, from 6.92% for the three months ended September 30, 2001,
coupled with a $76.1 million decrease in the average balance of such loans. The
decrease in the average balance of one-to-four family mortgage loans reflects
the increased level of repayment activity due to refinancings in the prevailing
interest rate environment, offset in part by the strong level of originations
and purchases. Interest income on multi-family, commercial real estate and
construction loans increased $10.2 million to $42.6 million for the three months
ended September 30, 2002, from $32.4 million for the three months ended
September 30, 2001, which was primarily the result of a $625.4 million increase
in the average balance of such loans, partially offset by a decrease in the
average yield to 7.87% for the three months ended September 30, 2002, from 8.40%
for the three months ended September 30, 2001. The increase in the average
balance of multi-family, commercial real estate and construction loans reflects
the increase in originations of such loans, coupled with the fact that we have
not experienced significant repayment activity within this portfolio in part due
to the prepayment penalties associated with these loans. The increase in the
average balance of total mortgage loans reflects our continued emphasis on the
origination of mortgage loans. The decrease in the average yields reflects the
lower interest rate environment during the third quarter of 2002 as compared to
the third quarter of 2001 as higher rate loans were prepaid and replaced with
lower yielding new originations and purchases.
Interest income on consumer and other loans increased $428,000 for the three
months ended September 30, 2002 compared to the three months ended September 30,
2001 resulting from an increase of $114.5 million in the average balance of this
portfolio, partially offset by a decrease in the average yield to 5.93% for the
three months ended September 30, 2002, from 8.36% for the three months ended
September 30, 2001. The changes in interest income on consumer and other loans
are primarily attributable to home equity loans which represent 85.8% of this
portfolio at September 30, 2002. The increase in the average balance of consumer
and other loans is due to the increase in home equity loans as a result of the
strong housing market combined with low interest rates over the past two years.
The decrease in the average yield on consumer and other loans was primarily the
result of a decrease in the average yield on our home equity loans which are
adjustable rate loans and generally reset monthly and are indexed to the prime
rate. The prime rate decreased 475 basis points during the year ended December
31, 2001 in response to the FOMC rate reductions discussed previously.
Interest income on mortgage-backed securities decreased $18.0 million to $91.6
million for the three months ended September 30, 2002, from $109.6 million for
the three months ended September 30, 2001. This decrease was the result of a
decrease in the average yield to 5.74% for the three months ended September 30,
2002, from 6.32% for the three months ended September 30, 2001, coupled with a
$559.0 million decrease in the average balance of this portfolio. The decrease
in the average balance of mortgage-backed securities is a result of our strategy
of repositioning the balance sheet, increased levels of principal repayments due
to the lower interest rate environment which has existed since June 2001 and
sales of securities
26
during the third quarter of 2002. Interest income on other securities decreased
$9.1 million to $16.6 million for the three months ended September 30, 2002,
from $25.7 million for the three months ended September 30, 2001. This decrease
resulted from a decrease of $530.3 million in the average balance of this
portfolio, primarily due to higher yielding securities being called throughout
2001 and 2002 as a result of the declining interest rate environment, slightly
offset by an increase in the average yield to 7.17% for the three months ended
September 30, 2002, from 7.05% for the three months ended September 30, 2001.
The increase in the average yield is a result of prepayment penalties associated
with certain callable securities which were called during the third quarter of
2002 which resulted in additional income. Interest income on federal funds sold
and repurchase agreements decreased $8.5 million as a result of a decrease in
the average yield to 1.73% for the three months ended September 30, 2002, from
3.53% for the three months ended September 30, 2001, coupled with a decrease of
$541.9 million in the average balance of the portfolio.
Interest income for the nine months ended September 30, 2002 decreased $123.7
million to $970.5 million, from $1.09 billion for the nine months ended
September 30, 2001. This decrease was the result of a decrease in the average
yield on interest-earning assets to 6.18% for the nine months ended September
30, 2002, from 6.79% for the nine months ended September 30, 2001, coupled with
a decrease of $535.7 million in the average balance of interest-earning assets
to $20.94 billion for the nine months ended September 30, 2002, from $21.48
billion for the nine months ended September 30, 2001. The decrease in the
average yield on interest-earning assets was due to the decreases in the average
yields on all asset categories, which reflects the lower interest rate
environment which has prevailed since June 2001. The decrease in the average
balance of interest-earning assets was primarily due to decreases in the average
balances of mortgage-backed and other securities, resulting from principal
repayments, maturities, calls and sales, partially offset by increases in the
average balances of mortgage loans, consumer and other loans and federal funds
sold and repurchase agreements. Also contributing to the decrease in the average
balance of interest-earning assets was the purchase of an additional $100.0
million of BOLI during the first quarter of 2002. The shift in the average
balances of interest-earning assets reflects our decision over the past several
years to reposition the balance sheet by emphasizing mortgage lending.
Interest income on one-to-four family mortgage loans decreased $40.1 million to
$484.2 million for the nine months ended September 30, 2002, from $524.3 million
for the nine months ended September 30, 2001, which was primarily the result of
a decrease in the average yield to 6.32% for the nine months ended September 30,
2002, from 6.98% for the nine months ended September 30, 2001, partially offset
by a $204.3 million increase in the average balance of such loans. Interest
income on multi-family, commercial real estate and construction loans increased
$28.1 million to $117.7 million for the nine months ended September 30, 2002,
from $89.6 million for the nine months ended September 30, 2001, which was
primarily the result of a $554.9 million increase in the average balance of such
loans, partially offset by a decrease in the average yield to 7.92% for the nine
months ended September 30, 2002, from 8.36% for the nine months ended September
30, 2001. As previously discussed, the increases in the average balances of our
mortgage loans and the decreases in the average yields for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001
reflect our continued emphasis on mortgage lending and the lower interest rate
environment.
Interest income on consumer and other loans decreased $1.0 million during the
nine months ended September 30, 2002 as compared to the nine months ended
September 30, 2001
27
resulting from a decrease in the average yield to 5.90% for the nine months
ended September 30, 2002, from 9.25% for the nine months ended September 30,
2001, partially offset by an increase of $89.5 million in the average balance of
this portfolio. The decrease in the average yield on consumer and other loans
was primarily the result of a decrease in the average yield on our home equity
loans, which are adjustable rate loans indexed to the prime rate, as previously
discussed.
Interest income on mortgage-backed securities decreased $65.7 million to $289.3
million for the nine months ended September 30, 2002, from $355.0 million for
the nine months ended September 30, 2001. This decrease was the result of a
$867.1 million decrease in the average balance of the portfolio, due to
principal repayments and sales as previously discussed, coupled with a decrease
in the average yield to 5.93% for the nine months ended September 30, 2002, from
6.42% for the nine months ended September 30, 2001. Interest income on other
securities decreased $30.6 million to $55.7 million for the nine months ended
September 30, 2002, from $86.3 million for the nine months ended September 30,
2001, resulting from a decrease of $530.8 million in the average balance of this
portfolio, primarily due to higher yielding securities being called throughout
2001 and 2002 as a result of the declining interest rate environment. As a
result of the decrease in the balance of higher yielding securities, the average
yield on other securities decreased to 6.80% for the nine months ended September
30, 2002, from 7.09% for the nine months ended September 30, 2001. Interest
income on federal funds sold and repurchase agreements decreased $14.4 million
as a result of a decrease in the average yield to 1.70% for the nine months
ended September 30, 2002, from 4.01% for the nine months ended September 30,
2001, slightly offset by an increase of $13.6 million in the average balance of
the portfolio. Despite strong loan originations and purchases, and the reduction
of borrowings, our cash flows from operations, loan and securities repayments
and deposit growth exceeded loan originations and purchases and other investment
purchases, resulting in the increase in the average balance of federal funds
sold and repurchase agreements for the nine months ended September 30, 2002
compared to the nine months ended September 30, 2001.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2002 decreased $50.3
million to $194.2 million, from $244.5 million for the three months ended
September 30, 2001. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 3.91% for the three months ended
September 30, 2002, from 4.76% for the three months ended September 30, 2001,
coupled with a $680.6 million decrease in the average balance of
interest-bearing liabilities to $19.86 billion for the three months ended
September 30, 2002, from $20.54 billion for the three months ended September 30,
2001. The decrease in the overall average cost of our interest-bearing
liabilities reflects the impact of the lower interest rate environment, which
has prevailed since June 2001, on the cost of our deposits. The decrease in the
average balance of interest-bearing liabilities was attributable to a decrease
in borrowings, due to the repayment of matured borrowings, partially offset by
an increase in deposits, which is consistent with our strategy of repositioning
the balance sheet.
Interest expense on deposits decreased $30.0 million, to $71.7 million for the
three months ended September 30, 2002, from $101.7 million for the three months
ended September 30, 2001, reflecting a decrease in the average cost of deposits
to 2.56% for the three months ended September 30, 2002, from 3.80% for the three
months ended September 30, 2001, partially offset by an increase of $517.9
million in the average balance of total deposits. The decrease
28
in the average cost of total deposits was driven by decreases in rates in all
deposit categories, primarily on our certificates of deposit and money market
accounts, as a result of the lower interest rate environment which has continued
into 2002. The increase in the average balance of total deposits was primarily
the result of increases in the average balances of savings and NOW accounts.
Interest expense on certificates of deposit decreased $16.1 million resulting
from a decrease in the average cost to 4.19% for the three months ended
September 30, 2002, from 5.39% for the three months ended September 30, 2001,
coupled with a decrease of $30.3 million in the average balance. The decrease in
the average cost of certificates of deposit was due to the effect of the lower
interest rate environment which has prevailed since 2001.
Interest expense on money market accounts decreased $8.8 million reflecting a
decrease in the average cost to 1.66% for the three months ended September 30,
2002, from 3.64% for the three months ended September 30, 2001, slightly offset
by an increase of $53.0 million in the average balance of such accounts.
Interest paid on money market accounts is on a tiered basis with 88.15% of the
balance at September 30, 2002 in the highest tier (accounts with balances of
$50,000 and higher). The yield on the highest tier is priced relative to the
discount rate for the three-month U.S. Treasury bill, which provides an
attractive short-term yield for our customers. The decrease in the average cost
of these deposits is reflective of the lower market interest rates in the third
quarter of 2002 compared to the third quarter of 2001.
Interest expense on savings accounts decreased $4.6 million which was
attributable to a decrease in the average cost to 1.13% for the three months
ended September 30, 2002, from 2.00% for the three months ended September 30,
2001, partially offset by an increase of $303.9 million in the average balance.
Interest expense on NOW accounts decreased $515,000 as a result of a decrease in
the average cost to 0.29% for the three months ended September 30, 2002, from
0.53% for the three months ended September 30, 2001, partially offset by an
increase of $191.3 million in the average balance. As previously discussed, the
decreases in the average costs of savings and NOW accounts are reflective of the
lower interest rate environment and the increases in the average balances are
consistent with our emphasis on deposit generation.
Interest expense on borrowed funds for the three months ended September 30, 2002
decreased $20.3 million to $122.5 million, from $142.8 million for three months
ended September 30, 2001, resulting from a decrease of $1.20 billion in the
average balance, coupled with a decrease in the average cost of borrowings to
5.66% for the three months ended September 30, 2002, from 5.80% for the three
months ended September 30, 2001. During the nine months ended September 30,
2002, $1.05 billion in borrowings with an average rate of 7.01% were repaid.
Interest expense for the nine months ended September 30, 2002 decreased $130.8
million to $607.8 million, from $738.6 million for the nine months ended
September 30, 2001. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 4.03% for the nine months ended
September 30, 2002, from 4.84% for the nine months ended September 30, 2001,
coupled with a $247.9 million decrease in the average balance of
interest-bearing liabilities to $20.11 billion for the nine months ended
September 30, 2002, from $20.36 billion for the nine months ended September 30,
2001. The decrease in the overall average cost of our interest-bearing
liabilities reflects the impact of the lower interest rate environment, which
has prevailed since 2001, on the cost of our deposits. The decrease in
29
the average balance of interest-bearing liabilities was attributable to a
decrease in borrowings, partially offset by an increase in deposits, which is
consistent with our strategy of repositioning the balance sheet.
Interest expense on deposits decreased $86.3 million, to $225.5 million for the
nine months ended September 30, 2002, from $311.8 million for the nine months
ended September 30, 2001, reflecting a decrease in the average cost of deposits
to 2.71% for the nine months ended September 30, 2002, from 3.99% for the nine
months ended September 30, 2001, partially offset by an increase of $676.5
million in the average balance of total deposits. The decrease in the average
cost of total deposits was driven by decreases in rates, primarily on our
certificates of deposit, money market and savings accounts, as a result of the
lower interest rate environment which has continued into 2002. The increase in
the average balance of total deposits was primarily the result of increases in
the average balances of savings, money market and NOW accounts.
Interest expense on certificates of deposit decreased $47.0 million resulting
from a decrease in the average cost to 4.37% for the nine months ended September
30, 2002, from 5.55% for the nine months ended September 30, 2001, coupled with
a decrease of $17.1 million in the average balance. The decrease in the average
cost of certificates of deposit was due to the effect of the lower interest rate
environment which has prevailed since 2001.
Interest expense on money market accounts decreased $25.2 million reflecting a
decrease in the average cost to 1.92% for the nine months ended September 30,
2002, from 4.22% for the nine months ended September 30, 2001, partially offset
by an increase of $250.9 million in the average balance of such accounts. The
decrease in the average cost of these deposits is reflective of the lower market
interest rates in the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001 as previously discussed.
Interest expense on savings accounts decreased $12.6 million which was
attributable to a decrease in the average cost to 1.20% for the nine months
ended September 30, 2002, from 2.00% for the nine months ended September 30,
2001, partially offset by an increase of $258.2 million in the average balance.
Interest expense on NOW accounts decreased $1.7 million as a result of a
decrease in the average cost to 0.28% for the nine months ended September 30,
2002, from 0.54% for the nine months ended September 30, 2001, partially offset
by an increase of $184.5 million in the average balance.
Interest expense on borrowed funds for the nine months ended September 30, 2002
decreased $44.4 million to $382.3 million, from $426.7 million for nine months
ended September 30, 2001, resulting from a decrease of $924.4 million in the
average balance, coupled with a decrease in the average cost of borrowings to
5.66% for the nine months ended September 30, 2002, from 5.73% for the nine
months ended September 30, 2001.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $301,000 for the three months ended September
30, 2002 compared to $1.0 million for the three months ended September 30, 2001.
For the nine months ended September 30, 2002, provision for loan losses totaled
$2.3 million compared to $3.0 million for the nine months ended September 30,
2001. The allowance for loan losses increased to $83.6 million at September 30,
2002, from $82.3 million at December 31, 2001. The increase in the allowance for
loan losses reflects the overall increase in our loan portfolio,
30
particularly increases in our multi-family and commercial real estate loan
portfolios, which generally involve greater credit risk than one-to-four family
mortgage loans. The decrease in the provision for loan losses for the three
months ended September 30, 2002 compared to the same period in 2001 is due to
our change in allowance coverage ratios which is reflective of our extremely low
level of historical charge-offs. Net loan charge-offs totaled $258,000 for the
three months ended September 30, 2002 compared to $372,000 for the three months
ended September 30, 2001. For the nine months ended September 30, 2002, net loan
charge-offs totaled $944,000 compared to $952,000 for the nine months ended
September 30, 2001. Non-performing loans decreased $4.8 million to $32.3 million
at September 30, 2002, from $37.1 million at December 31, 2001. The allowance
for loan losses as a percentage of non-performing loans increased to 259.20% at
September 30, 2002, from 221.70% at December 31, 2001 primarily due to the
decrease in non-performing loans from December 31, 2001 to September 30, 2002.
The allowance for loan losses as a percentage of total loans decreased slightly
to 0.67% at September 30, 2002, from 0.68% at December 31, 2001 due to the
increase in the loan portfolio. For further discussion of non-performing loans
and allowance for loan losses, see "Asset Quality."
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2002 increased
$10.1 million, or 37.5%, to $37.0 million, from $26.9 million for the three
months ended September 30, 2001 and increased $18.2 million, or 24.1%, to $93.4
million for the nine months ended September 30, 2002, from $75.2 million for the
nine months ended September 30, 2001. These increases in non-interest income
were primarily due to increases in net gain on sales of securities, customer
service fees and income from BOLI, partially offset by decreases in loan
servicing fees and other non-interest income.
Net gain on sales of securities totaled $8.5 million for the three and nine
month periods ended September 30, 2002. During September 2002, we sold
mortgage-backed securities with an amortized cost of $375.8 million. There were
no sales of securities in 2001. These gains were used as a hedge to offset most
of the increase in net amortization of mortgage servicing rights caused by a
valuation adjustment of $9.1 million, recorded in the 2002 third quarter.
Customer service fees increased $2.1 million to $15.6 million for the three
months ended September 30, 2002, from $13.5 million for the three months ended
September 30, 2001 and increased $6.8 million to $44.9 million for the nine
months ended September 30, 2002, from $38.1 for the nine months ended September
30, 2001. The increase in customer service fees was primarily attributable to an
increase in the number of NOW accounts, which was primarily due to an integrated
checking account promotion initiated in the second quarter of 2002 and continued
focus on our retail sales initiatives, including the introduction of our "PEAK
Process" in the first quarter of 2002.
Income from BOLI increased $1.6 million to $5.7 million for the three months
ended September 30, 2002, from $4.1 million for the three months ended September
30, 2001 and increased $3.3 million to $15.9 million for the nine months ended
September 30, 2002, from $12.6 million for the nine months ended September 30,
2001. As discussed previously, during the first quarter of 2002 we purchased an
additional $100.0 million of BOLI. Increases in the cash surrender value of BOLI
are recorded as income.
31
Loan servicing fees decreased $426,000 to $3.2 million for the three months
ended September 30, 2002, from $3.6 million for the three months ended September
30, 2001 and decreased $2.1 million to $9.5 million for the nine months ended
September 30, 2002, from $11.6 million for the nine months ended September 30,
2001. Loan servicing fees include all contractual and ancillary servicing
revenue we receive. The decrease in loan servicing fees was the result of a
decrease in the balance of loans serviced for others to $2.92 billion at
September 30, 2002, from $3.52 billion at September 30, 2001. The decrease in
the balance of loans serviced for others was the result of runoff in that
portfolio, due to repayments exceeding the level of new servicing volume from
loan sales.
Net gain on sales of loans increased $179,000 to $1.1 million for the three
months ended September 30, 2002, from $877,000 for the three months ended
September 30, 2001 and increased $1.3 million to $3.9 million for the nine
months ended September 30, 2002, from $2.6 million for the nine months ended
September 30, 2001. The increase in the net gain on sales of loans for the nine
months ended September 30, 2002 was primarily due to an increase in the volume
of fixed rate loans originated and sold into the secondary market during the
quarter ended March 31, 2002. Other loan fees increased during the three months
ended September 30, 2002 to $2.2 million compared to $1.6 million for the three
months ended September 30, 2001 and increased to $5.9 million for the nine
months ended September 30, 2002 compared to $4.6 million for the nine months
ended September 30, 2001.
Other non-interest income decreased $2.5 million to $729,000 for the three
months ended September 30, 2002, compared to $3.2 million for the three months
ended September 30, 2001. For the nine months ended September 30, 2002, other
non-interest income decreased $956,000 to $4.8 million, from $5.7 million for
the nine months ended September 30, 2001. The decrease for the three months
ended September 30, 2002 is due to income recognized in the 2001 third quarter
related to the dissolution of a trust account previously established for certain
former executives. For the nine months ended September 30, 2002, the decrease in
income was attributable to the income recognized in 2001 related to the
dissolution of the trust account, partially offset by income in the first
quarter of 2002 related to the sale of Prudential Financial, Inc. stock, which
was received as a result of the conversion of The Prudential Insurance Company
of America from a mutual company to a stock company, and income from an
investment in a limited partnership.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended September 30, 2002 was $63.5
million, an increase of $9.2 million from $54.3 million for the three months
ended September 30, 2001. For the nine months ended September 30, 2002,
non-interest expense increased $7.1 million to $173.2 million, from $166.1
million for the nine months ended September 30, 2001. These increases were
primarily due to increases in net amortization of mortgage servicing rights and
general and administrative expense, partially offset by the elimination of
goodwill amortization, effective January 1, 2002 upon adoption of SFAS No. 142,
which totaled $4.8 million for the three months ended September 30, 2001 and
$14.3 million for the nine months ended September 30, 2001, and a decrease in
goodwill litigation expense.
General and administrative expense increased $5.0 million to $48.4 million for
the three months ended September 30, 2002, from $43.4 million for the three
months ended September 30, 2001. For the nine months ended September 30, 2002,
general and administrative expense increased $13.7 million to $146.2 million,
from $132.5 million for the comparable 2001
32
period. These increases in general and administrative expense were primarily due
to increases in compensation and benefits expense and other expense.
Compensation and benefits expense increased $4.1 million to $26.6 million for
the three months ended September 30, 2002, from $22.5 million for the three
months ended September 30, 2001. For the nine months ended September 30, 2002,
compensation and benefits expense increased $11.0 million to $79.0 million, from
$68.0 million for the nine months ended September 30, 2001. The increases were
attributable to staff additions, primarily in our retail banking network, and
normal performance increases in salaries, coupled with an increase in net
employee benefit plan expense of $473,000 for the three months ended September
30, 2002 and $2.3 million for the nine months ended September 30, 2002 over the
comparable 2001 periods. Also included was an increase in ESOP expense of $1.4
million for the three months ended September 30, 2002 and $2.6 million for the
nine months ended September 30, 2002 over the comparable 2001 periods, which was
due to the increase in compensation, coupled with the higher average market
value of our common stock during the nine months ended September 30, 2002
compared to the nine months ended September 30, 2001.
Other expense increased $574,000 to $6.9 million for the three months ended
September 30, 2002, from $6.3 million for the three months ended September 30,
2001, and increased $3.3 million to $22.6 million for the nine months ended
September 30, 2002, from $19.3 million for the nine months ended September 30,
2001, primarily due to amortization and market value adjustments on $300.0
million notional amount of interest rate cap agreements. The interest rate cap
agreements were purchased primarily in the second half of 2001 as protection
against interest rate increases during the next several years as part of
management's interest rate risk strategy.
Advertising expense increased $267,000 to $997,000 for the three months ended
September 30, 2002, from $730,000 for the three months ended September 30, 2001.
For the nine months ended September 30, 2002, advertising expense decreased
$704,000 to $3.6 million, from $4.3 million for the nine months ended September
30, 2001, primarily due to our continued focus in 2002 on our sales and service
efforts and limited print advertising during the first quarter of 2002.
For the three months ended September 30, 2002, net amortization of mortgage
servicing rights increased $9.0 million to $11.8 million, from $2.8 million for
the three months ended September 30, 2001. For the nine months ended September
30, 2002, net amortization of mortgage servicing rights increased $9.1 million
to $16.9 million, from $7.8 million for the comparable 2001 period. These
increases in the net amortization of mortgage servicing rights were primarily
due to increases in the provision for the valuation allowance of mortgage
servicing rights, coupled with increases in the amortization of mortgage
servicing rights. For the three months ended September 30, 2002, we recorded a
provision of $9.1 million compared to a provision of $744,000 for the three
months ended September 30, 2001. This increase in the provision was coupled with
an increase of $615,000 in amortization expense to $2.7 million for the three
months ended September 30, 2002, from $2.1 million for the three months ended
September 30, 2001. For the nine months ended September 30, 2002, we recorded a
provision of $10.2 million compared to a provision of $1.4 million for the nine
months ended September 30, 2001. This increase in the provision was coupled with
an increase of $326,000 in amortization expense to $6.7 million for the nine
months ended September 30, 2002, from $6.4 million for the nine months ended
September 30, 2001. The increase in the provision for the valuation allowance of
mortgage servicing rights was related
33
to the current and forecasted lower interest rate environment and projected
accelerated loan prepayment speeds.
Goodwill litigation expense decreased $34,000 to $209,000 for the three months
ended September 30, 2002, from $243,000 for the three months ended September 30,
2001 and decreased $1.3 million to $769,000 for the nine months ended September
30, 2002, from $2.1 million for the nine months ended September 30, 2001,
reflecting the completion of discovery regarding our claims.
Our percentage of general and administrative expense to average assets was 0.88%
for the three and nine month periods ended September 30, 2002, compared to
0.77% for the three months ended September 30, 2001 and 0.79% for the nine
months ended September 30, 2001. The efficiency ratio was 32.74% for the three
months ended September 30, 2002 and 32.69% for the nine months ended September
30, 2002, compared to 30.72% for the three months ended September 30, 2001 and
30.74% for the nine months ended September 30, 2001. The increases in these
ratios were attributable to the increase in general and administrative expense
for the three and nine month periods ended September 30, 2002 compared to the
same periods in 2001 discussed previously.
INCOME TAX EXPENSE
For the three months ended September 30, 2002, income tax expense was $30.2
million, representing an effective tax rate of 32.7%, compared to $29.3 million,
representing an effective tax rate of 34.2%, for the three months ended
September 30, 2001. For the nine months ended September 30, 2002, income tax
expense was $93.3 million, representing an effective tax rate of 33.2%, as
compared to $91.5 million, representing an effective tax rate of 34.9%, for the
nine months ended September 30, 2001. The reduction in the effective tax rate
for the three and nine month periods ended September 30, 2002 was primarily due
to the adoption of SFAS No. 142, which eliminated the amortization of goodwill
which was not deductible for tax purposes.
ASSET QUALITY
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Through a variety of strategies, including, but not
limited to, aggressive collection efforts and marketing of foreclosed
properties, we have been proactive in addressing problem and non-performing
assets which, in turn, has helped to build the strength of our financial
condition. Such strategies, as well as our concentration on one-to-four family
mortgage lending, the maintenance of sound credit standards for new loan
originations, and a strong real estate market, have resulted in our maintaining
a very low level of non-performing assets in relation to both the size of our
loan portfolio and relative to our peers. Non-performing assets decreased to
$33.1 million at September 30, 2002, from $40.1 million at December 31, 2001.
The ratio of non-performing loans to total loans decreased to 0.26% at September
30, 2002, from 0.31% at December 31, 2001. The ratio of non-performing assets to
total assets decreased to 0.15% at September 30, 2002, from 0.18% at December
31, 2001.
34
DELINQUENT LOANS
The following table shows a comparison of delinquent loans at September 30, 2002
and December 31, 2001.
AT SEPTEMBER 30, 2002 AT DECEMBER 31, 2001
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------- --------------- ---------- ---------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
(Dollars in Thousands) LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
- ---------------------- ----- -------- ----- -------- ----- -------- ----- --------
Mortgage loans:
One-to-four family 8 $472 186 $27,800 20 $1,269 222 $31,991
Multi-family -- -- 4 2,472 1 84 5 1,860
Commercial real estate -- -- 1 773 5 1,395 4 1,752
Construction -- -- -- -- -- -- 1 522
Consumer and other loans 95 454 110 1,226 102 491 104 991
----- ------ ----- -------- ----- ------- ----- -------
Total delinquent loans 103 $926 301 $32,271 128 $3,239 336 $37,116
===== ====== ===== ======== ===== ======= ===== =======
Delinquent loans to total
loans 0.01% 0.26% 0.03% 0.31%
NON-PERFORMING ASSETS
The following table sets forth information regarding non-performing assets at
September 30, 2002 and December 31, 2001. In addition to the non-performing
loans, we had approximately $926,000 of potential problem loans at September 30,
2002 compared to $3.2 million at December 31, 2001. Such loans are 60-89 days
delinquent as shown above.
AT SEPTEMBER 30, AT DECEMBER 31,
(Dollars in Thousands) 2002 2001
---- ----
Non-accrual delinquent mortgage loans (1) ....... $29,936 $34,848
Non-accrual delinquent consumer and other loans . 1,226 991
Mortgage loans delinquent 90 days or more and
still accruing interest (2) ................ 1,109 1,277
------- -------
Total non-performing loans .............. 32,271 37,116
Real estate owned, net (3) ...................... 878 2,987
------- -------
Total non-performing assets ............. $33,149 $40,103
======= =======
Allowance for loan losses to non-performing loans 259.20% 221.70%
Allowance for loan losses to total loans ........ 0.67% 0.68%
(1) Consists primarily of loans secured by one-to-four family properties.
(2) Loans delinquent 90 days or more and still accruing interest consist
solely of loans delinquent 90 days or more as to their maturity date but
not their interest due, and are primarily secured by one-to-four family
properties.
(3) Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is recorded at the lower of cost or fair value, less estimated
selling costs.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of September 30, 2002, $9.2 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
35
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
$1.7 million for the nine months ended September 30, 2002 and $2.3 million for
the year ended December 31, 2001. This compares to actual payments recorded as
interest income, with respect to such loans, of $1.0 million for the nine months
ended September 30, 2002, and $1.8 million for the year ended December 31, 2001.
Excluded from non-performing assets are restructured loans that have complied
with the terms of their restructure agreement for a satisfactory period and
have, therefore, been returned to performing status. Restructured loans that are
in compliance with their restructured terms totaled $4.5 million at September
30, 2002 and $5.4 million at December 31, 2001.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the change in our allowance for loan losses for
the nine months ended September 30, 2002.
(In Thousands)
Balance at December 31, 2001 .. $ 82,285
Provision charged to operations 2,307
Charge-offs:
One-to-four family ......... (274)
Multi-family ............... (83)
Commercial ................. (268)
Construction ............... (281)
Consumer and other ......... (997)
--------
Total charge-offs ............. (1,903)
--------
Recoveries:
One-to-four family ......... 196
Multi-family ............... 83
Commercial ................. 257
Consumer and other ......... 423
--------
Total recoveries .............. 959
--------
Net charge-offs ............... (944)
--------
Balance at September 30, 2002 . $ 83,648
========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. Net interest income is the primary component of our net
income. Net interest income is the difference between the interest earned on our
loans, securities and other interest-earning assets and the interest expense
incurred on our deposits and borrowings. The yields, costs, and volumes of
loans, securities, deposits and borrowings are directly affected by the levels
of and changes in market interest rates. Additionally, changes in interest rates
also affect the related cash flows of our assets and liabilities as the option
to prepay assets or withdraw liabilities remains with our customers, in most
cases without penalty. The objective of our IRR management policy is to maintain
an appropriate mix and level of assets, liabilities and off-balance sheet items
to enable us to meet our growth and/or earnings objectives, while maintaining
specified minimum capital levels as required by the Office of Thrift
Supervision, or OTS, in the case of Astoria Federal, and as established by our
Board of Directors. We use a variety of analyses to monitor, control and adjust
our asset and liability positions, primarily interest rate sensitivity gap
analysis, or gap analysis, and Net Interest Income Sensitivity, or NII
Sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in
conformity
36
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 38, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at September 30, 2002 that we anticipate will reprice or mature in
each of the future time periods shown using certain assumptions based on our
historical experience and other market-based data available to us. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. Prepayment rates will vary
due to a number of factors, including the regional economy in the area where the
underlying collateral is located, seasonal factors, demographic variables and
the assumability of the underlying mortgages. However, the major factors
affecting mortgage prepayment rates are prevailing interest rates and related
mortgage refinancing opportunities.
The Gap Table does not indicate the impact of general interest rate movements on
our net interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates are
current trends and historical repricing experience with respect to similar
products. As a result, different assumptions may be used at different points in
time.
The Gap Table includes $5.69 billion of callable borrowings classified according
to their maturity dates, primarily in the one to three years category and the
more than five years category, which are callable within one year and at various
times thereafter. In addition, the Gap Table includes callable securities with
an amortized cost of $555.0 million classified according to their call dates, of
which $469.0 million are callable within one year and at various times
thereafter. As indicated in the Gap Table, our one-year cumulative gap at
September 30, 2002 was 25.36%. This compares to a one-year cumulative gap of
negative 0.34% at December 31, 2001. The increase in our one-year cumulative gap
is primarily attributable to a significant increase in mortgage loan and
mortgage-backed securities repayment assumptions, which reflect the significant
increase in refinance activity we have experienced in the 2002 third quarter,
coupled with the classification of callable securities according to their call
dates, which is consistent with our actual experience with these types of
securities in the 2002 third quarter. If interest rates begin rising and
repayments slow, the anticipated maturities of our mortgage loans and
mortgage-backed securities would extend and our one-year cumulative gap should
become less positive.
37
AT SEPTEMBER 30, 2002
------------------------------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR THREE YEARS
ONE YEAR TO TO MORE THAN
(Dollars in Thousands) OR LESS THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- ---------------------- ------------ ------------ ------------ ------------ -------------
Interest-earning assets:
Mortgage loans (1) $ 4,826,238 $ 2,985,508 $ 2,808,774 $ 1,373,618 $ 11,994,138
Consumer and other loans (1) 318,545 28,834 -- -- 347,379
Federal funds sold and
repurchase agreements 843,883 -- -- -- 843,883
Mortgage-backed and other
securities available-for-sale and
FHLB stock 2,401,263 193,087 259,796 274,075 3,128,221
Mortgage-backed and other securities
held-to-maturity 2,908,327 720,770 401,156 422,828 4,453,081
------------ ------------ ------------ ------------ -------------
Total interest-earning assets 11,298,256 3,928,199 3,469,726 2,070,521 20,766,702
Net unamortized purchase premiums
and deferred costs (2) 54,738 24,748 21,045 11,981 112,512
------------ ------------ ------------ ------------ -------------
Net interest-earning assets 11,352,994 3,952,947 3,490,771 2,082,502 20,879,214
------------ ------------ ------------ ------------ -------------
Interest-bearing liabilities:
Savings 155,124 310,247 310,247 2,042,460 2,818,078
Money market 1,637,699 18,859 18,859 141,442 1,816,859
NOW 35,806 71,610 71,610 1,127,152 1,306,178
Certificates of deposit 2,370,038 1,902,548 897,902 68,975 5,239,463
Borrowed funds 1,600,450 4,665,000 104,000 2,279,203 8,648,653
------------ ------------ ------------ ------------ -------------
Total interest-bearing liabilities 5,799,117 6,968,264 1,402,618 5,659,232 19,829,231
------------ ------------ ------------ ------------ -------------
Interest sensitivity gap 5,553,877 (3,015,317) 2,088,153 (3,576,730) $ 1,049,983
============ ============ ============ ============ =============
Cumulative interest sensitivity gap $ 5,553,877 $ 2,538,560 $ 4,626,713 $ 1,049,983
============ ============ ============ ============
Cumulative interest sensitivity
gap as a percentage of total assets 25.36% 11.59% 21.12% 4.79%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 195.77% 119.88% 132.65% 105.30%
(1) Mortgage loans and consumer and other loans include loans held-for-sale
and exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
NII SENSITIVITY ANALYSIS
In managing IRR, we also use an internal income simulation model for our NII
Sensitivity analyses. These analyses measure changes in projected net interest
income over various time periods resulting from hypothetical changes in interest
rates. The interest rate scenarios most commonly analyzed reflect gradual and
reasonable changes over a specified time period, which is typically one year.
The base net interest income projection utilizes similar assumptions as those
reflected in the Gap Table, assumes that cash flows are reinvested in similar
assets and liabilities and that interest rates as of the reporting date remain
constant over the projection period. For each alternative interest rate
scenario, corresponding changes in the cash flow and repricing assumptions of
each financial instrument are made to determine the impact on net interest
income.
Assuming the entire yield curve was to increase 200 basis points, through
quarterly parallel increments of 50 basis points, and remain at that level
thereafter, our projected net interest income for the twelve month period
beginning October 1, 2002 would increase by
38
approximately 1.24% from the base projection. At December 31, 2001, in the up
200 basis point scenario, our projected net interest income for the twelve month
period beginning January 1, 2002 would have increased by approximately 0.85%
from the base projection. The current low interest rate environment prevents us
from performing an income simulation for a decline in interest rates of the same
magnitude and timing as our rising interest rate simulation, since certain asset
yields, liability costs, and related indexes are below 2.00%. However, assuming
the entire yield curve was to decrease 100 basis points, through quarterly
parallel decrements of 25 basis points, and remain at that level thereafter, our
projected net interest income for the twelve month period beginning October 1,
2002 would decrease by approximately 0.42% from the base projection. At December
31, 2001, in the down 100 basis point scenario, our projected net interest
income for the twelve month period beginning January 1, 2002 would have
decreased by approximately 0.10% from the base projection.
During the prevailing interest rate environment of the past two years, which has
been characterized by significant declines in market interest rates, we have
experienced very high levels of loan and mortgage-backed securities prepayments.
During the third quarter of 2002, market interest rates continued to decline,
resulting in a further acceleration of loan and mortgage-backed securities
prepayments. Although we have continued to reprice our interest-bearing
liabilities during this time, we have not been able to do so to the same degree
as our interest-earning assets. Given our current volume and mix of
interest-bearing liabilities and interest-earning assets, if market interest
rates remain at their present levels for a prolonged period of time or decline
further, the cash flows from continued high levels of prepayments would be
reinvested at lower yields while our cost of funds would remain relatively flat,
resulting in an adverse impact on our results of operations.
Various shortcomings are inherent in both the Gap Table and NII Sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII Sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from this analysis. These include, but are not limited to, BOLI, MSR, defined
benefit pension costs and the mark to market adjustments on certain derivative
instruments, specifically our interest rate caps.
ITEM 4. CONTROLS AND PROCEDURES
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, as of November 4, 2002.
Based upon their evaluation, they each found that our disclosure controls and
procedures were adequate to ensure that information required to be disclosed in
the reports we file and submit under the Exchange Act is recorded, processed,
summarized and reported as and when required.
39
There were no significant changes in our disclosure controls and procedures or
internal controls for financial reporting or other factors that could
significantly affect those controls subsequent to November 4, 2002, and we
identified no significant deficiencies or material weaknesses requiring
corrective action with respect to such controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the litigation entitled Ronnie Weil also known as Ronnie Moore,
for Herself and on behalf of All Other Persons Who Obtained Mortgage Loans from
The Long Island Savings Bank, FSB during the period January 1, 1983 through
December 31, 1992 vs. The Long Island Savings Bank, FSB, et al., which is
pending in the United States District Court for the Eastern District of New
York, the Court on September 26, 2002 entered an order approving the claims
administrator's final report regarding claims submitted by class members through
June 30, 2002. As a result, we made a final payment of $700,000, in accordance
with the terms of the Stipulation of Settlement entered into on November 7,
2001, such funds to be distributed by the claims administrator to class members
in settlement of all remaining claims with respect to this matter.
For additional discussion of Legal Proceedings, see our Annual Report on Form
10-K for the year ended December 31, 2001, Item 3, Legal Proceedings, and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Part II,
Item 1, Legal Proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
11 Statement Regarding Computation of Per Share Earnings.
99.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
40
99.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
1. Report on Form 8-K dated August 12, 2002 which includes under Item 9
of Form 8-K "Statements Under Oath of Principal Executive Officer
and Principal Financial Officer Regarding Facts and Circumstances
Relating to Exchange Act Filings," executed by George L. Engelke,
Jr., Chief Executive Officer, and Monte N. Redman, Chief Financial
Officer. This report has been furnished but not filed pursuant to
Regulation FD.
2. Report on Form 8-K dated August 16, 2002 which includes under Item 9
of Form 8-K a written presentation of financial results and trends
through the period ended June 30, 2002. This report has been
furnished but not filed pursuant to Regulation FD.
3. Report on Form 8-K dated September 10, 2002 which includes under
Item 9 of Form 8-K a press release dated September 10, 2002
announcing revised earnings estimates for the quarter ended
September 30, 2002 and the full year 2002. This report has been
furnished but not filed pursuant to Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: November 12, 2002 By: /s/ Monte N. Redman
-------------------------- -------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
41
CERTIFICATIONS
I, George L. Engelke, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astoria Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
42
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 5, 2002
/S/ George L. Engelke, Jr.
- ------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Astoria Financial Corporation
I, Monte N. Redman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astoria Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and
43
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 5, 2002
/S/ Monte N. Redman
- --------------------------------------------
Monte N. Redman
Executive Vice President and Chief Financial Officer
Astoria Financial Corporation
44
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11 Statement Regarding Computation of Per Share Earnings.
99.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
99.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
45