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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3170868
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE ASTORIA FEDERAL PLAZA, LAKE SUCCESS, NEW YORK 11042
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(516) 327-3000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT):
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE NEW YORK
$.01 PER SHARE, AND RELATED STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS
(SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT): NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 28, 2002, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.76 billion. The number of shares of the registrant's Common
Stock outstanding as of March 13, 2003 was 83,095,757 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 8, 2003, in connection
with the Annual Meeting of Stockholders to be held on May 21, 2003 and any
adjournment thereof, which is expected to be filed with the Securities and
Exchange Commission on or about April 8, 2003, are incorporated by reference
into Part III.
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ASTORIA FINANCIAL CORPORATION
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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Part I
Item 1. Business.......................................................................... 2
Item 2. Properties........................................................................ 31
Item 3. Legal Proceedings................................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............................... 31
Part II
Item 5. Market for Astoria Financial Corporation's Common
Equity and Related Stockholder Matters.......................................... 32
Item 6. Selected Financial Data........................................................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 60
Item 8. Financial Statements and Supplementary Data....................................... 63
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 63
Part III
Item 10. Directors and Executive Officers of Astoria Financial Corporation................. 64
Item 11. Executive Compensation............................................................ 64
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................. 64
Item 13. Certain Relationships and Related Transactions.................................... 64
Item 14. Controls and Procedures........................................................... 64
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................................ 65
SIGNATURES..................................................................................... 66
CERTIFICATIONS................................................................................. 68
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These statements may be identified by the use of
the words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "outlook," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors 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;
- legislative or regulatory changes may adversely affect our
business;
- technological changes may be more difficult or expensive than
we anticipate; or
- success or consummation of new business initiatives may be
more difficult or expensive than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, including Astoria Federal Savings
and Loan Association and its subsidiaries, Astoria Capital Trust I and AF
Insurance Agency, Inc.
ITEM 1. BUSINESS
GENERAL
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and
coordinating the business activities of Astoria Federal, we invest primarily in
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. We have acquired, and may continue to acquire or organize
either directly or indirectly through Astoria Federal, other operating
subsidiaries including other financial institutions. We continue to evaluate
merger and acquisition activity as part of our strategic objective for long term
growth.
Astoria Federal's primary business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, principal repayments on loans and securities and borrowed funds,
primarily in one-to-four family mortgage loans, mortgage-backed securities,
multi-family mortgage loans and commercial real estate loans. To a 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. Non-interest income
includes customer service fees; other loan fees; net gain on sales of
securities; mortgage banking income, net; income from bank owned life insurance,
or BOLI; and other non-interest income. General and administrative expense
consists of compensation and benefits, occupancy, equipment and systems expense,
federal deposit insurance premiums, advertising and other operating expenses.
Other non-interest expense consists of extinguishment of debt 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.
As a premier community bank our focus has been to originate mortgage loans, with
the goal of increasing our loan portfolio balances, and to increase our customer
deposit balances. We have been successful in achieving these goals over the past
several years. Total loans receivable increased $1.77 billion, or 17.2%, to
$12.06 billion at December 31, 2002, from $10.29 billion at December 31, 1999,
while total deposits increased $1.52 billion, or 15.8%, to $11.07 billion at
December 31, 2002, from $9.55 billion at December 31, 1999. In addition to our
focus on loan and deposit growth, we had implemented a strategy over the past
several years to reposition our balance sheet through decreases in our
securities portfolio and our borrowings. We have been successful in achieving
these goals as well. Total securities decreased $2.93 billion, or 27.2%, to
$7.83 billion at December 31, 2002, from $10.76 billion at December 31, 1999 and
total borrowings decreased $2.70 billion, or 23.5%, to $8.82 billion at December
31, 2002, from $11.52 billion at December 31, 1999.
2
With interest rates at historic lows, the level of mortgage loan refinance and
prepayment activity outpaced our origination activity in 2002. Despite record
mortgage loan originations and purchases, which totaled $5.59 billion in 2002,
including originations of loans held-for-sale totaling $484.3 million, the
increased cash flow we experienced resulted in a $107.9 million decrease in our
loan portfolio from December 31, 2001 to December 31, 2002. This pattern of
repayment activity was also reflected in our securities portfolio. We
significantly increased our purchases of mortgage-backed securities in order to
effectively redeploy our securities cash flows and excess mortgage cash flows.
During 2002, we purchased $6.84 billion of mortgage-backed securities, resulting
in a $305.5 million increase in our mortgage-backed securities portfolio from
December 31, 2001 to December 31, 2002. If the existing low interest rate
environment and extraordinarily high levels of cash flows continue throughout
2003, we may see a further reduction in our one-to-four family mortgage loan
portfolio, and will, in all likelihood, continue to purchase mortgage-backed
securities, resulting in additional growth of our mortgage-backed securities
portfolio. We hope to counter some of the potential reduction in our one-to-four
family loan portfolio through an increase in our originations of multi-family
and commercial real estate loans. These loans typically contain significant
prepayment penalties and, therefore, are less likely to prepay than our
one-to-four family mortgage loans. When interest rates begin to stabilize and/or
increase and prepayment activity subsides, we would expect our ability to resume
significant growth in our mortgage loan portfolio to be greatly enhanced.
Additional factors affecting our ability to resume this growth include the
strength of the housing market, the level of new housing construction and
general economic conditions.
Total deposits increased to $11.07 billion at December 31, 2002 from $10.90
billion at December 31, 2001 and total borrowings decreased to $8.82 billion at
December 31, 2002 from $9.82 billion at December 31, 2001. While we will
continue to focus on attracting and retaining deposits through marketing, new
products, quality service and long-standing customer relationships, we have
experienced increased competition for deposits, particularly money market and
checking accounts, from certain local competitors, as well as recent entrants
into the local market, who have offered these accounts at well above market
rates. We have not increased the rates we offer on these types of accounts as we
do not consider it a cost effective strategy in the current low interest rate
environment. However, in this low interest rate environment, borrowings offer a
low cost alternative to deposit generation as a funding source. As a result, we
may consider future increases in our borrowings to fund asset growth.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and property and casualty insurance agency. Through contractual
agreements with various third party marketing organizations, AF Insurance
Agency, Inc. provides insurance products to the customers of Astoria Federal.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million aggregate liquidation amount of 9.75% Capital Securities due November 1,
2029, or Capital Securities, which are prepayable at our option on or after
November 1, 2009.
AVAILABLE INFORMATION
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at http://www.sec.gov.
3
LENDING ACTIVITIES
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2002, our loan portfolio totaled $12.06 billion, or 55.6% of total assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Loan originations totaled
$5.59 billion, including originations of loans held-for-sale totaling $484.3
million, for the year ended December 31, 2002 and $4.56 billion, including
originations of loans held-for-sale totaling $405.7 million, for the year ended
December 31, 2001. Our retail loan origination program accounted for $2.22
billion of originations during 2002 and $1.30 billion of originations during
2001. We have an extensive broker network in fifteen states: New York, New
Jersey, Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio,
Virginia, North Carolina, South Carolina, Georgia, Illinois, California and
Florida. Our broker loan origination program consists of relationships with
mortgage brokers and accounted for $1.84 billion of originations during 2002 and
$1.83 billion of originations during 2001. Our third party loan origination
program includes relationships with other financial institutions and mortgage
bankers in forty-four states and accounted for $1.53 billion of originations
during 2002 and $1.43 billion of originations during 2001. See the "Loan
Portfolio Composition" table on page 25 and the "Loan Maturity, Repricing and
Activity" tables on pages 26 and 27.
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment by
the borrower. We also offer second mortgage loans which are underwritten
according to the same standards as first mortgage loans, although we have
originated only a limited number of such loans.
At December 31, 2002, $9.21 billion, or 76.9%, of our total loan portfolio
consisted of one-to-four family loans, of which $7.77 billion, or 84.4%, were
adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists
primarily of hybrid ARM loans. We currently offer ARM loans which initially have
a fixed rate for one, three, five, seven or ten years and convert into one year
ARM loans at the end of the initial fixed rate period. The one, three, five and
seven year ARM loans have terms of up to forty years and the ten year ARM loans
have terms of up to thirty years. ARM loans may carry, for a period of time, an
initial interest rate which is less than the fully indexed rate for the loan at
the time of origination. We determine the initial discounted rate in accordance
with market and competitive factors. However, in the current low interest rate
environment, we generally have not been offering our ARM loans at interest rates
below the fully indexed rate. All ARM loans we offer have annual and lifetime
interest rate ceilings and floors. Generally, ARM loans pose credit risks
somewhat greater than the risks posed by fixed rate loans primarily because, as
interest rates rise, the underlying payments of the borrower rise, increasing
the potential for default. To recognize the credit risks associated with ARM
loans initially offered below their fully-indexed rates, we generally underwrite
our one-year ARM loans assuming a rate equal to 200 basis points over the
initial discounted rate, but not less than 7.00%. For ARM loans with longer
adjustment periods, and therefore less credit risk due to the longer period for
the borrower's income to adjust to anticipated higher future payments, we
underwrite the loans using the initial rate, which may be a discounted rate. We
use the same underwriting standards for our retail, broker and third party
mortgage loan originations.
4
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors with either servicing retained or released. Generally, the sale of
such loans is arranged through a master commitment either on a mandatory
delivery or best efforts basis. At December 31, 2002, loans serviced for others
totaled $2.67 billion.
One-to-four family loan originations and purchases, including originations of
loans held-for-sale, increased $590.4 million to $4.53 billion in 2002, from
$3.94 billion in 2001. This increase was primarily the result of the significant
increase in mortgage refinance activity due to the continued decline in interest
rates.
Multi-Family and Commercial Real Estate Lending
As of December 31, 2002, our total loan portfolio contained $1.60 billion, or
13.4%, of multi-family loans and $744.6 million, or 6.2%, of commercial real
estate loans. Over the last few years we have increased our emphasis on
multi-family and commercial real estate lending. During 2002, we originated
$1.01 billion of multi-family, commercial real estate and mixed use loans
compared to $591.8 million in 2001. Mixed use loans are secured by properties
which are intended for both residential and business use and are classified as
multi-family or commercial real estate based on the greater number of
residential versus commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans generally are
provided as five to fifteen year term balloon loans amortized over fifteen to
thirty years. Our policy generally has been to originate multi-family and
commercial real estate loans in the New York metropolitan area. In making such
loans, we primarily consider the ability of the net operating income generated
by the real estate to support the debt service, the financial resources, income
level and managerial expertise of the borrower, the marketability of the
property and our lending experience with the borrower. Our current practice is
to require a minimum debt service coverage ratio of 1.20 times for multi-family
and commercial real estate loans. Additionally, on multi-family and commercial
real estate loans, our current practice is to finance up to 75% of the lesser of
the purchase price or appraised value of the property securing the loan on
purchases and up to 70% of the appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
forty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2002, our single largest multi-family loan
had an outstanding balance of $9.4 million, was current and secured by a
364-unit apartment complex located in Staten Island, New York. At December 31,
2002, the average balance of loans in our multi-family portfolio was
approximately $600,000.
Commercial real estate loans typically are secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2002, our single largest commercial real estate loan had an
outstanding principal balance of $8.6 million, was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2002, the
average balance of loans in our commercial real estate portfolio was
approximately $900,000.
Multi-family and commercial real estate loans generally involve a greater degree
of credit risk than one-to-four family loans because they typically have larger
balances and are more affected by adverse conditions in the economy. As such,
these loans require more ongoing evaluation and monitoring.
5
Because payments on loans secured by multi-family properties and commercial real
estate often depend upon the successful operation and management of the
properties and the businesses which operate from within them, repayment of such
loans may be affected by factors outside the borrower's control, such as adverse
conditions in the real estate market or the economy or changes in government
regulation.
Construction Loans
As of December 31, 2002, $56.5 million, or 0.5%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Generally, we offer
construction loans up to a maximum of $10.0 million. Construction lending
generally involves additional credit risks to the lender as compared with other
types of mortgage lending. These credit risks are attributable to the fact that
loan funds are advanced upon the security of the project under construction,
predicated on the present value of the property and the anticipated future value
of the property upon completion of construction or development. Construction
loans are funded monthly and monitored by a professional construction engineer
and our commercial real estate lending department.
Consumer and Other Loans
At December 31, 2002, $372.6 million, or 3.1%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity lines of credit, are offered primarily on a fixed rate,
short-term basis. The underwriting standards we employ for consumer loans
include a determination of the borrower's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness. In addition to the credit worthiness of the borrower, the
underwriting process also includes a review of the value of the collateral, if
any, in relation to the proposed loan amount. Our consumer loans tend to have
higher interest rates, shorter maturities and are considered to entail a greater
risk of default than one-to-four family mortgage loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 80% of the appraised value
of the property. Such lines of credit are underwritten based upon our internal
guidelines in order to evaluate the borrower's ability and willingness to repay
the debt.
Included in consumer and other loans were $22.6 million of commercial business
loans at December 31, 2002. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for loans in excess of $10.0 million, mortgage loan approval authority
has been delegated by the Board of Directors to our underwriters and Loan
Committee, which consists of certain members of executive management and other
Astoria Federal officers.
Upon receipt of a completed application from a prospective borrower, for
mortgage loans secured by one-to-four family properties, we generally order a
credit report, verify income and other information and, if necessary, obtain
additional financial or credit related information. An appraisal of the real
estate used for collateral is also obtained. For mortgage loans secured by
multi-family properties and commercial real estate, appraisals are obtained as
part of the final underwriting process. All appraisals are performed by licensed
or certified appraisers. Most appraisals are performed by licensed independent
third party appraisers. The Board of Directors annually reviews and approves our
appraisal policy.
6
ASSET QUALITY
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, the maintenance of sound credit standards for new loan originations and
a strong real estate market have resulted in our maintaining a very low level of
non-performing assets. Through a variety of strategies, including, but not
limited to, early intervention on delinquent loans, borrower workout
arrangements and aggressive 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.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent
primarily on employment and other sources of income, which in turn is impacted
by general economic conditions, although other factors, such as unanticipated
expenditures or changes in the financial markets may also impact a borrower's
ability to pay. Collateral values, particularly real estate values, are also
impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
Non-performing Assets
Non-performing assets include non-accrual loans, loans delinquent 90 days or
more and still accruing interest and real estate owned, or REO. Total
non-performing assets decreased to $35.6 million at December 31, 2002, from
$40.1 million at December 31, 2001. Non-performing loans, the most significant
component of non-performing assets, decreased $2.6 million to $34.5 million at
December 31, 2002, from $37.1 million at December 31, 2001. The ratio of
non-performing loans to total loans decreased to 0.29% at December 31, 2002,
from 0.31% at December 31, 2001. Our ratio of non-performing assets to total
assets was 0.16% at December 31, 2002, compared to 0.l8% at December 31, 2001.
The allowance for loan losses as a percentage of total non-performing loans was
242.04% at December 31, 2002, compared to 221.70% at December 31, 2001. For a
further discussion of the allowance for loan losses and non-performing assets
and loans, see Item 7, "Management's Discussion and Analysis," or "MD&A."
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in most instances the borrower has only missed
two payments. In addition, we reverse all previously accrued and uncollected
interest through a charge to interest income. While loans are in non-accrual
status, interest due is monitored and income is recognized only to the extent
cash is received until a return to accrual status is warranted. In some
circumstances we continue to accrue interest on loans delinquent 90 days or more
as to their maturity date but not their interest due. In general, 90 days prior
to a loan's maturity, the borrower is reminded of the maturity date. Where the
borrower has continued to make monthly payments to us and where we do not have a
reason to believe that any loss will be incurred on the loan, we have treated
these loans as current and have continued to accrue interest. Such loans consist
primarily of one-to-four family mortgage loans and totaled $1.0 million at
December 31, 2002 and $1.3 million at December 31, 2001.
Real Estate Owned
The net carrying value of our REO totaled $1.1 million at December 31, 2002 and
consisted of one-to-four family properties. The REO balance decreased $1.9
million, from $3.0 million at December 31, 2001. REO is carried net of all
allowances for losses at the lower of cost or fair value less estimated selling
costs. See the table on page 57 for further detail on our REO.
7
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our classified assets.
Federal regulations and our policy require the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as "special mention," "substandard," "doubtful" or "loss" assets. An asset
classified as special mention has potential weaknesses, which, if uncorrected,
may result in the deterioration of the repayment prospects or in the
institution's credit position at some future date. An asset classified as
substandard is inadequately protected by the current net worth and paying
capacity of the obligor or the collateral pledged, if any. Substandard assets
include those characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all of the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses present make
collection or liquidation in full satisfaction of the loan amount, on the basis
of currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of
such little value that their continuance as assets without the establishment of
a specific loss reserve is not warranted. Those assets classified as
substandard, doubtful or loss are considered adversely classified. See the table
on page 57 for additional information on our classified assets.
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the estimated fair value.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2002, net of
their related allowance for loan losses of $1.6 million, totaled $15.0 million.
Interest income recognized on impaired loans amounted to $1.3 million for the
year ended December 31, 2002. For further detail on our impaired loans, see Note
4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies," in Item 7, "MD&A."
In addition to the requirements of accounting principles generally accepted in
the United States of America, or GAAP, related to loss contingencies, a
federally chartered savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other
federal banking agencies, provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of valuation allowances. It is required that all
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institutions have effective systems and controls to identify, monitor and
address asset quality problems, analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner and establish acceptable
allowance evaluation processes that meet the objectives of the federal
regulatory agencies. While we believe that the allowance for loan losses has
been established and maintained at adequate levels, future adjustments may be
necessary if economic or other conditions differ substantially from the
conditions used in making the initial determinations. In addition, there can be
no assurance that the OTS or other regulators, as a result of reviewing our loan
portfolio and/or allowance, will not request us to alter our allowance for loan
losses, thereby affecting our financial condition and earnings.
INVESTMENT ACTIVITIES
General
Our investment policy is designed primarily to complement our lending
activities, to generate a favorable return without incurring undue interest rate
and credit risk, to enable us to manage the interest rate sensitivity of our
overall assets and liabilities and to provide and maintain liquidity, primarily
through cash flow. In establishing our investment strategies, we consider our
business and growth plans, the economic environment, our interest rate
sensitivity position, the types of securities held and other factors. At
December 31, 2002, our portfolio of mortgage-backed and other securities totaled
$7.83 billion, or 36.1% of total assets.
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, including collateralized mortgage
obligations, or CMOs, and real estate mortgage investment conduits, or REMICs,
certain certificates of deposit of insured banks and federally chartered savings
associations, certain bankers acceptances and, subject to certain limits,
corporate securities, commercial paper and mutual funds.
Our investment policy also permits us to invest in certain derivative financial
instruments. We do not use derivatives for trading purposes. See Note 1 and Note
11 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data," for further discussion of such derivative
financial instruments.
Securities
As previously mentioned, we utilize mortgage-backed and other securities
purchases as a complement to our mortgage lending activities. Purchases during
2002 consisted primarily of CMO and REMIC agency and non-agency securities which
provide liquidity, collateral for borrowings and minimal credit risk while
providing appropriate returns. At December 31, 2002, we had $7.11 billion in
REMIC and CMO mortgage-backed securities, or 32.7% of total assets, of which
96.9% had fixed rates. Of the REMIC and CMO securities portfolio, $4.21 billion,
or 59.3%, are insured or guaranteed, either directly or indirectly, by Fannie
Mae, or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, or the
Government National Mortgage Association, or GNMA, as issuer. The balance of
this portfolio is comprised of privately issued securities, substantially all of
which have a credit rating of AAA. Our fixed rate REMIC and CMO securities had
coupon rates ranging from 4.50% to 7.00% and a weighted average yield of 5.00%
at December 31, 2002. Our adjustable rate REMIC and CMO securities, a majority
of which are indexed to the one-month LIBOR, had coupon rates ranging from 2.38%
to 6.98% and a weighted average yield of 2.87% at December 31, 2002. During the
year ended December 31, 2002, we purchased $6.84 billion of REMIC and CMO
securities as a result of our redeployment of our cash flows in excess of our
mortgage and other loan fundings. We believe these securities represent
attractive and limited risk alternatives to other investments due to the wide
variety of maturity and repayment options available. In addition, at December
31, 2002, we had $274.0 million, or 1.3% of total assets, in mortgage-backed
pass-through certificates insured or guaranteed by either FNMA, FHLMC or GNMA.
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Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, mortgage-backed securities issued or guaranteed by FNMA,
FHLMC or GNMA, are weighted at no more than 20% for OTS risk-based capital
purposes, compared to the 50% risk weighting assigned to most non-securitized
one-to-four family mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, they, along with whole loans, remain subject to the risk of a
fluctuating interest rate environment. Changes in interest rates affect both the
prepayment rate and estimated market value of mortgage-backed securities and
mortgage loans.
The other securities portfolio totaled $454.3 million, or 2.1% of total assets,
and consisted of obligations of the U.S. Government and agencies, obligations of
state and political subdivisions and equity and corporate debt securities.
Included in the other securities portfolio are various securities, which, by
their terms, may be called by the issuer, typically after the passage of a fixed
period of time. As of December 31, 2002, the amortized cost of such callable
securities totaled $397.6 million. Securities called during the year ended
December 31, 2002 totaled $569.2 million.
At December 31, 2002, our securities available-for-sale totaled $2.79 billion
and our securities held-to-maturity totaled $5.04 billion. For a further
discussion of our securities portfolio, see the tables on pages 28 and 29, Item
7, "MD&A" and Note 3 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data."
As a member of the Federal Home Loan Bank of New York, or FHLB-NY, Astoria
Federal is required to maintain a specified investment in the capital stock of
the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System."
Federal Funds Sold and Repurchase Agreements
We invest in various money market instruments, including overnight and term
federal funds and repurchase agreements (securities purchased under agreements
to resell). Money market instruments are used to invest our available funds
resulting from cash flow and to help satisfy liquidity needs. For a further
discussion of our federal funds sold and repurchase agreements, see Item 7,
"MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
SOURCES OF FUNDS
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, NOW accounts, money
market accounts, demand deposit accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on marketing, new products, quality service and long-standing customer
relationships to attract and retain these deposits. During the year ended
December 31, 2002, we initiated our "PEAK Process," an
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interactive, disciplined sales and service approach, in the first quarter and an
integrated checking account promotion in the second quarter. Brokered deposits
are used occasionally to supplement retail customer deposits in raising funds
for financing and liquidity purposes. At December 31, 2002, our deposits totaled
$11.07 billion. Of the total deposit balance, $1.44 billion, or 13.0%, represent
Individual Retirement Accounts. We held no brokered deposits at December 31,
2002.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a strong level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 53.4% of total deposits at December 31, 2002 and 52.7% of total
deposits at December 31, 2001.
For a further discussion of our deposits, see the tables on pages 30 and 31,
Item 7, "MD&A" and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
Borrowings
We enter into reverse repurchase agreements (securities sold under agreements to
repurchase) with nationally recognized primary securities dealers and the
FHLB-NY. Reverse repurchase agreements are accounted for as borrowings and are
secured by the securities sold under the agreements. We also obtain advances
from the FHLB-NY which are generally secured by a blanket lien against, among
other things, our one-to-four family mortgage loan portfolio and our investment
in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will advance,
for purposes other than for meeting withdrawals, fluctuates from time to time in
accordance with the policies of the FHLB-NY. See "Regulation and Supervision -
Federal Home Loan Bank System." Occasionally, we will obtain funds through the
issuance of unsecured debt obligations. These obligations are classified as
other borrowings in our statement of financial condition.
In addition, at December 31, 2002, we had available a 12-month commitment for
overnight and one month lines of credit with the FHLB-NY totaling $100.0
million. Both lines of credit are priced at the federal funds rate plus 10.0
basis points and reprice daily. Effective January 2003, both lines of credit are
priced at the federal funds rate plus 5.0 basis points and reprice daily.
During the year ended December 31, 2002, as part of our interest rate risk
management strategy as well as part of our strategy to reposition our
liabilities, we decreased our borrowings by $1.00 billion, or 10.2%, to $8.82
billion at December 31, 2002, from $9.82 billion at December 31, 2001. Included
in our borrowings are various obligations which, by their terms, may be called
by the securities dealers and the FHLB-NY. At December 31, 2002, we had $5.94
billion of borrowings which are callable within one year and at various times
thereafter and have contractual maturities of up to six years.
For a further discussion of our borrowings, see Item 7, "MD&A" and Note 8 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and
growing our mutual fund, deferred annuities and insurance sales. Our mutual
fund, deferred annuities and insurance sales are operated out of our
wholly-owned subsidiaries. See "Subsidiary Activities."
MARKET AREA AND COMPETITION
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our
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retail banking network includes multiple delivery channels including full
service banking offices, automated teller machines, or ATMs, and telephone and
internet banking capabilities. We consider our strong retail banking network,
together with our reputation for financial strength and customer service, as our
major competitive advantage in attracting and retaining customers in our market
areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. Astoria Federal ranked third in deposit market share, with an
8.9% market share, in the Long Island market, which includes the counties of
Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance
Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30,
2002. Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network in fifteen states and through a third party loan origination
program in forty-four states.
Our broker and third party loan origination programs provide efficient and
diverse delivery channels for deployment of our cash flows. Additionally, they
provide geographic diversification, reducing our exposure to concentrations of
credit risk. At December 31, 2002, $5.89 billion, or 50.8%, of our total
mortgage loan portfolio was secured by properties located in 47 states other
than New York. Excluding New York, we have a concentration of mortgage lending
of greater than 5.0% in four states: Connecticut, which comprises 10.3% of our
total mortgage loan portfolio; New Jersey, which comprises 8.6% of our total
mortgage loan portfolio; Illinois, which comprises 5.5% of our total mortgage
loan portfolio; and Massachusetts, which comprises 5.1% of our total mortgage
loan portfolio.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past two years, several large out-of-state
financial institutions have entered the New York metropolitan area market. All
are our competitors to varying degrees. Our competition for loans, both locally
and in the aggregate, comes principally from mortgage banking companies,
commercial banks, savings banks and savings and loan associations. Our most
direct competition for deposits comes from commercial banks, savings banks,
savings and loan associations and credit unions. We also face intense
competition for deposits from money market mutual funds and other corporate and
government securities funds as well as from other financial intermediaries such
as brokerage firms and insurance companies.
During 2002, the nation began an extremely slow recovery from the country's
first recession in more than a decade. U.S. Treasury yields continued to fall
during the year with interest rates at forty year lows. Companies have
experienced revenue losses and, as a result, have had to lay off employees.
Corporate scandals undermined the public's confidence in companies and the
equity markets. The nation is faced with major geopolitical uncertainties.
Additionally, the New York City economy is still troubled by the aftermath of
the terrorist attacks on September 11, 2001. Despite the lackluster economy, we
have not experienced any deterioration in our credit quality and related
measures. The national and local real estate markets have remained strong and
continue to support new and existing home sales. While the strength of the real
estate markets has helped us maintain our strong credit quality and purchase
mortgage activity, the decline in interest rates has resulted in an
extraordinary increase in refinance and prepayment activity. As a result, we,
along with other mortgage originators and investors, have been faced with the
increased challenge of redeployment of funds in a lower interest rate
environment. To date, other than the additional challenges resulting from the
low interest rate environment, our banking and lending operations have not been
negatively affected by the national and New York City economies. However, we
cannot guarantee that our operations will not be affected in the future should
current economic conditions continue or worsen.
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SUBSIDIARY ACTIVITIES
We have three direct wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., which are reported on a consolidated
basis.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million of Capital Securities. See Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data" for further
discussion of the Capital Securities.
AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. provides insurance products
to the customers of Astoria Federal.
At December 31, 2002, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety
of mutual funds through its licensed agents and stock brokerage services through
an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses
and administrative services it provides to AF Agency, Inc. Fees generated by AF
Agency, Inc. totaled $9.0 million for the year ended December 31, 2002, which
represented 8.4% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. The initial premium paid was $250.0 million. An additional
$100.0 million premium was paid in the first quarter of 2002 to purchase
additional BOLI.
Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999, to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, and Starline Development Corp.,
or Starline, which qualify as real estate investment trusts under the Internal
Revenue Code of 1986, as amended. During the year ended December 31, 2002,
Starline was merged with and into APFC. APFC mortgage loans totaled $5.14
billion at December 31, 2002.
Suffco Service Corporation serves as document custodian in connection with
mortgage loans being serviced for FNMA and certain other investors.
201 Old Country Road Inc. was formed as a special purpose subsidiary which
previously held mortgage loans that served as collateral for a funding note
which was repaid in June 2001. Astoria Federal intends to dissolve this
subsidiary.
Infoserve Corporation provides research information services for Astoria Federal
and other financial institutions. The research generally relates to check
clearing and processing as well as check and money order issuances.
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has four subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
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Astoria Federal has five additional subsidiaries, two of which are single
purpose entities that have interests in individual real estate investments,
which individually and in the aggregate are not material to our financial
condition, and two of which have no assets or operations but may be used to
acquire interests in real estate in the future. The fifth such subsidiary serves
as a holding company for one of the other four.
Astoria Federal has three additional subsidiaries which are inactive and which
Astoria Federal intends to dissolve.
PERSONNEL
As of December 31, 2002, we had 1,796 full-time employees and 319 part-time
employees, or 1,956 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
REGULATION AND SUPERVISION
GENERAL
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the Federal Home Loan
Bank, or FHLB, System and its deposit accounts are insured up to applicable
limits by the FDIC under the Savings Association Insurance Fund, or SAIF, except
for those deposits acquired from The Greater New York Savings Bank, or The
Greater, which are insured by the FDIC under the Bank Insurance Fund, or BIF. We
and Astoria Federal must file reports with the OTS concerning our activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other financial institutions. The OTS and the FDIC periodically perform safety
and soundness examinations of Astoria Federal and us and test our compliance
with various regulatory requirements. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the OTS that enforcement action be taken with respect to a
particular federally chartered savings association and, if action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.
This regulation and supervision establish a comprehensive framework to regulate
and control the activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, FDIC or Congress, could have a
material adverse impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
FEDERALLY CHARTERED SAVINGS ASSOCIATION REGULATION
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations,
14
Astoria Federal may invest in mortgage loans secured by residential and
non-residential real estate, commercial and consumer loans, certain types of
debt securities and certain other assets. Astoria Federal may also establish
service corporations that may engage in activities not otherwise permissible for
Astoria Federal, including certain real estate equity investments and securities
and insurance brokerage activities. These investment powers are subject to
various limitations, including (1) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories, (2) a limit of 400% of an association's capital on the aggregate
amount of loans secured by non-residential real estate property, (3) a limit of
20% of an association's assets on commercial loans, with the amount of
commercial loans in excess of 10% of assets being limited to small business
loans, (4) a limit of 35% of an association's assets on the aggregate amount of
consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of
assets on non-conforming loans (loans in excess of the specific limitations of
HOLA), and (6) a limit of the greater of 5% of assets or an association's
capital on certain construction loans made for the purpose of financing what is
or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core capital) ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2002, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 7.23%, leverage capital ratio of 7.23% and total risk-based
capital ratio of 15.44%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS adopted regulations, effective January 1,
1994, that set forth the methodology for calculating an IRR component to be
incorporated into the OTS risk-based capital regulations. On May 10, 2002, the
OTS adopted an amendment to its capital regulations which eliminated the IRR
component of the risk-based capital requirement. Pursuant to the amendment, the
OTS will continue to monitor the IRR of individual institutions through the OTS
requirements for IRR management, the ability of the OTS to impose individual
minimum capital requirements on institutions that exhibit a high degree of IRR,
and the requirements of Thrift Bulletin 13a, which provides guidance on the
management of IRR and the responsibility of boards of directors in that area.
The OTS continues to monitor the IRR of individual institutions through analysis
of the change in net portfolio value, or NPV. NPV is defined as the net present
value of the expected future cash flows of an entity's assets and liabilities
and, therefore, hypothetically represents the value of an institution's net
worth. The OTS has also used this NPV analysis as part of its evaluation of
certain applications or notices submitted by thrift institutions. The OTS,
through its general oversight of the safety and soundness of savings
associations, retains the right to impose minimum capital requirements on
individual institutions to the extent the institution is not in compliance with
certain written guidelines established by the OTS regarding NPV analysis. The
OTS has not imposed any such requirements on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to
15
take other, supervisory actions against undercapitalized institutions, based
upon five categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," the severity of which depends upon the
institution's degree of capitalization. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2002, Astoria Federal was considered
"well capitalized" by the OTS.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2002 for
the assessment for the FICO payments was $2.0 million.
Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are secured by readily-marketable collateral. Astoria
Federal is in compliance with applicable loans to one borrower limitations. At
December 31, 2002, Astoria Federal's largest aggregate amount of loans to one
borrower totaled $32.2 million. All of the loans for the largest borrower were
performing in accordance with their terms and the borrower had no affiliation
with Astoria Federal.
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and
16
related investments, including certain mortgage-backed securities, credit card
loans, student loans, and small business loans) on a monthly basis during at
least 9 out of every 12 months. As of December 31, 2002, Astoria Federal
maintained in excess of 92% of its portfolio assets in qualified thrift
investments and had more than 65% of its portfolio assets in qualified thrift
investments for each of the 12 months ending December 31, 2002. Therefore,
Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Astoria Federal may not pay dividends to us if, after paying those dividends, it
would fail to meet the required minimum levels under risk-based capital
guidelines and the minimum leverage and tangible capital ratio requirements or
the OTS notified Astoria Federal that it was in need of more than normal
supervision. Under the Federal Deposit Insurance Act, or FDIA, an insured
depository institution such as Astoria Federal is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the FDIA). Payment of dividends by Astoria Federal also may be
restricted at any time at the discretion of the appropriate regulator if it
deems the payment to constitute an unsafe and unsound banking practice.
In addition, Astoria Federal may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below the amounts required for the
liquidation accounts which were established as a result of Astoria Federal's
conversion from mutual to stock form of ownership and the acquisitions of
Fidelity New York, FSB, or Fidelity, The Greater and Long Island Bancorp, Inc.,
or LIB. For further discussion on the liquidation accounts, see Note 9 of Notes
to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic
17
assessment is based; the association's supervisory condition, which results in
an additional assessment based on a percentage of the basic assessment for any
savings institution with a composite rating of 3, 4 or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which results in an additional assessment based on a percentage of
the basic assessment for any savings association that managed over $1.00 billion
in trust assets, serviced for others loans aggregating more than $1.00 billion,
or had certain off-balance sheet assets aggregating more than $1.00 billion. For
the year ended December 31, 2002, we paid $2.8 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with its examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans in its service areas; (2) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and businesses; and (3) a service test, to evaluate
the institution's delivery of banking services throughout its CRA assessment
area. The CRA also requires all institutions to make public disclosure of their
CRA ratings. Astoria Federal has been rated as "outstanding" over its last four
CRA examinations. Regulations require that we publicly disclose certain
agreements that are in fulfillment of CRA. We have no such agreements in place
at this time.
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
as well as additional limitations as may be adopted by the Director of the OTS.
These provisions, among other things, prohibit, limit or place restrictions upon
a savings institution extending credit to, or entering into certain transactions
with, its affiliates (which for Astoria Federal would include us and our
non-federally chartered savings association subsidiaries, if any), principal
stockholders, directors and executive officers.
Effective April 1, 2003, the Federal Reserve Board, or FRB, is rescinding its
interpretations of Sections 23A and 23B of the FRA and is replacing these
interpretations with Regulation W. In addition, Regulation W makes various
changes to existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
Under Regulation W all transactions entered into on or before December 12, 2002
that would become subject to Sections 23A and 23B solely because of Regulation W
and all transactions covered by Sections 23A and 23B, the treatment of which
will change solely because of Regulation W, will not become subject to
Regulation W until July 1, 2003. All other covered affiliate transactions become
18
subject to Regulation W on April 1, 2003. The FRB expects each depository
institution that is subject to Sections 23A and 23B to implement policies and
procedures to ensure compliance with Regulation W. We do not expect that the
changes made by Regulation W will have a material adverse effect on our
business.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Astoria
Federal, that is subject to the insider lending restrictions of Section 22(h) of
the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, or Community Development
Act, the OTS, together with the other federal bank regulatory agencies, adopted
guidelines establishing general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS adopted regulations
pursuant to FDICIA to require a savings association that is given notice by the
OTS that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the OTS. If, after being so notified, a savings
association fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing corrective actions and may issue an order directing other
actions of the types to which a significantly undercapitalized institution is
subject under the "prompt corrective action" provisions of FDICIA. If a savings
association fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties. For further
discussion, see "Regulation and Supervision - Federally Chartered Savings
Association Regulation - Prompt Corrective Regulatory Action."
Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
PRIVACY PROTECTION
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the ability
to "opt-out" of having Astoria Federal share their nonpublic personal
information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines
19
describe the agencies' expectations for the creation, implementation and
maintenance of an information security program, which would include
administrative, technical and physical safeguards appropriate to the size and
complexity of the institution and the nature and scope of its activities. The
standards set forth in the guidelines are intended to insure the security and
confidentiality of customer records and information, protect against any
anticipated threats or hazards to the security or integrity of such records and
protect against unauthorized access to or use of such records or information
that could result in substantial harm or inconvenience to any customer.
FEDERAL HOME LOAN BANK SYSTEM
Astoria Federal is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, 0.3% of total
assets, or 5% of its borrowings from the FHLB-NY, whichever is greater. Astoria
Federal was in compliance with this requirement with an investment in FHLB-NY
stock at December 31, 2002, of $247.6 million. Dividends from the FHLB-NY to
Astoria Federal amounted to $10.7 million for the year ended December 31, 2002,
$17.5 million for the year ended December 31, 2001 and $19.2 million for the
year ended December 31, 2000.
Pursuant to regulations promulgated by the Federal Housing Finance Board, as
required by Gramm-Leach, the FHLB-NY has adopted a capital plan, which is
expected to become effective during the second half of 2003, that will change
the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the
new capital plan, each member of the FHLB-NY will have to maintain a minimum
investment in FHLB-NY capital stock in an amount equal to the sum of (1) the
greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50%
of the dollar amount of any outstanding advances under such member's Advances,
Collateral Pledge and Security Agreement with the FHLB-NY.
FEDERAL RESERVE SYSTEM
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $6.0 million and $42.1 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $42.1 million. The first $6.0 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, President George W. Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT
Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. By way of amendments to the Bank Secrecy
Act, Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among bank regulatory
20
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (1) internal policies, procedures and controls, (2)
specific designation of an anti-money laundering compliance
officer, (3) ongoing employee training programs and (4) an
independent audit function to test the anti-money laundering
program. Interim final rules implementing Section 352 were
issued by the Treasury Department on April 29, 2002. Such
rules state that a financial institution is in compliance with
Section 352 if it implements and maintains an anti-money
laundering program that complies with the anti-money
laundering regulations of its federal functional regulator.
Astoria Federal is in compliance with the OTS's anti-money
laundering regulations.
- Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
On July 23, 2002, the OTS and the other federal bank
regulators jointly issued proposed rules to implement Section
326. The proposed rules require financial institutions to
establish a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts. This identifying information would be essentially
the same information currently obtained by most financial
institutions for individual customers. A financial
institution's program would also have to contain procedures to
verify the identity of customers within a reasonable period of
time, generally through the use of the same forms of identity
verification currently in use, such as driver's licenses,
passports, credit reports and other similar means.
- Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish
appropriate, specific and, where necessary, enhanced due
diligence policies, procedures and controls designed to detect
and report money laundering. Interim rules under Section 312
were issued by the Treasury Department on July 23, 2002. The
interim rules state that a due diligence program is reasonable
if it comports with existing best practices standards for
banks that maintain correspondent accounts for foreign banks
and evidences good faith efforts to incorporate due diligence
procedures for accounts posing increased risk of money
laundering. In addition, an enhanced due diligence program is
reasonable if it comports with best practices standards and
focuses enhanced due diligence measures on those correspondent
accounts posing a particularly high risk of money laundering
based on the bank's overall assessment of the risk posed by
the foreign correspondent bank. Finally, a private banking due
diligence program must be reasonably designed to detect and
report money laundering and the existence of proceeds of
foreign corruption. Such a program is reasonable if it focuses
on those private banking accounts that present a high risk of
money laundering.
- Financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a
physical presence in any country), and are subject to certain
recordkeeping obligations with respect to correspondent
accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on FRA
and Bank Merger Act applications.
Compliance with the regulations adopted under the USA PATRIOT Act is not
expected to have a material adverse impact on our financial condition or results
of operations.
21
HOLDING COMPANY REGULATION
We are a unitary savings and loan association holding company within the meaning
of the HOLA. As such, we are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over us and our savings association
subsidiary. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan association holding
companies that are "grandfathered," i.e., unitary savings and loan association
holding companies in existence or with applications filed with the OTS on or
before May 4, 1999, such as us, retain their authority under the prior law. All
other unitary savings and loan association holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies
from acquiring grandfathered unitary savings and loan association holding
companies.
The HOLA prohibits a savings and loan association holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
FEDERAL SECURITIES LAWS
We are subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Exchange Act.
DELAWARE CORPORATION LAW
We are incorporated under the laws of the State of Delaware. Thus, we are
subject to regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
FEDERAL TAXATION
General
We report our income on a calendar year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations.
Corporate Alternative Minimum Tax
In addition to the regular income tax, corporations (including savings and loan
associations) generally are subject to an alternative minimum tax, or AMT, in an
amount equal to 20% of alternative minimum taxable income to the extent the AMT
exceeds the corporation's regular tax. The AMT is available as a credit against
future regular income tax. We do not expect to be subject to the AMT.
Tax Bad Debt Reserves
Effective 1996, federal tax legislation modified the methods by which a thrift
computes its bad debt deduction. As a result, Astoria Federal is required to
claim a deduction equal to its actual loss
22
experience, and the "reserve method" is no longer available. Any cumulative
reserve additions (i.e., bad debt deductions) in excess of actual loss
experience for tax years 1988 through 1995 are subject to recapture over a six
year period. Generally, reserve balances as of December 31, 1987 will only be
subject to recapture upon distribution of such reserves to shareholders. For a
further discussion of bad debt reserves see "Distributions."
Distributions
To the extent that Astoria Federal makes "nondividend distributions" to
shareholders, such distributions will be considered to result in distributions
from Astoria Federal's "base year reserve," (i.e., its reserve as of December
31, 1987), to the extent thereof, and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in Astoria Federal's taxable income. Nondividend distributions include
distributions in excess of Astoria Federal's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Astoria Federal's current or accumulated earnings
and profits will not constitute nondividend distributions and, therefore, will
not be included in Astoria Federal's taxable income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 35% federal corporate income tax rate.
Dividends Received Deduction and Other Matters
We may exclude from our income 100% of dividends received from Astoria Federal
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which we will not file a consolidated tax
return, except that if we own more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
STATE AND LOCAL TAXATION
New York State Taxation
New York State imposes an annual franchise tax on banking corporations, based on
net income allocable to New York State, at a rate of 8.0%, (7.5% effective for
taxable years beginning after July 1, 2002). If, however, the application of an
alternative minimum tax (based on taxable assets allocated to New York,
"alternative" net income, or a flat minimum fee) results in a greater tax, an
alternative minimum tax will be imposed. In addition, New York State imposes a
tax surcharge of 17.0% of the New York State franchise tax, calculated using an
annual franchise tax rate of 9.0% (which represents the 2000 annual franchise
tax rate), allocable to business activities carried on in the Metropolitan
Commuter Transportation District. These taxes apply to us, Astoria Federal and
certain of Astoria Federal's subsidiaries. Certain subsidiaries of a banking
corporation may be subject to a general business corporation tax in lieu of the
tax on banking corporations. The rules regarding the determination of income
allocated to New York and alternative minimum taxes differ for these
subsidiaries.
Bad Debt Deduction
New York State passed legislation that incorporated the former provisions of
Internal Revenue Code, or IRC, Section 593 into New York State tax law. The
impact of this legislation enabled Astoria Federal to defer the recapture of the
New York State tax bad debt reserves that would have otherwise occurred as a
result of the federal amendment to IRC 593. The legislation also enabled Astoria
Federal to continue to utilize the reserve method for computing its bad debt
deduction. Astoria Federal must meet
23
certain definitional tests, primarily relating to its assets and the nature of
its business to be a qualifying thrift and would then be permitted to establish
a reserve for bad debts and to make annual additions thereto, which additions
may, within specified formula limits, be deducted in arriving at its taxable
income. Astoria Federal will be a qualifying thrift if, among other
requirements, at least 60% of its assets are assets described in Section
1453(h)(1) of the New York State tax law, or the 60% Test.
Astoria Federal presently satisfies the 60% Test. Although there can be no
assurance that Astoria Federal will satisfy the 60% Test in the future, we
believe that this level of qualifying assets can be maintained by Astoria
Federal. Astoria Federal's deduction for additions to its bad debt reserve with
respect to qualifying loans may be computed using the experience method or a
percentage equal to 32% of Astoria Federal's taxable income, computed with
certain modifications, without regard to Astoria Federal's actual loss
experience, and reduced by the amount of any addition permitted to the reserve
for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria
Federal's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on its actual loss experience.
Under the experience method, the amount of a reasonable addition, in general,
equals the amount necessary to increase the balance of the bad debt reserve at
the close of the taxable year to the greater of (1) the amount that bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years
bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the base year (assuming
that the loans outstanding have not declined since then). The "base year" for
these purposes is the last taxable year beginning before the NYS Percentage of
Taxable Income Method bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the addition to the
reserve for qualifying real property loans calculated under the NYS Percentage
of Taxable Income Method. Each year Astoria Federal reviews the most favorable
way to calculate the deduction attributable to an addition to the bad debt
reserve.
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS Percentage of Taxable Income Method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which 12% of the amount
that the total deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeded the sum of the qualifying
thrift's surplus, undivided profits and reserves at the beginning of such year.
New York City Taxation
Astoria Federal is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. New York City has enacted
legislation regarding the use and treatment of tax bad debt reserves that is
substantially similar to the New York State legislation described above. A
significant portion of Astoria Federal's entire net income for New York City
purposes is allocated outside the jurisdiction which has the effect of
significantly reducing the New York City taxable income of Astoria Federal.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, we are exempt from
Delaware corporate income tax but are required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
24
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance with
Industry Guide 3, prescribed by the SEC. This data should be read in conjunction
with the description of our business appearing earlier in this Item 1, Item 7,
"MD&A" and Item 8, "Financial Statements and Supplementary Data."
Information regarding distribution of assets, liabilities and stockholders'
equity; interest rates and interest differential appears under Item 7, "MD&A."
Pages 43 and 44 present the distribution of assets, liabilities and
stockholders' equity under the caption "Analysis of Net Interest Income," and
the interest differential under the caption "Rate/Volume Analysis."
LOAN PORTFOLIO
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF OF OF
(Dollars in Thousands) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS (GROSS):
One-to-four family $ 9,209,360 76.86% $ 10,105,063 83.59% $ 9,850,390 86.79%
Multi-family 1,599,985 13.35 1,094,312 9.05 801,917 7.07
Commercial real estate 744,623 6.21 598,334 4.95 480,211 4.23
Construction 56,475 0.47 50,739 0.42 34,599 0.30
- -----------------------------------------------------------------------------------------------------------------------
Total mortgage loans 11,610,443 96.89 11,848,448 98.01 11,167,117 98.39
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (GROSS):
Home equity 323,494 2.70 189,259 1.57 133,748 1.18
Commercial 22,569 0.19 18,124 0.15 8,822 0.08
Line of Credit, Overdraft 15,475 0.13 18,046 0.15 20,603 0.18
Passbook 7,502 0.06 9,012 0.07 8,710 0.08
Other 3,598 0.03 5,753 0.05 10,673 0.09
- -----------------------------------------------------------------------------------------------------------------------
Total consumer and other loans 372,638 3.11 240,194 1.99 182,556 1.61
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 11,983,081 100.00% 12,088,642 100.00% 11,349,673 100.00%
Net unamortized premiums
and deferred loans costs 76,280 78,619 72,622
Allowance for loan losses (83,546) (82,285) (79,931)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $ 11,975,815 $ 12,084,976 $ 11,342,364
- -----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
--------------------------------------------------
1999 1998
--------------------------------------------------
PERCENT PERCENT
OF OF
(Dollars in Thousands) AMOUNT TOTAL AMOUNT TOTAL
- ------------------------------------------------------------------------------------------
MORTGAGE LOANS (GROSS):
One-to-four family $ 9,006,894 88.07% $ 7,646,641 87.12%
Multi-family 615,438 6.02 452,854 5.16
Commercial real estate 398,198 3.89 414,565 4.72
Construction 34,837 0.34 37,822 0.43
- ------------------------------------------------------------------------------------------
Total mortgage loans 10,055,367 98.32 8,551,882 97.43
- ------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (GROSS):
Home equity 116,726 1.14 142,437 1.63
Commercial 4,531 0.04 5,573 0.06
Line of Credit, Overdraft 23,186 0.23 24,846 0.28
Passbook 7,481 0.07 6,653 0.08
Other 20,200 0.20 45,750 0.52
- ------------------------------------------------------------------------------------------
Total consumer and other loans 172,124 1.68 225,259 2.57
- ------------------------------------------------------------------------------------------
TOTAL LOANS 10,227,491 100.00% 8,777,141 100.00%
Net unamortized premiums
and deferred loans costs 58,803 32,463
Allowance for loan losses (76,578) (74,403)
- ------------------------------------------------------------------------------------------
TOTAL LOANS, NET $ 10,209,716 $ 8,735,201
- ------------------------------------------------------------------------------------------
25
Loan Maturity, Repricing and Activity
The following table shows the maturities of our loans receivable at December 31,
2002 and does not reflect the effect of prepayments or scheduled principal
amortization.
AT DECEMBER 31, 2002
---------------------------------------------------------------------------------------------
ONE-TO CONSUMER
-FOUR MULTI- COMMERCIAL AND TOTAL LOANS
(In Thousands) FAMILY FAMILY REAL ESTATE CONSTRUCTION OTHER RECEIVABLE
- -------------------------------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 13,466 $ 5,403 $ 20,272 $ 31,457 $ 28,065 $ 98,663
After one year:
One to three years 13,398 7,141 22,688 25,018 12,904 81,149
Three to five years 37,120 29,742 25,798 - 11,042 103,702
Five to ten years 504,738 616,515 368,563 - 13,352 1,503,168
Ten to twenty years 1,060,245 762,498 299,750 - 36,903 2,159,396
Over twenty years 7,580,393 178,686 7,552 - 270,372 8,037,003
- -------------------------------------------------------------------------------------------------------------------------------
Total due after one year 9,195,894 1,594,582 724,351 25,018 344,573 11,884,418
- -------------------------------------------------------------------------------------------------------------------------------
Total amount due $ 9,209,360 $ 1,599,985 $ 744,623 $ 56,475 $ 372,638 11,983,081
Net unamortized premiums and deferred loan costs 76,280
Allowance for loan losses (83,546)
- -------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 11,975,815
- -------------------------------------------------------------------------------------------------------------------------------
The following table sets forth at December 31, 2002, the dollar amount of our
loans receivable due after December 31, 2003, and whether such loans have fixed
interest rates or adjustable interest rates. Our hybrid ARM loans are classified
as adjustable rate loans.
DUE AFTER DECEMBER 31, 2003
--------------------------------------------------
(In Thousands) FIXED ADJUSTABLE TOTAL
- ------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 1,428,082 $ 7,767,812 $ 9,195,894
Multi-family 402,707 1,191,875 1,594,582
Commercial real estate 142,379 581,972 724,351
Construction - 25,018 25,018
Consumer and other loans 29,482 315,091 344,573
- ------------------------------------------------------------------------------------------------------
Total $ 2,002,650 $ 9,881,768 $ 11,884,418
======================================================================================================
26
The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(In Thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
MORTGAGE LOANS (GROSS) (1):
At beginning of year $ 11,889,940 $ 11,180,662 $ 10,066,743
Mortgage loans originated:
One-to-four family 2,992,746 2,510,227 1,533,299
Multi-family 750,196 413,518 204,948
Commercial real estate 259,986 178,246 109,533
Construction 50,942 29,187 43,449
- ----------------------------------------------------------------------------------------------------------
Total mortgage loans originated 4,053,870 3,131,178 1,891,229
- ----------------------------------------------------------------------------------------------------------
Purchases of mortgage loans (2) 1,534,999 1,427,099 836,782
Sales of mortgage loans (463,984) (379,929) (125,086)
Transfer of loans to REO (1,900) (5,420) (8,146)
Principal repayments (5,341,016) (3,462,677) (1,480,354)
Net loans charged off (342) (973) (506)
- ----------------------------------------------------------------------------------------------------------
At end of year $ 11,671,567 $ 11,889,940 $ 11,180,662
- ----------------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (GROSS) (3):
At beginning of year $ 242,092 $ 184,710 $ 174,904
Consumer and other loans originated 279,905 178,682 118,286
Sales of consumer and other loans (3,518) (4,061) (5,261)
Principal repayments (143,592) (115,685) (101,541)
Net loans charged off (704) (1,554) (1,678)
- ----------------------------------------------------------------------------------------------------------
At end of year $ 374,183 $ 242,092 $ 184,710
- ----------------------------------------------------------------------------------------------------------
(1) Includes loans classified as held-for-sale totaling $61.2 million, $41.5
million and $13.5 million at December 31, 2002, 2001 and 2000,
respectively.
(2) Purchases of mortgage loans represent third party loan originations and are
predominantly secured by one-to-four family properties.
(3) Includes loans classified as held-for-sale totaling $1.5 million, $1.9
million and $2.2 million at December 31, 2002, 2001 and 2000, respectively.
Delinquent Loans and Classified Assets
Information regarding delinquent loans, non-performing assets and classified
assets appears under Item 7, "MD&A."
27
SECURITIES PORTFOLIO
The following table sets forth the composition of our available-for-sale and
held-to-maturity securities portfolios at their respective carrying values in
dollar amounts and in percentages of the portfolios at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
(Dollars in Thousands) AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Agency pass-through certificates $ 249,459 8.93% $ 462,748 13.04% $ 663,341 8.61%
REMICs and CMOs:
Agency issuance 616,552 22.08 1,402,093 39.50 4,954,148 64.31
Non-agency issuance 1,587,622 56.86 1,150,122 32.41 1,393,696 18.09
Obligations of the U.S. Government
and agencies 133,448 4.78 359,561 10.13 499,568 6.49
FNMA and FHLMC preferred stock 136,682 4.89 111,276 3.14 133,789 1.74
Corporate debt and other securities 68,818 2.46 63,383 1.78 58,680 0.76
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 2,792,581 100.00% $ 3,549,183 100.00% $ 7,703,222 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
Mortgage-backed securities:
Agency pass-through certificates $ 24,534 0.49% $ 36,620 0.82% $ 49,747 2.90%
REMICs and CMOs:
Agency issuance 3,595,244 71.31 2,979,357 66.74 517,626 30.23
Non-agency issuance 1,306,113 25.91 1,043,110 23.37 296,156 17.30
Obligations of the U.S. Government
and agencies 65,776 1.30 362,034 8.11 804,659 47.00
Obligations of states and
political subdivisions 39,611 0.79 42,807 0.96 44,003 2.57
Corporate debt securities 9,979 0.20 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 5,041,257 100.00% $ 4,463,928 100.00% $ 1,712,191 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
During the quarter ended June 30, 2001, we transferred agency REMIC and CMO
securities with an amortized cost of $2.90 billion and a market value of $2.88
billion from available-for-sale to held-to-maturity. The net unrealized loss,
which is being amortized over the life of the securities transferred, was $22.6
million at the date of the transfer and is included, net of taxes, in
accumulated other comprehensive income at December 31, 2002. The balance of the
net unrealized loss on the securities transferred from available-for-sale to
held-to-maturity totaled $1.3 million at December 31, 2002 and $15.7 million at
December 31, 2001.
28
The table below sets forth certain information regarding the amortized costs,
estimated fair values, weighted average yields and contractual maturities of our
federal funds sold and repurchase agreements, FHLB-NY stock and mortgage-backed
and other securities available-for-sale and held-to-maturity portfolios at
December 31, 2002.
WITHIN ONE TO FIVE TO
ONE YEAR FIVE YEARS TEN YEARS
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
(Dollars in Thousands) COST YIELD COST YIELD COST YIELD
- ----------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD AND
REPURCHASE AGREEMENTS $ 510,252 1.20% $ - -% $ - -%
- ----------------------------------------------------------------------------------------------------------
FHLB-NY STOCK (1)(2) $ - -% $ - -% $ - -%
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED AND OTHER
SECURITIES AVAILABLE-FOR-SALE:
Agency pass-through certificates $ - -% $ 885 6.54% $ 8,159 7.39%
REMICs and CMOs:
Agency issuance - - 2,201 6.23 300 6.57
Non-agency issuance - - 24 6.80 1,952 7.13
Obligations of the U.S.
Government and agencies 1,000 4.53 1,145 3.74 - -
FNMA and FHLMC preferred
stock (1) - - - - - -
Corporate debt and other
securities - - 1,000 6.80 5,000 9.25
- ----------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 1,000 4.53% $ 5,255 5.85% $ 15,411 7.94%
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED AND OTHER
SECURITIES HELD-TO-MATURITY:
Agency pass-through certificates $ 14 6.78% $ 2,008 7.36% $ 4,338 8.68%
REMICs and CMOs:
Agency issuance - - 7,149 6.32 5,269 6.82
Non-agency issuance - - - - 1,348 7.09
Obligations of the U.S.
Government and agencies - - - - - -
Obligations of states and
political subdivisions - - - - - -
Corporate debt securities - - 9,979 5.81 - -
- ----------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 14 6.78% $ 19,136 6.16% $ 10,955 7.59%
- ----------------------------------------------------------------------------------------------------------
OVER
TEN YEARS TOTAL SECURITIES
--------------------- -----------------------------------
WEIGHTED ESTIMATED WEIGHTED
AMORTIZED AVERAGE AMORTIZED FAIR AVERAGE
(Dollars in Thousands) COST YIELD COST VALUE YIELD
- --------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD AND
REPURCHASE AGREEMENTS $ - -% $ 510,252 $ 510,252 1.20%
- --------------------------------------------------------------------------------------------------
FHLB-NY STOCK (1)(2) $ 247,550 5.45% $ 247,550 $ 247,550 5.45%
- --------------------------------------------------------------------------------------------------
MORTGAGE-BACKED AND OTHER
SECURITIES AVAILABLE-FOR-SALE:
Agency pass-through certificates $ 232,102 5.45% $ 241,146 $ 249,459 5.52%
REMICs and CMOs:
Agency issuance 605,575 5.01 608,076 616,552 5.01
Non-agency issuance 1,579,499 4.88 1,581,475 1,587,622 4.88
Obligations of the U.S.
Government and agencies 129,866 6.97 132,011 133,448 6.93
FNMA and FHLMC preferred
stock (1) 140,015 5.03 140,015 136,682 5.03
Corporate debt and other
securities 61,854 7.88 67,854 68,818 7.96
- --------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,748,911 5.13% $ 2,770,577 $2,792,581 5.15%
- --------------------------------------------------------------------------------------------------
MORTGAGE-BACKED AND OTHER
SECURITIES HELD-TO-MATURITY:
Agency pass-through certificates $ 18,174 7.62% $ 24,534 $ 26,190 7.78%
REMICs and CMOs:
Agency issuance 3,582,826 4.91 3,595,244 3,646,023 4.91
Non-agency issuance 1,304,765 5.00 1,306,113 1,313,349 5.00
Obligations of the U.S.
Government and agencies 65,776 7.48 65,776 66,018 7.48
Obligations of states and
political subdivisions 39,611 6.69 39,611 39,611 6.69
Corporate debt securities - - 9,979 9,374 5.81
- --------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,011,152 4.99% $ 5,041,257 $5,100,565 5.00%
- --------------------------------------------------------------------------------------------------
(1) As equity securities have no maturities, they are classified in the over
ten years category.
(2) The carrying amount of FHLB-NY stock equals cost.
29
DEPOSITS
The following table presents our deposit activity for the years indicated.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
(Dollars in Thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------
Opening balance $ 10,903,693 $ 10,071,687 $ 9,554,534
Net (withdrawals) deposits (124,497) 432,017 107,052
Interest credited 288,000 399,989 410,101
- ----------------------------------------------------------------------------------------
Ending balance $ 11,067,196 $ 10,903,693 $ 10,071,687
- ----------------------------------------------------------------------------------------
Net increase $ 163,503 $ 832,006 $ 517,153
- ----------------------------------------------------------------------------------------
Percentage increase 1.50% 8.26% 5.41%
- ----------------------------------------------------------------------------------------
The following table sets forth the maturity periods of our certificates of
deposit in amounts of $100,000 or more at December 31, 2002.
(In Thousands) AMOUNT
- -----------------------------------------------------------------------
Within three months $ 155,616
Three to six months 93,125
Six to twelve months 126,825
Over twelve months 495,277
- -----------------------------------------------------------------------
Total $ 870,843
- -----------------------------------------------------------------------
The following table sets forth the distribution of our average deposit balances
for the periods indicated and the weighted average nominal interest rates for
each category of deposit presented.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AVERAGE PERCENT NOMINAL AVERAGE PERCENT NOMINAL
(Dollars in Thousands) BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE
- ------------------------------------------------------------------------------------------------------
Savings $ 2,754,000 24.80% 1.05% $ 2,495,532 23.70% 1.83%
Money market 1,876,107 16.90 1.72 1,734,232 16.47 3.71
NOW 732,905 6.60 0.43 599,919 5.70 0.85
Non-interest bearing NOW
and demand deposit 536,961 4.84 - 475,605 4.52 -
- ------------------------------------------------------------------------------------------------------
Total 5,899,973 53.14 1.09 5,305,288 50.39 2.17
- ------------------------------------------------------------------------------------------------------
Certificates of deposit (1):
Within one year 1,493,726 13.45 2.31 1,698,436 16.13 4.23
One to three years 1,790,529 16.12 4.48 1,769,563 16.81 5.61
Three to five years 1,658,333 14.94 5.67 1,410,231 13.39 6.08
Over five years 79,177 0.71 5.53 94,409 0.90 6.61
Jumbo 181,845 1.64 2.75 250,524 2.38 5.01
- ------------------------------------------------------------------------------------------------------
Total 5,203,610 46.86 4.19 5,223,163 49.61 5.28
- ------------------------------------------------------------------------------------------------------
Total deposits $11,103,583 100.00% 2.54% $10,528,451 100.00% 3.71%
- ------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000
---------------------------------
WEIGHTED
AVERAGE
AVERAGE PERCENT NOMINAL
(Dollars in Thousands) BALANCE OF TOTAL RATE
- ---------------------------------------------------------------
Savings $ 2,529,448 25.88% 2.00%
Money market 1,337,754 13.68 5.19
NOW 548,022 5.61 1.00
Non-interest bearing NOW
and demand deposit 391,693 4.01 -
- ---------------------------------------------------------------
Total 4,806,917 49.18 2.61
- ---------------------------------------------------------------
Certificates of deposit (1):
Within one year 1,788,655 18.30 5.08
One to three years 1,616,331 16.53 5.45
Three to five years 1,340,468 13.71 6.13
Over five years 71,504 0.73 6.62
Jumbo 151,193 1.55 5.56
- ---------------------------------------------------------------
Total 4,968,151 50.82 5.52
- ---------------------------------------------------------------
Total deposits $ 9,775,068 100.00% 4.09%
- ---------------------------------------------------------------
(1) Terms indicated are original, not term remaining to maturity.
30
The following table presents, by rate categories, the remaining periods to
maturity of our certificates of deposit outstanding at December 31, 2002 and the
balances of our certificates of deposit outstanding at December 31, 2002, 2001
and 2000.
PERIOD TO MATURITY FROM DECEMBER 31, 2002 AT DECEMBER 31,
--------------------------------------------------------- ---------------------------------------
WITHIN ONE TO TWO TWO TO THREE OVER THREE
(In Thousands) ONE YEAR YEARS YEARS YEARS 2002 2001 2000
- ------------------------------------------------------------------------------------ ---------------------------------------
Certificates of deposit:
3.99% or less $ 1,752,609 $ 650,600 $ 69,605 $ 76,283 $2,549,097 $1,339,409 $ 150,043
4.00% to 4.99% 200,481 214,112 85,374 275,894 775,861 1,037,154 127,422
5.00% to 5.99% 289,132 88,901 905 576,689 955,627 947,565 2,589,393
6.00% and over 192,052 232,257 405,735 42,409 872,453 1,836,170 2,282,877
- ----------------------------------------------------------------------------------------------------------------------- ---------
Total $ 2,434,274 $1,185,870 $ 561,619 $ 971,275 $5,153,038 $5,160,298 $5,149,735
- ---------------------------------------------------------------------------------------------------------------------------------
BORROWINGS
For information regarding our borrowings outstanding, average borrowings,
maximum borrowings and weighted average interest rates at and for each of the
years ended December 31, 2002, 2001 and 2000, see Note 8 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
ITEM 2. PROPERTIES
At December 31, 2002 we operated 86 full-service banking offices, of which 50
were owned and 36 were leased. At December 31, 2002, we owned our principal
executive office and the office for our mortgage operations, both located in
Lake Success, New York. We believe such facilities are suitable and adequate for
our operational needs.
For further information regarding our obligations, see Note 12 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
At December 31, 2002, we leased our previous mortgage operating facility in
Mineola, New York which we no longer occupy. At December 31, 2002 approximately
two-thirds of this facility was sublet and we have a lease commitment for the
remainder of the facility commencing in February 2003.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse affect on
our financial condition, operating results or liquidity.
We are a party to two actions pending against the United States, involving
assisted acquisitions made in the early 1980's and supervisory goodwill
accounting utilized in connection therewith, which could result in a gain. The
ultimate outcomes of such actions are uncertain and there can be no assurance
that we will benefit financially from such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ended December 31, 2002 to a vote of
our security holders through the solicitation of proxies or otherwise.
31
PART II
ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On May 17, 2002, our common stock began trading on the New York Stock Exchange,
or NYSE, under the symbol "AF." Previously, our common stock traded on The
Nasdaq Stock Market, or Nasdaq, under the symbol "ASFC." The table below shows
the reported high and low sale prices reported on the NYSE or the high and low
closing prices reported on Nasdaq, as applicable, for our common stock during
the periods indicated in 2002 and the high and low closing prices reported on
Nasdaq during the periods indicated in 2001.
2002 2001
---------------------------------------- ----------------------
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------
First Quarter $31.02 (1) $26.34 (1) $28.56 $24.28
Second Quarter 35.17 (2) 28.85 (1) 29.15 25.88
Third Quarter 34.45 (2) 23.66 (2) 31.50 27.30
Fourth Quarter 27.75 (2) 21.60 (2) 30.50 24.66
(1) Closing price as reported on Nasdaq
(2) Sale price as reported on the NYSE
As of March 13, 2003, we had 3,939 shareholders of record. As of December 31,
2002, there were 84,805,817 shares of common stock outstanding.
The following schedule summarizes the cash dividends paid per common share for
2002 and 2001.
2002 2001
- -----------------------------------------------
First Quarter $ 0.17 $ 0.13
Second Quarter 0.20 0.155
Third Quarter 0.20 0.155
Fourth Quarter 0.20 0.17
On January 22, 2003, our Board of Directors declared a quarterly cash dividend
of $0.20 per common share, payable on March 3, 2003, to common stockholders of
record as of the close of business on February 18, 2003. Our Board of Directors
intends to review the payment of dividends quarterly and plans to continue to
maintain a regular quarterly dividend in the future, dependent upon our
earnings, financial condition and other factors.
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. Our payment of dividends is dependent, in large part,
upon receipt of dividends from Astoria Federal. Astoria Federal is subject to
certain restrictions which may limit its ability to pay us dividends. See Item
1, "Business - Regulation and Supervision" and Note 9 of Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data"
for an explanation of the impact of the liquidation accounts and regulatory
capital requirements on Astoria Federal's ability to pay dividends. See Item 1,
"Business - Federal Taxation" and Note 13 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data" for an
explanation of the tax impact of the unlikely event that Astoria Federal (1)
makes distributions in excess of current and accumulated earnings and profits,
as calculated for federal income tax purposes; (2) redeems its stock; or (3)
liquidates.
32
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other data. This
financial data is derived in part from, and should be read in conjunction with,
our consolidated financial statements and related notes.
AT DECEMBER 31,
---------------------------------------------------------------------------------
(In Thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA:
Total assets $ 21,697,829 $ 22,667,706 $ 22,336,802 $ 22,696,536 $ 20,587,741
Federal funds sold and repurchase
agreements 510,252 1,309,164 171,525 335,653 266,437
Mortgage-backed and other securities
available-for-sale 2,792,581 3,549,183 7,703,222 8,862,749 8,196,444
Mortgage-backed and other securities
held-to-maturity 5,041,257 4,463,928 1,712,191 1,899,957 2,108,811
Loans held-for-sale 62,669 43,390 15,699 14,156 217,027
Loans receivable, net 11,975,815 12,084,976 11,342,364 10,209,716 8,735,201
Mortgage servicing rights, net 20,411 35,295 40,962 48,369 50,237
Deposits 11,067,196 10,903,693 10,071,687 9,554,534 9,668,286
Borrowed funds, net 8,821,180 9,821,795 10,320,350 11,524,349 9,022,797
Stockholders' equity 1,553,998 1,542,586 1,513,163 1,196,912 1,462,384
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
(In Thousands, Except Per Share Data) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 1,266,262 $ 1,438,563 $ 1,517,934 $ 1,495,279 $ 1,224,448
Interest expense 801,838 981,605 1,023,353 957,500 775,465
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 464,424 456,958 494,581 537,779 448,983
Provision for loan losses 2,307 4,028 4,014 4,119 15,380
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 462,117 452,930 490,567 533,660 433,603
Non-interest income 107,407 90,105 69,246 86,696 62,263
Non-interest expense:
General and administrative 195,827 178,767 190,040 201,786 234,819
Extinguishment of debt 2,202 - - - 18,547
Amortization of goodwill - 19,078 19,078 19,136 19,369
Acquisition costs and restructuring charges - - - - 124,168
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 198,029 197,845 209,118 220,922 396,903
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of accounting change 371,495 345,190 350,695 399,434 98,963
Income tax expense 123,066 120,036 134,146 163,764 53,915
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 248,429 225,154 216,549 235,670 45,048
Cumulative effect of accounting change, net of tax - (2,294) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Net income 248,429 222,860 216,549 235,670 45,048
Preferred dividends declared 6,000 6,000 6,000 6,000 6,000
- -----------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 242,429 $ 216,860 $ 210,549 $ 229,670 $ 39,048
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 2.90 $ 2.40 $ 2.20 $ 2.24 $ 0.38
Diluted earnings per common share $ 2.85 $ 2.35 $ 2.16 $ 2.19 $ 0.37
33
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets 1.12% 0.99% 0.97% 1.04% 0.25%
Return on average stockholders' equity 15.87 14.13 16.70 17.31 3.02
Return on average tangible stockholders' equity (1) 18.00 16.12 20.01 20.90 3.65
Average stockholders' equity to average assets 7.07 7.01 5.81 5.99 8.13
Average tangible stockholders' equity
to average tangible assets (1)(2) 6.29 6.19 4.90 5.01 6.84
Stockholders' equity to total assets 7.16 6.81 6.77 5.27 7.10
Core deposits to total deposits (3) 53.44 52.67 48.87 48.41 47.84
Net interest rate spread 2.11 1.91 1.98 2.22 2.32
Net interest margin 2.23 2.12 2.27 2.45 2.58
Average interest-earning assets to average
interest-bearing liabilities 1.03x 1.05x 1.06x 1.05x 1.06x
General and administrative expense to average assets 0.88% 0.79% 0.85% 0.89% 1.28%
Efficiency ratio (4) 34.25 32.68 33.71 32.31 45.93
Cash dividends paid per common share $ 0.77 $ 0.61 $ 0.51 $ 0.48 $ 0.40
Dividend payout ratio 27.02% 25.96% 23.61% 21.92% 108.11%
ASSET QUALITY RATIOS:
Non-performing loans to total loans (5) 0.29 0.31 0.32 0.52 1.26
Non-performing loans to total assets (5) 0.16 0.16 0.16 0.24 0.54
Non-performing assets to total assets (5)(6) 0.16 0.18 0.18 0.26 0.58
Allowance for loan losses to non-performing loans 242.04 221.70 220.88 143.49 66.99
Allowance for loan losses to non-accrual loans 249.53 229.60 226.85 151.77 70.00
Allowance for loan losses to total loans 0.69 0.68 0.70 0.74 0.84
OTHER DATA:
Number of deposit accounts 990,873 985,473 972,777 952,514 980,307
Mortgage loans serviced for others (in thousands) $2,671,085 $3,322,087 $3,929,483 $4,414,684 $4,944,176
Number of full service banking offices 86 86 86 87 96
Regional lending offices 1 1 1 1 12
Full time equivalent employees 1,956 1,885 1,862 1,914 1,987
(1) Average tangible stockholders' equity represents average stockholders'
equity less average goodwill.
(2) Average tangible assets represents average assets less average goodwill.
(3) Core deposits are comprised of savings, money market, NOW and demand
deposit accounts.
(4) Efficiency ratio represents general and administrative expense divided by
the sum of net interest income plus non-interest income.
(5) Non-performing loans consist of all non-accrual loans and all mortgage
loans delinquent 90 days or more as to their maturity date but not their
interest due and exclude loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $5.0 million, $5.4 million, $5.2
million, $6.7 million and $6.9 million at December 31, 2002, 2001, 2000,
1999 and 1998, respectively.
(6) Non-performing assets consist of all non-performing loans, real estate
owned and non-performing investments in real estate, net.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" contains a summary of our significant
accounting policies. Various elements of our accounting policies, by their
nature, are inherently subject to estimation techniques, valuation assumptions
and other subjective assessments. Certain assets are carried in our consolidated
statements of financial condition at fair value or at the lower of cost or fair
value. Our policies with respect to the methodologies used to determine the
allowance for loan losses, the valuation of mortgage servicing rights, or MSR,
and judgments regarding goodwill and securities impairment are our most critical
accounting policies because they are important to the presentation of our
financial condition and results of operations, involve a higher degree of
complexity and require management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters. The
use of different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
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 Statement of Financial Accounting Standards, or SFAS,
No. 114, "Accounting by Creditors for Impairment of a Loan, an Amendment of FASB
Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB
Statement No. 114." Such evaluation, which includes a review of loans on which
full collectibility is not reasonably assured, considers the estimated fair
value of the underlying collateral, if any, current and anticipated economic and
regulatory conditions, current and historical loss experience of similar loans
and other factors that determine risk exposure to arrive at an adequate loan
loss allowance. Pursuant to our policy, loan losses are charged-off in the
period the loans, or portions thereof, are deemed uncollectible. The
determination of the loans on which full collectibility is not reasonably
assured, the estimates of the fair value of the underlying collateral, and the
assessments of economic and regulatory conditions are subject to assumptions and
judgments by management. Specific valuation allowances could differ materially
as a result of changes in these assumptions and judgments.
General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with our lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. The determination of the adequacy of the valuation
allowance takes into consideration a variety of factors. We segment our loan
portfolio into like categories by composition and size and perform analyses
against each category. These analyses include 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
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market conditions may have on the portfolio as well as known and inherent risks
in the portfolio. Finally, we evaluate and consider the allowance ratios and
coverage percentages of both peer group and regulatory agency data. After
evaluating these variables, we determine appropriate allowance coverage
percentages for each of our portfolio segments and the appropriate level of our
allowance for loan losses.
These evaluations are inherently subjective because, even though they are based
on objective data, it is management's interpretation of that data that
determines the amount of the appropriate allowance. Therefore, from time to
time, we review the actual performance and charge-off history of our portfolio
and compare that to our previously determined allowance coverage percentages. In
doing so, we evaluate the impact the previously mentioned variables may have had
on the portfolio to determine which changes, if any, should be made to our
assumptions and analyses.
As indicated above, actual results could differ from our estimate as a result of
changes in economic or market conditions. Changes in estimates could result in a
material change in the allowance. While we believe that the allowance for loan
losses has been established and maintained at levels adequate to reflect the
risks inherent in our loan portfolio, future increases may be necessary if
economic or market conditions decline substantially from the conditions that
existed at the time of the initial determinations.
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses" and "Asset Quality."
Valuation of MSR
MSR are carried at cost and amortized over the estimated remaining lives of the
loans serviced. Impairment, if any, is recognized through a valuation allowance.
The initial recognition of originated MSR is based upon an allocation of the
total cost of the related loans between the loans and the servicing rights based
on their relative estimated fair values. The estimated fair value of MSR is
based upon quoted market prices of similar loans which we sell servicing
released. Purchased MSR are recorded at cost, although we generally do not
purchase MSR. Impairment exists if the carrying value of MSR exceeds the
estimated fair value. We stratify our MSR by underlying loan type, primarily
fixed and adjustable, and further stratify the fixed rate loans by interest
rate. Individual impairment allowances for each stratum are established when
necessary and then adjusted in subsequent periods to reflect changes in the
measurement of impairment. The estimated fair values of each MSR stratum are
obtained through independent third party valuations through an analysis of
future cash flows, incorporating numerous assumptions including servicing
income, servicing costs, market discount rates, prepayment speeds, default rates
and other market driven data. All assumptions are reviewed for reasonableness on
a quarterly basis to ensure they reflect current and anticipated market
conditions.
The fair value of MSR is highly sensitive to changes in assumptions. Changes in
prepayment speed assumptions have the most significant impact on the fair value
of our MSR. Generally, as interest rates decline, mortgage loan prepayments
accelerate due to increased refinance activity, which results in a decrease in
the fair value of MSR. As interest rates rise, mortgage loan prepayments slow
down, which results in an increase in the fair value of MSR. Thus, any
measurement of the fair value of our MSR is limited by the conditions existing
and the assumptions utilized as of a particular point in time, and those
assumptions may not be appropriate if they are applied at a different point in
time.
Goodwill Impairment
Goodwill is accounted for in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," which was effective January 1, 2002. Goodwill is presumed to
have an indefinite useful life and should not be 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
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exceeds its carrying amount, goodwill of the reporting unit is not considered
impaired. For purposes of our goodwill impairment testing, we identified a
single reporting unit. Upon adoption of SFAS No. 142 we performed a transitional
goodwill impairment evaluation. Additionally, on September 30, 2002 we performed
our annual goodwill impairment test. We used the quoted market price of our
common stock on our impairment testing dates as the basis for determining the
fair value of our one reporting unit. As of both impairment test dates, we
determined the fair value of our one reporting unit to be in excess of its
carrying value. Accordingly, as of our adoption of SFAS No. 142 and as of our
annual impairment test date, there was no indication of goodwill impairment.
According to SFAS No. 142, quoted market prices in active markets are the best
evidence of fair value and are to be used as the basis for the measurement, when
available. Other acceptable valuation methods include present value measurement
or measurements based on multiples of earnings or revenue or similar performance
measures. Differences in the identification of reporting units and the use of
valuation techniques can result in materially different evaluations of
impairment.
Securities Impairment
Our available-for-sale portfolio is carried at estimated fair value, with any
unrealized gains and losses, net of taxes reported as accumulated other
comprehensive income in stockholders' equity. The securities which we have the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. We conduct a periodic review
and evaluation of the securities portfolio to determine if the decline in the
fair value of any security below its carrying value is other than temporary. If
we deem such decline to be other than temporary, the security is written down to
a new cost basis and the resulting loss is charged to earnings. The market
values of our securities, particularly our fixed rate mortgage-backed securities
which comprise 88.8% of our total securities portfolio at December 31, 2002, are
affected by changes in interest rates. In general, as interest rates rise, the
market value of fixed rate securities will decrease; as interest rates fall, the
market value of fixed rate securities will increase. Estimated fair values for
securities are based on published or securities dealers' market values. There
were no security write downs during the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is cash provided by principal and interest payments
on loans and mortgage-backed and other securities. Principal payments on loans
and mortgage-backed securities and proceeds from calls and maturities of other
securities totaled $12.15 billion for the year ended December 31, 2002 and $7.28
billion for the year ended December 31, 2001. The increase in loan and security
repayments was primarily the result of the increase in mortgage loan refinance
activity caused by the lower interest rate environment during the year ended
December 31, 2002. The Federal Open Market Committee, or FOMC, reduced the
federal funds rate by a total of 475 basis points during 2001 and an additional
50 basis points in 2002. More importantly, medium- and long-term interest rates
(maturities of two to ten years) declined on average approximately 140 basis
points during the year ended December 31, 2002. These rate reductions resulted
in a lower interest rate environment during the year ended December 31, 2002 as
compared to the year ended December 31, 2001.
In addition to cash provided by principal and interest payments on loans and
securities, our other sources of funds include cash provided by operating
activities, deposits and borrowings. Net cash provided by operating activities
totaled $157.4 million during the year ended December 31, 2002 and $222.2
million during the year ended December 31, 2001. During the year ended December
31, 2002, net borrowings decreased $1.00 billion, while net deposits increased
$163.5 million. During the year ended December 31, 2001, net borrowings
decreased $498.6 million, while net deposits increased $832.0 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, NOW and demand deposits accounts. The net increases in
deposits for the years ended December 31, 2002 and 2001 reflect our continued
emphasis on attracting customer deposits through competitive rates, extensive
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product offerings and quality service. Despite increased local competition for
checking accounts, we have been successful in increasing the number of NOW and
demand deposit accounts opened in 2002 due in large part to the previously
discussed PEAK process and an integrated checking account promotion which were
introduced in the first and second quarters of 2002, respectively.
Our primary use of funds is for the origination and purchase of mortgage loans.
However, during the year ended December 31, 2002, despite record loan
originations, our purchases of mortgage-backed securities exceeded our
origination and purchase of mortgage loans. During the year ended December 31,
2002, our gross originations and purchases of mortgage loans totaled $5.59
billion, including originations of loans held-for-sale totaling $484.3 million,
compared to $4.56 billion, including originations of loans held-for-sale
totaling $405.7 million, during the year ended December 31, 2001. This increase
was primarily attributable to the lower interest rate environment during 2002
which resulted in an increase in mortgage refinance activity. Cash flows in
excess of mortgage and other loan fundings were primarily utilized for the
purchase of mortgage-backed securities and the repayment of borrowings.
Purchases of mortgage-backed securities totaled $6.84 billion and purchases of
other securities totaled $31.0 million during the year ended December 31, 2002.
In addition, net borrowings were reduced by $1.00 billion during the year ended
December 31, 2002. For the year ended December 31, 2001, purchases of
mortgage-backed securities totaled $2.03 billion, purchases of other securities
totaled $2.0 million and net borrowings were reduced by $498.6 million. The
rapid decline in interest rates in 2001 and the decline in medium- and long-term
interest rates in 2002 resulted in a significant increase in loan and
mortgage-backed securities repayments during the year ended December 31, 2002.
Even with our increased levels of originations and purchases of mortgage loans
and mortgage-backed securities purchases, both our total loan and securities
portfolios decreased slightly from 2001 to 2002. Should the pace of repayment
activity remain at its recent levels and cash inflows continue to exceed
mortgage and other loan fundings, we will, in all likelihood, continue to
purchase mortgage-backed and other securities, resulting in growth of our
securities portfolio. If repayment activity declines in the future, we will
likely reduce our purchases of mortgage-backed and other securities.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, our most liquid
assets, totaled $677.9 million at December 31, 2002, compared to $1.45 billion
at December 31, 2001. Increased loan and security repayments provided the
additional liquidity at December 31, 2001, which was maintained, in part, to
both help fund our approximately $2.2 billion mortgage application pipeline at
December 31, 2001 and to help repay a portion of the $850.0 million of
borrowings which matured in the first quarter of 2002. Borrowings maturing over
the next twelve months total $2.20 billion with a weighted average rate of
4.98%. We have the flexibility to either repay or rollover such borrowings as
they mature. In addition, we have $2.43 billion in certificates of deposit with
a weighted average rate of 2.88% maturing over the next twelve months. We expect
to retain or replace a significant portion of such deposits based on our
competitive pricing and historical experience. Retained or replaced deposits and
refinanced borrowings during the next twelve months should carry lower weighted
average rates than those they replace, assuming that interest rates remain at or
near their current levels.
The most significant liquidity challenge we face is the variability in cash
flows as a result of mortgage refinance activity. As mortgage interest rates
decline, customers' refinance activities tend to accelerate causing the cash
flow from both our mortgage loan portfolio and our mortgage-backed securities
portfolio to accelerate. When mortgage rates increase the opposite effect tends
to occur. In addition, as mortgage interest rates decrease, customers tend to
prefer fixed rate mortgage loan products over variable rate products. Since we
generally sell our fifteen year and thirty year fixed rate loan production into
the secondary mortgage market, the origination of such products for sale does
not significantly reduce our liquidity.
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During the quarter ended December 31, 2002, we issued $250.0 million of senior
unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes
were placed with a limited number of institutional investors under Rule 144A of
the Securities Act. In December 2002, we filed an exchange offer registration
statement with the SEC to allow the note holders to exchange the notes for a new
issue of substantially identical notes registered under the Securities Act,
which are designated as our 5.75% Senior Notes due 2012, Series B. The
registration statement became effective on December 30, 2002. As of January 30,
2003, all of the outstanding notes had been tendered for exchange. 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 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.
Stockholders' equity increased to $1.55 billion at December 31, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $248.4 million, the effect of stock options exercised
and related tax benefit of $22.3 million, 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 $10.2 million. These
increases were partially offset by repurchases of our common stock of $211.1
million and dividends declared of $70.2 million.
We declared cash dividends on our common stock totaling $64.2 million during the
year ended December 31, 2002 and $55.3 million during the year ended December
31, 2001. During each of the years ended December 31, 2002 and 2001, we declared
cash dividends on our Series B Preferred Stock totaling $6.0 million. On January
22, 2003, we declared a quarterly cash dividend of $0.20 per share on shares of
our common stock payable on March 3, 2003 to stockholders of record as of the
close of business on February 18, 2003.
During the year ended December 31, 2002, we completed our eighth stock
repurchase plan, which was approved by our Board of Directors on September 17,
2001. This plan authorized the purchase, at management's discretion, of up to
10,000,000 shares, or approximately 11% of our common stock then outstanding. On
October 16, 2002, our Board of Directors approved our ninth stock repurchase
plan authorizing the purchase, at management's discretion, of 10,000,000 shares,
or approximately 11% of our common stock then outstanding, over a two year
period in open-market or privately negotiated transactions. Under these plans,
during the year ended December 31, 2002, we repurchased 7,283,400 shares of our
common stock at an aggregate cost of $211.1 million, of which 318,000 shares
were acquired pursuant to our ninth stock repurchase plan.
At December 31, 2002, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.23%, leverage
capital ratio of 7.23% and total risk-based capital ratio of 15.44%. The minimum
regulatory requirements are a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and total risk-based capital ratio of 8.00%.
COMMITMENTS AND CONTINGENCIES
In the normal course of business, we routinely enter into various commitments,
primarily relating to the origination, purchase and sale of loans, the purchase
of securities and the leasing of certain office facilities. At December 31,
2002, we had outstanding commitments to originate and purchase loans totaling
$744.7 million; outstanding unused lines of credit totaling $336.9 million,
which relate primarily to home equity lines of credit; outstanding commitments
to sell loans totaling $125.5 million; and outstanding commitments to purchase
securities totaling $504.0 million. Minimum rental payments due under
non-cancelable operating leases for 2003 totaled $6.5 million at December 31,
2002. We anticipate that we will have sufficient funds available to meet our
current commitments in the normal course of our business.
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COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
FINANCIAL CONDITION
Total assets decreased $969.9 million to $21.70 billion at December 31, 2002,
from $22.67 billion at December 31, 2001. The primary reason for the decrease in
total assets was the decrease in federal funds sold and repurchase agreements.
Federal funds sold and repurchase agreements decreased $798.9 million to $510.3
million at December 31, 2002, from $1.31 billion at December 31, 2001. The
unusually high level of liquidity at December 31, 2001 reflected the increased
cash flows from loan and security repayments which we held and used, in part, to
both help fund our mortgage application pipeline at December 31, 2001 and to
repay a portion of borrowings which matured, primarily during the first quarter
of 2002.
Mortgage loans decreased $244.0 million to $11.68 billion at December 31, 2002,
from $11.92 billion at December 31, 2001. This decrease was primarily due to the
extraordinarily high level of mortgage loan repayments in 2002, partially offset
by an increase in gross mortgage loans originated and purchased in 2002 as
compared to 2001. Mortgage loan repayments increased to $5.34 billion for the
year ended December 31, 2002, from $3.46 billion for the year ended December 31,
2001. Gross mortgage loans originated and purchased during the year ended
December 31, 2002 totaled $5.10 billion, excluding originations of loans
held-for-sale totaling $484.3 million, of which $3.57 billion were originations
and $1.53 billion were purchases. This compares to $2.72 billion of originations
and $1.43 billion of purchases for a total of $4.15 billion, excluding
originations of loans held-for-sale totaling $405.7 million, during the year
ended December 31, 2001. The increase in mortgage loan repayments, originations
and purchases was primarily a result of the lower interest rate environment
during 2002 compared to 2001, which has increased the level of mortgage
refinance activity.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans, which represent 76.9% of our total loan portfolio at
December 31, 2002, decreased $895.7 million to $9.21 billion at December 31,
2002, from $10.11 billion at December 31, 2001. As noted above, this decrease
was primarily due to the high level of loan repayments as a result of refinance
activity in the prevailing interest rate environment. While we continue to be
primarily a one-to-four family mortgage lender, we have increased our emphasis
on multi-family and commercial real estate loan originations. Our multi-family
mortgage loans, which tend to be less susceptible to prepayment risk than our
one-to-four family loans, increased $505.7 million to $1.60 billion at December
31, 2002, from $1.09 billion at December 31, 2001. Similarly, our commercial
real estate loans increased $146.3 million to $744.6 million at December 31,
2002, from $598.3 million at December 31, 2001. Our 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. Our portfolio of consumer and other loans
increased by $132.4 million to $372.6 million at December 31, 2002, from $240.2
million at December 31, 2001. This increase is primarily in home equity lines of
credit as a result of the strong housing market and the low interest rate
environment.
Mortgage-backed securities increased $305.5 million to $7.38 billion at December
31, 2002, from $7.07 billion at December 31, 2001. This increase was primarily
the result of purchases of $6.84 billion of REMICs and CMOs, partially offset by
principal payments received of $6.09 billion and sales of $438.6 million. During
the year ended December 31, 2001, our purchases of mortgage-backed securities
totaled $2.03 billion and principal payments received totaled $3.01 billion.
There were no security sales during the year ended December 31, 2001.
Other securities decreased $484.8 million to $454.3 million at December 31,
2002, from $939.1 million at December 31, 2001, primarily due to $573.2 million
in securities which were called or matured, partially offset by the net
accretion of discounts of $41.4 million, purchases of other securities totaling
$31.0 million and a decrease in the net unrealized loss on securities
available-for-sale of $16.0
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million. The continued decline in interest rates in 2002 resulted in a
significant portion of our callable investment securities being called. The
improvement in the 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 December 31, 2002.
BOLI increased $116.1 million to $358.9 million at December 31, 2002, from
$242.8 million at December 31, 2001, primarily as a result of an additional
$100.0 million premium paid in the first quarter of 2002 to purchase additional
BOLI. BOLI is classified as a non-interest earning asset. Increases in the cash
surrender value are recorded as non-interest income and insurance proceeds
received are recorded as a reduction of the cash surrender value. Other assets
decreased $23.3 million to $89.4 million at December 31, 2002, from $112.7
million at December 31, 2001, primarily due to a decrease in the net deferred
tax asset which was primarily related to a decrease in the net unrealized loss
on securities available-for-sale.
During 2002, we continued shifting our liability emphasis from borrowings to
deposits, particularly lower costing core deposits. Deposits increased $163.5
million to $11.07 billion at December 31, 2002, from $10.90 billion at December
31, 2001. The increase in deposits was primarily due to an increase of $170.8
million in core deposits to $5.91 billion at December 31, 2002, from $5.74
billion at December 31, 2001 which was attributable to our continued emphasis on
deposit generation through competitive rates, extensive product offerings and
quality service. While total core deposits increased, our money market accounts,
which are a component of core deposits, decreased $256.7 million to $1.70
billion at December 31, 2002, from $1.96 billion at December 31, 2001. The
decrease in our money market accounts can be attributed to increased competition
for money market and checking accounts. Certain local competitors, as well as
recent entrants into the local market, have continued to offer well above market
rates for these types of deposits. We have not increased the rates we offer on
these accounts because we do not consider it a cost effective strategy.
Offsetting this decrease in our money market accounts were increases in savings
accounts of $244.1 million and NOW and demand deposit accounts of $183.3
million. Despite increased local competition for checking accounts, we have been
successful in increasing the number of NOW and demand deposit accounts opened in
2002 due in large part to the previously discussed PEAK process and an
integrated checking account promotion, which were introduced in the first and
second quarters of 2002, respectively. Reverse repurchase agreements decreased
$1.10 billion to $6.29 billion at December 31, 2002, from $7.39 billion at
December 31, 2001. Federal Home Loan Bank of New York advances increased $150.0
million to $2.06 billion at December 31, 2002, from $1.91 billion at December
31, 2001. Other borrowings, net, decreased $50.6 million to $472.2 million at
December 31, 2002, from $522.8 million at December 31, 2001. The net decrease in
other borrowings was the result of the maturity of a $300.0 million medium-term
note in June 2002, partially offset by the issuance of $250.0 million of senior
unsecured notes during the quarter ended December 31, 2002. The decrease in
borrowings reflects management's decision to utilize excess cash flow to repay
various borrowings which matured during the year ended December 31, 2002. For
additional information on the $250.0 million of senior unsecured notes see
"Liquidity and Capital Resources."
Stockholders' equity increased to $1.55 billion at December 31, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $248.4 million, the effect of stock options exercised
and related tax benefit of $22.3 million, other comprehensive income, net of
tax, of $11.8 million and the amortization of the allocated portion of shares
held by the ESOP of $10.2 million. These increases were partially offset by
repurchases of our common stock of $211.1 million and dividends declared of
$70.2 million.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 2002 increased $25.5 million to
$248.4 million, from $222.9 million for the year ended December 31, 2001. For
the year ended December 31, 2002, diluted
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earnings per common share increased to $2.85 per share, as compared to $2.35 per
share for the year ended December 31, 2001. Return on average assets increased
to 1.12% for the year ended December 31, 2002, from 0.99% for the year ended
December 31, 2001. Return on average stockholders' equity increased to 15.87%
for the year ended December 31, 2002, from 14.13% for the year ended December
31, 2001. Return on average tangible stockholders' equity increased to 18.00%
for the year ended December 31, 2002, from 16.12% for the year ended December
31, 2001.
The results of operations for the year ended December 31, 2002 include the
benefit derived from the adoption of SFAS No. 142. SFAS No. 142 eliminated
goodwill amortization which totaled $19.1 million, or $0.21 per diluted common
share, for the year ended December 31, 2001. The results of operations for the
year ended December 31, 2001 also include a $2.3 million, after tax, charge for
the cumulative effect of accounting change related to the adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," effective January 1, 2001.
See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data," for further discussion of
the impact of the implementation of SFAS No. 142, SFAS No. 133 and SFAS No. 138.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
primarily upon the volume of interest-earning assets and interest-bearing
liabilities and the corresponding interest rates earned or paid. Our net
interest income is significantly impacted by changes in interest rates and
market yield curves. See Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the year ended December 31, 2002, net interest income increased $7.4 million
to $464.4 million, from $457.0 million for the year ended December 31, 2001.
This increase was primarily attributable to an increase in the net interest
margin to 2.23% for the year ended December 31, 2002, from 2.12% for the year
ended December 31, 2001. The increase in the net interest margin was primarily
due to the decrease in the cost of funds due to the downward repricing of
deposits as a result of the lower interest rate environment which has persisted
since June of 2001, along with the repayment of various higher cost borrowings.
The average balance of net interest-earning assets decreased $328.5 million to
$635.0 million at December 31, 2002, from $963.5 million at December 31, 2001.
The decrease in the average balance of net interest-earning assets was the
result of a decrease of $670.9 million in the average balance of total
interest-earning assets to $20.84 billion for the year ended December 31, 2002,
from $21.51 billion for the year ended December 31, 2001, partially offset by a
decrease of $342.4 million in the average balance of total interest-bearing
liabilities to $20.20 billion for the year ended December 31, 2002, from $20.54
billion for the year ended December 31, 2001. The net interest rate spread
increased to 2.11% for the year ended December 31, 2002, from 1.91% for the year
ended December 31, 2001. The change in the net interest rate spread was the
result of a decrease in the average cost of interest-bearing liabilities to
3.97% for the year ended December 31, 2002, from 4.78% for the year ended
December 31, 2001, partially offset by a decrease in the average yield on
interest-earning assets to 6.08% for the year ended December 31, 2002, from
6.69% for the year ended December 31, 2001. The changes in such costs and yields
were a result of the lower interest rate environment previously discussed. The
changes in average interest-earning assets and interest-bearing liabilities and
their related yields and costs are discussed in greater detail under "Interest
Income" and "Interest Expense."
42
Analysis of Net Interest Income
The following table sets forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the years
ended December 31, 2002, 2001 and 2000. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The average balance of loans receivable includes loans 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 YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST BALANCE INTEREST COST
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 10,077,810 $ 626,251 6.21% $10,069,593 $ 694,596 6.90%
Multi-family, commercial
real estate and construction 2,072,805 162,677 7.85 1,487,504 124,163 8.35
Consumer and other loans (1) 307,103 17,623 5.74 206,903 17,853 8.63
------------- ---------- ----------- -----------
Total loans 12,457,718 806,551 6.47 11,764,000 836,612 7.11
Mortgage-backed securities (2) 6,599,887 377,623 5.72 7,282,666 462,621 6.35
Other securities (2)(3) 1,011,280 69,211 6.84 1,519,647 107,315 7.06
Federal funds sold and
repurchase agreements 766,906 12,877 1.68 940,394 32,015 3.40
------------- ---------- ----------- -----------
Total interest-earning assets 20,835,791 1,266,262 6.08 21,506,707 1,438,563 6.69
---------- -----------
Goodwill 185,151 195,191
Other non-interest-earning assets 1,116,863 813,033
------------- -----------
Total assets $ 22,137,805 $22,514,931
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,754,000 29,096 1.06 $ 2,495,532 46,283 1.85
Money market 1,876,107 32,512 1.73 1,734,232 65,484 3.78
NOW and demand deposit 1,269,866 3,176 0.25 1,075,524 5,097 0.47
Certificates of deposit 5,203,610 223,216 4.29 5,223,163 283,125 5.42
------------- ---------- ----------- -----------
Total deposits 11,103,583 288,000 2.59 10,528,451 399,989 3.80
Borrowed funds 9,097,198 513,838 5.65 10,014,736 581,616 5.81
------------- ---------- ----------- -----------
Total interest-bearing liabilities 20,200,781 801,838 3.97 20,543,187 981,605 4.78
---------- -----------
Non-interest-bearing liabilities 372,050 394,302
------------- -----------
Total liabilities 20,572,831 20,937,489
Stockholders' equity 1,564,974 1,577,442
------------- -----------
Total liabilities and
stockholders' equity $ 22,137,805 $22,514,931
------------- -----------
Net interest income/net
interest rate spread (4) $ 464,424 2.11% $ 456,958 1.91%
---------- ------ --------- -----
Net interest-earning assets/
net interest margin (5) $ 635,010 2.23% $ 963,520 2.12%
------------- ------ ----------- -----
Ratio of interest-earning assets
to interest-bearing liabilities 1.03x 1.05x
------------- -----------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2000
-----------------------------------
AVERAGE
AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST
- ---------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,513,843 $ 673,707 7.08%
Multi-family, commercial
real estate and construction 1,143,120 95,837 8.38
Consumer and other loans (1) 177,075 18,237 10.30
------------- ----------
Total loans 10,834,038 787,781 7.27
Mortgage-backed securities (2) 8,805,772 577,808 6.56
Other securities (2)(3) 1,878,922 132,426 7.05
Federal funds sold and
repurchase agreements 313,053 19,919 6.36
------------- ----------
Total interest-earning assets 21,831,785 1,517,934 6.95
----------
Goodwill 214,302
Other non-interest-earning assets 266,695
-------------
Total assets $ 22,312,782
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,529,448 51,112 2.02
Money market 1,337,754 71,290 5.33
NOW and demand deposit 939,715 5,439 0.58
Certificates of deposit 4,968,151 282,260 5.68
------------- ----------
Total deposits 9,775,068 410,101 4.20
Borrowed funds 10,824,360 613,252 5.67
------------- ----------
Total interest-bearing liabilities 20,599,428 1,023,353 4.97
----------
Non-interest-bearing liabilities 416,950
-------------
Total liabilities 21,016,378
Stockholders' equity 1,296,404
-------------
Total liabilities and
stockholders' equity $ 22,312,782
-------------
Net interest income/net
interest rate spread (4) $ 494,581 1.98%
---------- ------
Net interest-earning assets/
net interest margin (5) $ 1,232,357 2.27%
------------- ------
Ratio of interest-earning assets
to interest-bearing liabilities 1.06x
--------------
(1) Mortgage and consumer and other loans include loans held-for-sale and
non-performing loans and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized cost.
(3) Other securities include Federal Home Loan Bank of New York stock.
(4) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
43
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
YEAR ENDED DECEMBER 31, 2002 YEAR ENDED DECEMBER 31, 2001
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 2001 YEAR ENDED DECEMBER 31, 2000
---------------------------------------- -------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------------------------- -------------------------------------------
(IN THOUSANDS) VOLUME RATE NET VOLUME RATE NET
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $ 572 $ (68,917) $ (68,345) $ 38,418 $ (17,529) $ 20,889
Multi-family, commercial
real estate and construction 46,338 (7,824) 38,514 28,671 (345) 28,326
Consumer and other loans 6,934 (7,164) (230) 2,818 (3,202) (384)
Mortgage-backed securities (41,296) (43,702) (84,998) (97,198) (17,989) (115,187)
Other securities (34,857) (3,247) (38,104) (25,299) 188 (25,111)
Federal funds sold and
repurchase agreements (5,114) (14,024) (19,138) 24,856 (12,760) 12,096
- -------------------------------------------------------------------------------------------------------------------------------
Total (27,423) (144,878) (172,301) (27,734) (51,637) (79,371)
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 4,342 (21,529) (17,187) (664) (4,165) (4,829)
Money market 4,998 (37,970) (32,972) 18,001 (23,807) (5,806)
NOW and demand deposit 783 (2,704) (1,921) 746 (1,088) (342)
Certificates of deposit (1,057) (58,852) (59,909) 14,113 (13,248) 865
Borrowed funds (52,113) (15,665) (67,778) (46,571) 14,935 (31,636)
- -------------------------------------------------------------------------------------------------------------------------------
Total (43,047) (136,720) (179,767) (14,375) (27,373) (41,748)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in net interest
income $ 15,624 $ (8,158) $ 7,466 $ (13,359) $ (24,264) $ (37,623)
- -------------------------------------------------------------------------------------------------------------------------------
Interest Income
Interest income for the year ended December 31, 2002 decreased $172.3 million to
$1.27 billion, from $1.44 billion for the year ended December 31, 2001. This
decrease was the result of a decrease in the average yield on interest-earning
assets to 6.08% for the year ended December 31, 2002, from 6.69% for the year
ended December 31, 2001, coupled with a decrease of $670.9 million in the
average balance of interest-earning assets to $20.84 billion for the year ended
December 31, 2002, from $21.51 billion for the year ended December 31, 2001. The
decrease in the average yield on interest-earning assets was due to the
decreases in the average yields on all asset categories. As previously
discussed, the reduction in short-term interest rates as well as the declines in
medium- and long-term interest rates during 2002, have created a lower interest
rate environment during the year ended December 31, 2002 than that which existed
during the year ended December 31, 2001. The decrease in the average balance of
interest-earning assets was primarily due to decreases in the average balances
of mortgage-backed and other securities, resulting from principal repayments,
maturities, calls and sales, and decrease in the average balance of federal
funds sold and repurchase agreements, partially offset by increases in the
average balances of mortgage loans, primarily multi-family, commercial real
estate and construction loans, and consumer and other loans. Also contributing
to the decrease in the average balance of interest-earning assets was the
purchase of an additional $100.0 million of BOLI in the first quarter of
44
2002. The decrease and shift in the average balances of interest-earning assets
reflects our decision over the past several years to limit balance sheet growth
and reposition the balance sheet by emphasizing mortgage lending.
Interest income on one-to-four family mortgage loans decreased $68.3 million to
$626.3 million for the year ended December 31, 2002, from $694.6 million for the
year ended December 31, 2001, which was primarily the result of a decrease in
the average yield to 6.21% for the year ended December 31, 2002, from 6.90% for
the year ended December 31, 2001, slightly offset by an increase of $8.2 million
in the average balance of such loans. The slight increase in the average balance
of one-to-four family mortgage loans reflects the strong level of originations
and purchases, substantially offset by the extraordinarily high level of
repayment activity, due to refinancings, particularly in the second half of the
year. Interest income on multi-family, commercial real estate and construction
loans increased $38.5 million to $162.7 million for the year ended December 31,
2002, from $124.2 million for the year ended December 31, 2001, which was
primarily the result of an increase of $585.3 million in the average balance of
such loans, partially offset by a decrease in the average yield to 7.85% for the
year ended December 31, 2002, from 8.35% for the year ended December 31, 2001.
The increase in the average balance of multi-family, commercial real estate and
construction loans reflects the increase in originations of such loans, coupled
with the fact that we have not experienced significant repayment activity within
this portfolio in part due to the prepayment penalties associated with these
loans. The increase in the average balance of total mortgage loans reflects our
continued emphasis on the origination of mortgage loans. The decrease in the
average yields on mortgage loans reflects the lower interest rate environment
during 2002 as compared to 2001 as higher rate loans were repaid and replaced
with lower yielding new originations and purchases and ARM loans repriced.
Additionally, the yield is also negatively impacted by accelerated loan premium
amortization as a result of the increased refinance activity.
Interest income on consumer and other loans decreased $230,000 for the year
ended December 31, 2002 compared to the year ended December 31, 2001 resulting
from a decrease in the average yield to 5.74% for the year ended December 31,
2002, from 8.63% for the year ended December 31, 2001, partially offset by an
increase of $100.2 million in the average balance of this portfolio. The changes
in interest income on consumer and other loans are primarily attributable to
home equity loans which represent 86.5% of this portfolio at December 31, 2002.
The decrease in the average yield on consumer and other loans was primarily the
result of a decrease in the average yield on our home equity loans which are
adjustable rate loans which generally reset monthly and are indexed to the prime
rate. The prime rate decreased 475 basis points during the year ended December
31, 2001 and 50 basis points during the year ended December 31, 2002 in response
to the FOMC rate reductions. The increase in the average balance of consumer and
other loans was 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.
Interest income on mortgage-backed securities decreased $85.0 million to $377.6
million for the year ended December 31, 2002, from $462.6 million for the year
ended December 31, 2001. This decrease was the result of a decrease in the
average yield to 5.72% for the year ended December 31, 2002, from 6.35% for the
year ended December 31, 2001, coupled with a decrease of $682.8 million in the
average balance of the portfolio. Similar to mortgage loans, the decrease in the
average yield on mortgage-backed securities reflects the lower interest rate
environment during 2002 as higher yielding securities were repaid and replaced
with lower yielding purchases and security premium amortization accelerated. The
decrease in the average balance of mortgage-backed securities was the result of
our strategy of repositioning the balance sheet over the past several years,
increased levels of principal repayments due to the lower interest rate
environment which has existed since June 2001 and sales of securities during the
second half of 2002. Interest income on other securities decreased $38.1 million
to $69.2 million for the year ended December 31, 2002, from $107.3 million for
the year ended December 31, 2001. This decrease resulted from a decrease of
$508.4 million in the average balance of this portfolio, primarily due to higher
yielding securities being called throughout 2001 and 2002 as a result of the
declining interest rate environment. As a result of the decrease in the balance
of higher
45
yielding securities, the average yield decreased to 6.84% for the year ended
December 31, 2002, from 7.06% for the year ended December 31, 2001. Interest
income on federal funds sold and repurchase agreements decreased $19.1 million
as a result of a decrease in the average yield to 1.68% for the year ended
December 31, 2002, from 3.40% for the year ended December 31, 2001, coupled with
a decrease of $173.5 million in the average balance of the portfolio.
Interest Expense
Interest expense for the year ended December 31, 2002 decreased $179.8 million
to $801.8 million, from $981.6 million for the year ended December 31, 2001.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 3.97% for the year ended December 31, 2002, from
4.78% for the year ended December 31, 2001, coupled with a decrease of $342.4
million in the average balance of interest-bearing liabilities to $20.20 billion
for the year ended December 31, 2002, from $20.54 billion for the year ended
December 31, 2001. The decrease in the overall average cost of our
interest-bearing liabilities reflects the impact of the lower interest rate
environment, which has prevailed since June 2001, primarily on the cost of our
deposits. The decrease in the average balance of interest-bearing liabilities
was attributable to a decrease in borrowings, due to the repayment of matured
borrowings, partially offset by an increase in deposits, which reflects our
decision over the past several years to reposition the balance sheet through, in
part, a shift in our liability mix toward lower costing and less interest rate
sensitive core deposits.
Interest expense on deposits decreased $112.0 million, to $288.0 million for the
year ended December 31, 2002, from $400.0 million for the year ended December
31, 2001, reflecting a decrease in the average cost of deposits to 2.59% for the
year ended December 31, 2002, from 3.80% for the year ended December 31, 2001,
partially offset by an increase of $575.1 million in the average balance of
total deposits. The decrease in the average cost of total deposits was driven by
decreases in rates in all deposit categories, primarily on our certificates of
deposit and money market accounts, as a result of the lower interest rate
environment which has continued into 2002. The increase in the average balance
of total deposits was primarily the result of increases in the average balances
of savings, NOW and money market accounts, partially offset by a slight decrease
in the average balance of certificates of deposit.
Interest expense on certificates of deposit decreased $59.9 million resulting
from a decrease in the average cost to 4.29% for the year ended December 31,
2002, from 5.42% for the year ended December 31, 2001, coupled with a $19.6
million decrease in the average balance.
Interest expense on money market accounts decreased $33.0 million reflecting a
decrease in the average cost to 1.73% for the year ended December 31, 2002, from
3.78% for the year ended December 31, 2001, partially offset by an increase of
$141.9 million in the average balance of such accounts. Interest paid on money
market accounts is on a tiered basis with 87.07% of the balance at December 31,
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.
Interest expense on savings accounts decreased $17.2 million which was
attributable to a decrease in the average cost to 1.06% for the year ended
December 31, 2002, from 1.85% for the year ended December 31, 2001, partially
offset by an increase of $258.5 million in the average balance. Interest expense
on interest-bearing NOW accounts decreased $1.9 million as a result of a
decrease in the average cost to 0.25% for the year ended December 31, 2002, from
0.47% for the year ended December 31, 2001, partially offset by an increase of
$194.3 million in the average balance. The increases in the average balances of
savings and NOW and demand deposit accounts are consistent with our emphasis on
deposit generation.
Interest expense on borrowed funds for the year ended December 31, 2002
decreased $67.8 million to $513.8 million, from $581.6 million for year ended
December 31, 2001, resulting from a decrease of
46
$917.5 million in the average balance, coupled with a decrease in the average
cost of borrowings to 5.65% for the year ended December 31, 2002, from 5.81% for
the year ended December 31, 2001. During the year ended December 31, 2002, $1.90
billion in borrowings with an average rate of 6.81% matured, of which $1.40
billion were repaid and $500.0 million were rolled into short-term borrowings at
substantially lower rates. Additionally, we issued $250.0 million of 5.75%
senior unsecured notes during the quarter ended December 31, 2002.
Provision for Loan Losses
Provision for loan losses decreased $1.7 million, to $2.3 million for the year
ended December 31, 2002 compared to $4.0 million for the year ended December 31,
2001. During the third quarter of 2002, we performed an analysis of the actual
charge-off history of our loan portfolio compared to our previously determined
allowance coverage percentages. Our analysis indicated that our projection of
estimated losses inherent in our portfolio exceeded our actual charge-off
history during the recent economic downturn. In response to the results of this
analysis, we lowered our projections of estimated losses inherent in our
portfolio and we adjusted our allowance coverage percentages for our portfolio
segments accordingly. As a result of our analysis, no provision for loan losses
was recorded for the 2002 fourth quarter. However, the allowance for loan losses
increased to $83.5 million at December 31, 2002, from $82.3 million at December
31, 2001. The increase in the allowance for loan losses reflects the increases
in our multi-family and commercial real estate mortgage loan portfolios, which
generally involve greater credit risk, and therefore have higher allowance
coverage percentages, than one-to-four family mortgage loans. Net loan
charge-offs totaled $1.0 million for the year ended December 31, 2002 compared
to $1.7 million for the year ended December 31, 2001. Non-performing loans
decreased $2.6 million to $34.5 million at December 31, 2002, from $37.1 million
at December 31, 2001. The allowance for loan losses as a percentage of
non-performing loans increased to 242.04% at December 31, 2002, from 221.70% at
December 31, 2001 primarily due to the decrease in non-performing loans from
December 31, 2001 to December 31, 2002. For further discussion of non-performing
loans and allowance for loan losses, see "Critical Accounting Policies" and
"Asset Quality."
Non-Interest Income
Non-interest income for the year ended December 31, 2002 increased $17.3
million, to $107.4 million, from $90.1 million for the year ended December 31,
2001. The increase in non-interest income was primarily due to increases in net
gain on sales of securities, customer service fees and income from BOLI,
partially offset by a decrease in mortgage banking income, net.
Customer service fees increased $8.2 million to $60.2 million for the year ended
December 31, 2002, from $52.0 million for the year ended December 31, 2001. The
increase in customer service fees was primarily attributable to an increase in
the number of NOW and demand deposit accounts, which was primarily due to an
integrated checking account promotion initiated in the second quarter of 2002
and continued focus on our retail sales initiatives, including the introduction
of our PEAK Process in the first quarter of 2002. Other loan fees increased
$832,000 to $7.7 million for the year ended December 31, 2002, from $6.9 million
for the year ended December 31, 2001, primarily due to increased mortgage loan
refinance activity and production volume in 2002 as compared to 2001.
Mortgage banking income, net, which includes loan servicing fees, net gain on
sales of loans, amortization of MSR and valuation allowance adjustments for the
impairment of MSR, decreased $9.8 million. We recognized a net loss of $2.3
million for the year ended December 31, 2002, compared to net income of $7.5
million for the year ended December 31, 2001. This decrease was primarily due to
increases in the provision for the valuation allowance of MSR and the
amortization of MSR, coupled with a decrease in loan servicing fees. These
changes were partially offset by an increase in the gain on sales of loans. The
valuation allowance adjustments for the impairment of MSR increased $9.5 million
to $10.8 million for the year ended December 31, 2002, from $1.3 million for the
year ended December 31, 2001. This increase was related to the current and
forecasted lower interest rate
47
environment and projected accelerated loan prepayment speeds. Amortization of
mortgage servicing rights increased $655,000 to $10.2 million for the year ended
December 31, 2002, from $9.6 million for the year ended December 31, 2001. Loan
servicing fees, which include all contractual and ancillary servicing revenue we
receive, decreased $3.0 million to $12.1 million for the year ended December 31,
2002, from $15.1 million for the year ended December 31, 2001. This decrease in
loan servicing fees was the result of a decrease in the balance of loans
serviced for others to $2.67 billion at December 31, 2002, from $3.32 billion at
December 31, 2001. The decrease in the balance of loans serviced for others was
the result of runoff in that portfolio, due to repayments in the lower interest
rate environment exceeding the level of new servicing volume from loan sales.
Net gain on sales of loans increased $3.3 million to $6.6 million for the year
ended December 31, 2002, from $3.3 million for the year ended December 31, 2001.
The increase in net gain on sales of loans was primarily due to an increase in
the volume of fixed rate loans originated and sold into the secondary market
during 2002. The current interest rate environment has resulted in a significant
increase in refinance activity and greater demand for fixed rate loans, the
majority of which are not retained for our portfolio.
Net gain on sales of securities totaled $10.8 million for the year ended
December 31, 2002. During the second half of 2002, we sold mortgage-backed
securities with an amortized cost of $438.6 million. These gains were used as a
natural hedge to offset MSR valuation allowance adjustments caused by the
impairment of MSR discussed previously. There were no sales of securities in
2001.
Income from BOLI increased $4.6 million to $21.4 million for the year ended
December 31, 2002, from $16.8 million for the year ended December 31, 2001. As
discussed previously, during the first quarter of 2002 we purchased an
additional $100.0 million of BOLI. Increases in the cash surrender value of BOLI
are recorded as income.
Other non-interest income increased $2.7 million to $9.6 million for the year
ended December 31, 2002, from $6.9 million for the year ended December 31, 2001.
This increase was primarily due to the receipt of a $3.8 million net insurance
settlement regarding the lawsuit 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., or the
Weil Litigation, income 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. In 2001, we recognized income related to
the dissolution of a trust account previously established for certain former
executives.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2002 totaled $198.0
million, an increase of $184,000 from $197.8 million for the year ended December
31, 2001. This increase was primarily due to a $17.0 million increase in general
and administrative expense and a $2.2 million prepayment penalty incurred in
December 2002 on the prepayment of a $100.0 million reverse repurchase
agreement, offset by the elimination of goodwill amortization upon adoption of
SFAS No. 142 effective January 1, 2002, which totaled $19.1 million for the year
ended December 31, 2001.
General and administrative expense increased $17.0 million to $195.8 million for
the year ended December 31, 2002, from $178.8 million for the year ended
December 31, 2001. This increase was primarily due to an increase in
compensation and benefits expense.
Compensation and benefits expense increased $13.9 million to $106.7 million for
the year ended December 31, 2002, from $92.8 million for the year ended December
31, 2001. This increase was attributable to staff additions, primarily in our
retail banking network, and normal annual increases in salaries, coupled with an
increase in pension and other postretirement benefits expense of $3.4 million
and an increase in ESOP expense of $2.4 million for the year ended December 31,
2002 as compared to the year ended December 31, 2001. The increase in pension
expense is primarily related to the
48
decrease in the value of our pension assets which is a result of the continued
decline in the equities markets. The increase in ESOP expense was due to the
increase in eligible compensation, coupled with the higher average market value
of our common stock during the year ended December 31, 2002 compared to the year
ended December 31, 2001.
Other expense increased $2.6 million to $29.2 million for the year ended
December 31, 2002, from $26.6 million for the year ended December 31, 2001,
primarily due to a decrease in the fair value of our $300.0 million notional
amount of interest rate cap agreements. The interest rate caps were purchased in
the second half of 2001 as protection against interest rate increases during the
next several years as part of management's interest rate risk strategy.
Our percentage of general and administrative expense to average assets was 0.88%
for the year ended December 31, 2002, compared to 0.79% for the year ended
December 31, 2001. The efficiency ratio, which represents general and
administrative expense divided by the sum of net interest income plus
non-interest income, was 34.25% for the year ended December 31, 2002, compared
to 32.68% for the year ended December 31, 2001. The increases in these ratios
are attributable to the increase in general and administrative expense for the
year ended December 31, 2002 compared to the year ended December 31, 2001.
Income Tax Expense
For the year ended December 31, 2002, income tax expense was $123.1 million,
representing an effective tax rate of 33.1%, compared to $120.0 million,
representing an effective tax rate of 34.8%, for the year ended December 31,
2001. The reduction in the effective tax rate for the year ended December 31,
2002 was primarily due to the adoption of SFAS No. 142, which eliminated the
amortization of goodwill which was not deductible for tax purposes.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
FINANCIAL CONDITION
Total assets increased $330.9 million to $22.67 billion at December 31, 2001,
from $22.34 billion at December 31, 2000. We continued our strategy of
repositioning the balance sheet through increases in deposits and loans and
decreases in securities and borrowings, while limiting asset growth. Mortgage
loans increased $685.0 million to $11.92 billion at December 31, 2001, from
$11.24 billion at December 31, 2000. Gross mortgage loans originated and
purchased during the year ended December 31, 2001 totaled $4.15 billion,
excluding originations of loans held-for-sale totaling $405.7 million, of which
$2.72 billion were originations and $1.43 billion were purchases. This compares
to $1.77 billion of originations and $836.1 million of purchases for a total of
$2.60 billion, excluding originations of loans held-for-sale totaling $125.7
million, during the year ended December 31, 2000. The increase in mortgage loan
originations and purchases was primarily a result of the general decrease in
market interest rates, which has increased the level of mortgage refinance
activity. This increase was partially offset by an increase in mortgage loan
repayments to $3.46 billion for the year ended December 31, 2001, from $1.48
billion for the year ended December 31, 2000, which was also primarily a result
of the decrease in market interest rates.
Our mortgage loan portfolio, as well as our originations and purchases,
consisted primarily of one-to-four family mortgage loans. Our one-to-four family
mortgage loans, which represented 83.6% of our total loan portfolio at December
31, 2001, increased $254.7 million to $10.11 billion at December 31, 2001, from
$9.85 billion at December 31, 2000. Our multi-family mortgage loans increased
$292.4 million to $1.09 billion at December 31, 2001, from $801.9 million at
December 31, 2000. Our commercial real estate loans increased $118.1 million to
$598.3 million at December 31, 2001, from $480.2 million at December 31, 2000.
49
Mortgage-backed securities decreased $800.7 million to $7.07 billion at December
31, 2001, from $7.87 billion at December 31, 2000. This decrease was the result
of principal payments received of $3.01 billion, offset by purchases of $2.03
billion and a decrease in the net unrealized loss on securities
available-for-sale of $186.7 million, which includes a $22.6 million net
unrealized loss related to securities transferred to held-to-maturity during the
second quarter of 2001. The decrease in the net unrealized loss on securities
available-for-sale is directly related to the significant decline in market
interest rates in 2001.
In addition to the changes noted above in the mortgage-backed securities and
mortgage loan portfolios, other securities decreased $601.6 million to $939.1
million at December 31, 2001, from $1.54 billion at December 31, 2000, primarily
due to $695.5 million in securities which were called or matured, partially
offset by a decrease in the net unrealized loss on securities available-for-sale
of $36.2 million, the net accretion of discounts of $55.7 million, and purchases
of other securities totaling $2.0 million for the year ended December 31, 2001.
Federal funds sold and repurchase agreements increased $1.14 billion to $1.31
billion at December 31, 2001, from $171.5 million at December 31, 2000.
Increased loan and security repayments provided additional liquidity at December
31, 2001, which was used, in part, to both help fund our approximately $2.2
billion mortgage application pipeline at December 31, 2001 and to help repay a
portion of borrowings which matured primarily during the first quarter of 2002.
BOLI decreased $8.8 million to $242.8 million at December 31, 2001, from $251.6
million at December 31, 2000 primarily due to insurance proceeds received which
are recorded as a reduction of the cash surrender value. Other assets decreased
$97.3 million to $112.7 million at December 31, 2001, from $210.0 million at
December 31, 2000 primarily due to the decrease in the net deferred tax asset
which was directly related to a decrease in the net unrealized loss on
securities available-for-sale.
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 $832.0 million to
$10.90 billion at December 31, 2001, from $10.07 billion at December 31, 2000.
The increase in deposits was primarily due to an increase of $821.4 million in
core deposits to $5.74 billion at December 31, 2001, from $4.92 billion at
December 31, 2000 which was attributable to our continued emphasis on deposit
generation through competitive rates and product offerings. Reverse repurchase
agreements decreased $400.0 million to $7.39 billion at December 31, 2001, from
$7.79 billion at December 31, 2000. Federal Home Loan Bank of New York advances
totaled $1.91 billion at December 31, 2001 and 2000. Other borrowings, net,
decreased $102.6 million to $522.8 million at December 31, 2001, from $625.4
million at December 31, 2000. The decrease in borrowings is a result of the
repayment of various borrowings which either matured or were called during the
year ended December 31, 2001, partially offset by our issuance of $100.0 million
of senior unsecured notes.
Stockholders' equity increased to $1.54 billion at December 31, 2001, from $1.51
billion at December 31, 2000. The increase in stockholders' equity was the
result of net income of $222.9 million, other comprehensive income, net of tax,
of $119.1 million, the effect of stock options exercised and related tax benefit
of $29.9 million, and the amortization of the allocated portion of shares held
by the ESOP of $8.0 million. These increases were partially offset by
repurchases of our common stock of $289.1 million and dividends declared of
$61.3 million.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 2001 increased $6.4 million to $222.9
million, from $216.5 million for the year ended December 31, 2000. For the year
ended December 31, 2001, diluted earnings per common share increased to $2.35
per share, as compared to $2.16 per share for the year ended December 31, 2000.
Return on average assets increased to 0.99% for the year ended December 31,
2001, from 0.97% for the year ended December 31, 2000. Return on average
stockholders' equity
50
decreased to 14.13% for the year ended December 31, 2001, from 16.70% for the
year ended December 31, 2000. Return on average tangible stockholders' equity
decreased to 16.12% for the year ended December 31, 2001, from 20.01% for the
year ended December 31, 2000. The decreases in the returns on stockholders'
equity for the year ended December 31, 2001 were the result of a higher level of
average stockholders' equity. The increase in average stockholders' equity was
primarily due to the decrease in the net unrealized loss on securities
available-for-sale, net of taxes.
The results of operations for the year ended December 31, 2001 include a $2.3
million, after tax, charge for the cumulative effect of accounting change
related to the adoption of SFAS No. 133 and SFAS No. 138, effective January 1,
2001. See Note 1 and Note 11 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data," for further discussion of
the impact of the implementation of SFAS No. 133 and SFAS No. 138. The results
of operations for the year ended December 31, 2000 include a $2.5 million, after
tax, net gain on the disposition of banking offices and a $3.4 million, after
tax, charge for an executive severance payment.
Net Interest Income
For the year ended December 31, 2001, net interest income decreased $37.6
million to $457.0 million, from $494.6 million for the year ended December 31,
2000. This decrease was a result of the decrease in the net interest rate spread
to 1.91% for the year ended December 31, 2001, from 1.98% for the year ended
December 31, 2000. The change in the net interest rate spread was a result of a
decrease in the average yield on interest-earning assets to 6.69% for the year
ended December 31, 2001, from 6.95% for the year ended December 31, 2000,
partially offset by a decrease in the average cost of interest-bearing
liabilities to 4.78% for the year ended December 31, 2001, from 4.97% for the
year ended December 31, 2000. The average balance of net interest-earning assets
decreased $268.8 million to $963.5 million at December 31, 2001, from $1.23
billion at December 31, 2000. The decrease in the average balance of net
interest-earning assets was the result of a decrease of $325.1 million in the
average balance of total interest-earning assets to $21.51 billion for the year
ended December 31, 2001, from $21.83 billion for the year ended December 31,
2000, partially offset by a decrease of $56.2 million in the average balance of
total interest-bearing liabilities to $20.54 billion for the year ended December
31, 2001, from $20.60 billion for the year ended December 31, 2000. During the
fourth quarter of 2000, we implemented a BOLI program which decreased
interest-earning assets by approximately $250.0 million. The net interest margin
was 2.12% for the year ended December 31, 2001 and 2.27% for the year ended
December 31, 2000.
The changes in average interest-earning assets and interest-bearing liabilities
and their related yields and costs are discussed in greater detail under
"Interest Income" and "Interest Expense."
Interest Income
Interest income for the year ended December 31, 2001 decreased $79.4 million to
$1.44 billion, from $1.52 billion for the year ended December 31, 2000. This
decrease was the result of a decrease in the average yield on interest-earning
assets to 6.69% for the year ended December 31, 2001, from 6.95% for the year
ended December 31, 2000, coupled with a decrease of $325.1 million in the
average balance of interest-earning assets to $21.51 billion for the year ended
December 31, 2001, from $21.83 billion for the year ended December 31, 2000. The
decrease in the average yield on interest-earning assets was due to the
decreases in the average yields on primarily all asset categories which reflects
the declining interest rate environment we experienced in 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 and calls, partially offset by increases in the
average balances of mortgage loans and federal funds sold and repurchase
agreements. Additionally, we implemented a BOLI program in the fourth quarter of
2000 which decreased interest-earning assets by approximately $250.0 million.
The decrease and shift in the average balance of interest-earning assets
reflects our decision to limit balance sheet growth while continuing to
emphasize
51
one-to-four family mortgage lending. As previously discussed, the FOMC rate
reductions during 2001, which totaled 475 basis points, created a significantly
different interest rate environment during 2001 than that which existed at
December 31, 2000. Despite strong loan originations, our cash flows from
operations, loan and security repayments and deposit growth exceeded loan
originations and other investment purchases, resulting in the significant
increase in the average balance of federal funds sold and repurchase agreements
for the year ended December 31, 2001.
Interest income on one-to-four family mortgage loans increased $20.9 million to
$694.6 million for the year ended December 31, 2001, from $673.7 million for the
year ended December 31, 2000, which was primarily the result of a $555.8 million
increase in the average balance of such loans, partially offset by a decrease in
the average yield to 6.90% for the year ended December 31, 2001, from 7.08% for
the year ended December 31, 2000. Interest income on multi-family, commercial
real estate and construction loans increased $28.4 million to $124.2 million for
the year ended December 31, 2001, from $95.8 million for the year ended December
31, 2000, which was primarily the result of a $344.4 million increase in the
average balance of this portfolio, slightly offset by a decrease in the average
yield to 8.35% for the year ended December 31, 2001, from 8.38% for the year
ended December 31, 2000. The increase in the average balance of mortgage loans
reflects our continued emphasis on the origination of mortgage loans, primarily
one-to-four family. The decrease in the average yields reflects the decline in
interest rates during 2001.
Interest income on consumer and other loans decreased $384,000 resulting from a
decrease in the average yield to 8.63% for the year ended December 31, 2001,
from 10.30% for the year ended December 31, 2000, partially offset by an
increase of $29.8 million in the average balance of this portfolio. The decrease
in the average yield on consumer and other loans was primarily a result of the
decrease in the average yield on our home equity loans which represented 78.2%
of our consumer and other loan portfolio at December 31, 2001. Home equity loans
are adjustable rate loans which generally reset monthly and are indexed to the
prime rate. The prime rate decreased 475 basis points during the year ended
December 31, 2001 in response to the FOMC rate reductions discussed previously.
Interest income on mortgage-backed securities decreased $115.2 million to $462.6
million for the year ended December 31, 2001, from $577.8 million for the year
ended December 31, 2000. This decrease was the result of a $1.52 billion
decrease in the average balance of the portfolio, coupled with a decrease in the
average yield to 6.35% for the year ended December 31, 2001, from 6.56% for the
year ended December 31, 2000. Interest income on other securities decreased
$25.1 million, resulting from a decrease of $359.3 million in the average
balance of this portfolio, primarily due to securities being called as a result
of the declining interest rate environment. This decrease was slightly offset by
an increase in the average yield to 7.06% for the year ended December 31, 2001,
from 7.05% for the year ended December 31, 2000, primarily as a result of
prepayment penalties we received on securities which were called. Interest
income on federal funds sold and repurchase agreements increased $12.1 million
as a result of an increase of $627.3 million in the average balance of the
portfolio, partially offset by a decrease in the average yield to 3.40% for the
year ended December 31, 2001, from 6.36% for the year ended December 31, 2000.
Interest Expense
Interest expense for the year ended December 31, 2001 decreased $41.7 million to
$981.6 million, from $1.02 billion for the year ended December 31, 2000. This
decrease was the result of a decrease in the average cost of interest-bearing
liabilities to 4.78% for the year ended December 31, 2001, from 4.97% for the
year ended December 31, 2000, coupled with a decrease of $56.2 million in the
average balance of interest-bearing liabilities. The decrease in the overall
average cost of our interest-bearing liabilities reflects the impact of the
lower interest rate environment that prevailed during 2001 on the cost of our
deposits. The decrease in 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 our balance
sheet.
52
Interest expense on deposits decreased $10.1 million, to $400.0 million for the
year ended December 31, 2001, from $410.1 million for the year ended December
31, 2000, reflecting a decrease in the average cost of deposits to 3.80% for the
year ended December 31, 2001, from 4.20% for the year ended December 31, 2000,
partially offset by an increase of $753.4 million in the average balance of
total deposits. The decrease in the average cost and the increase in the average
balance of total deposits were primarily driven by decreases in rates, as a
result of the lower interest rate environment in 2001, and increases in the
average balance of money market and certificate of deposit accounts.
Interest expense on money market accounts decreased $5.8 million reflecting a
decrease in the average cost to 3.78% for the year ended December 31, 2001, from
5.33% for the year ended December 31, 2000, partially offset by an increase of
$396.5 million in the average balance of such accounts. Interest paid on money
market accounts is on a tiered basis with 90.73% of the balance at December 31,
2001 in the highest tier. The decrease in the average cost of these deposits
reflected the decline in market interest rates during 2001.
Interest expense on certificates of deposit increased $865,000 resulting from an
increase of $255.0 million in the average balance, substantially offset by a
decrease in the average cost to 5.42% for the year ended December 31, 2001, from
5.68% for the year ended December 31, 2000. The decrease in the average cost of
certificates of deposit was due to the effect of the lower interest rate
environment in 2001. The increase in the average balance of certificates of
deposit reflects our commitment to offer competitive rates to our customers, as
well as our strategy to shift our liability mix. Interest expense on savings
accounts decreased $4.8 million which was attributable to a decrease in the
average cost to 1.85% for the year ended December 31, 2001, from 2.02% for the
year ended December 31, 2000, coupled with a decrease of $33.9 million in the
average balance. Interest expense on interest-bearing NOW accounts decreased
$342,000 as a result of a decrease in the average cost to 0.47% for the year
ended December 31, 2001, from 0.58% for the year ended December 31, 2000,
partially offset by an increase of $135.8 million in the average balance of NOW
and demand deposit accounts.
Interest expense on borrowed funds for the year ended December 31, 2001
decreased $31.7 million to $581.6 million, from $613.3 million for year ended
December 31, 2000, resulting from a decrease of $809.6 million in the average
balance, partially offset by an increase in the average cost of borrowings to
5.81% for the year ended December 31, 2001, from 5.67% for the year ended
December 31, 2000. The rising interest rate environment which prevailed
throughout most of 2000 resulted in most of our borrowings being called upon
reaching their call dates during the year ended December 31, 2000. While a
portion of the called borrowings were repaid, the remainder of the called
borrowings were rolled over into short- and medium-term borrowings without call
features and at higher rates, thereby increasing the overall cost of our
borrowings in 2001.
Provision for Loan Losses
Provision for loan losses totaled $4.0 million for the years ended December 31,
2001 and 2000. The allowance for loan losses increased to $82.3 million at
December 31, 2001, from $79.9 million at December 31, 2000. The provision for
loan losses for 2001 and the resultant increase in the allowance for loan losses
reflected the overall increase in our loan portfolio, particularly increases in
our multi-family and commercial real estate portfolios which generally involve
greater credit risk than one-to-four family mortgage loans and, as a result,
require a larger reserve percentage. Net loan charge-offs totaled $1.7 million
for the year ended December 31, 2001 compared to $661,000 for the year ended
December 31, 2000. Non-performing loans increased $929,000 to $37.1 million at
December 31, 2001, from $36.2 million at December 31, 2000. The allowance for
loan losses as a percentage of non-performing loans increased slightly to
221.70% at December 31, 2001, from 220.88% at December 31, 2000. The allowance
for loan losses as a percentage of total loans decreased to 0.68% at December
31, 2001, from 0.70% at December 31, 2000, primarily due to the increase of
$745.0 million in total loans from December 31, 2000 to December 31, 2001. For
further discussion of non-performing loans and allowance for loan losses, see
"Asset Quality."
53
Non-Interest Income
Non-interest income for the year ended December 31, 2001 increased $20.9
million, or 30.1%, to $90.1 million, from $69.2 million for the year ended
December 31, 2000. Included in non-interest income for the year ended December
31, 2000 is a $4.0 million net gain on the disposition of banking offices. The
increase in non-interest income is primarily due to an increase in income from
BOLI and customer service fees.
Income from BOLI, which was purchased in November of 2000, was $16.8 million for
the year ended December 31, 2001, reflecting a full year's impact of this
purchase, compared to $1.6 million for the year ended December 31, 2000.
Customer service fees increased $8.4 million to $52.0 million for the year ended
December 31, 2001, from $43.6 million for the year ended December 31, 2000. The
increase in customer service fees was primarily attributable to an increase in
the number of NOW and demand deposit accounts, an increase in customer service
fees which became effective during the first quarter of 2001, and continued
focus on our sales initiatives. Other loan fees increased $1.7 million to $6.9
million for the year ended December 31, 2001, from $5.2 million for the year
ended December 31, 2000, primarily due to increased mortgage loan refinance
activity and production volume in 2001 as compared to 2000.
Mortgage banking income, net, decreased $2.0 million to $7.5 million for the
year ended December 31, 2001, from $9.5 million for the year ended December 31,
2000. This decrease was primarily due to a decrease in loan servicing fees
coupled with an increase in the amortization of MSR, partially offset by an
increase in the gain on sales of loans and a decrease in the provision for
valuation allowance on MSR. Loan servicing fees, decreased $2.0 million to $15.1
million for the year ended December 31, 2001, from $17.1 million for the year
ended December 31, 2000. This decrease was the result of a decrease in the
balance of loans serviced for others to $3.32 billion at December 31, 2001, from
$3.93 billion at December 31, 2000. The decrease in the balance of loans
serviced for others was the result of a runoff in that portfolio due to
repayments exceeding the level of new servicing volume from loan sales.
Amortization of MSR increased $2.9 million to $9.5 million for the year ended
December 31, 2001, from $6.6 million for the year ended December 31, 2000. This
increase is due to increased prepayments and refinance activity experienced in
2001 as compared to 2000. The valuation allowance adjustments for the impairment
of MSR decreased $600,000 to $1.3 million for the year ended December 31, 2001,
from $1.9 million for the year ended December 31, 2000, resulting from a
decrease in the balance of mortgage servicing assets from December 31, 2000 to
December 31, 2001. Net gain on sales of loans increased $2.4 million to $3.3
million for the year ended December 31, 2001, from $866,000 for the year ended
December 31, 2000. This increase was primarily due to an increase in the volume
of fixed rate loans originated and sold into the secondary market in 2001 as
compared to 2000. The interest rate environment in 2001 resulted in a
significant increase in refinance activity and a greater demand for fixed rate
loans, the majority of which are not retained for our portfolio.
Other non-interest income increased $1.5 million to $6.9 million for the year
ended December 31, 2001, from $5.4 million for the year ended December 31, 2000.
This increase was primarily due to income recognized in 2001 related to the
dissolution of a trust account previously established for certain former
executives.
Net gain on disposition of banking offices totaled $4.0 million for the year
ended December 31, 2000. We recorded a net gain of $2.8 million during the
second quarter of 2000 related to the sale of the former LIB headquarters and a
net gain of $1.2 million during the first quarter of 2000 related to the sale of
a former Long Island Savings Bank banking office.
54
Non-Interest Expense
Non-interest expense for the year ended December 31, 2001 was $197.8 million, a
decrease of $11.3 million from $209.1 million for the year ended December 31,
2000. Included in non-interest expense for the year ended December 31, 2000 is a
$5.4 million charge for a severance payment made upon the resignation of one of
our executive officers in the fourth quarter of 2000.
General and administrative expense decreased $11.2 million to $178.8 million for
the year ended December 31, 2001, from $190.0 million for the year ended
December 31, 2000, including the previously mentioned $5.4 million severance
payment. General and administrative expense decreased primarily due to decreases
in other expense and advertising expense, partially offset by an increase in
compensation and benefits expense.
Other expense decreased $14.4 million to $26.6 million for the year ended
December 31, 2001, from $41.0 million for the year ended December 31, 2000. This
decrease relates primarily to a decrease of $6.4 million in goodwill litigation
expense to $2.2 million for the year ended December 31, 2001, from $8.6 million
for the year ended December 2000, reflecting the completion of fact-based
discovery regarding our claims. Additionally, we recorded a $3.0 million charge
to legal expense during the year ended December 31, 2000 related to the
previously disclosed Weil Litigation.
Advertising expense decreased $3.3 million to $4.9 million for the year ended
December 31, 2001, from $8.2 million for the year ended December 31, 2000.
During 2001, we significantly reduced print advertising and focused our
resources on the continued development of our sales and service efforts.
Compensation and benefits expense increased $5.1 million to $92.8 million for
the year ended December 31, 2001, from $87.7 million for the year ended December
31, 2000, including the $5.4 million severance payment in 2000. The increase was
primarily attributable to normal annual increases in salaries, an increase in
our incentive compensation program and an increase in net employee benefit plan
expense. Also included in this increase was a $3.0 million increase in ESOP
expense for the year ended December 31, 2001 compared to the year ended December
31, 2000. The increase in ESOP expense was primarily due to the effect of the
higher average market value of our common stock during 2001 compared to 2000, as
well as an increase in the cash contribution paid to participant accounts in
2001.
Our percentage of general and administrative expense to average assets was 0.79%
for the year ended December 31, 2001, compared to 0.85% for the year ended
December 31, 2000. The efficiency ratio was 32.68% for the year ended December
31, 2001, compared to 33.71% for the year ended December 31, 2000.
Income Tax Expense
For the year ended December 31, 2001, income tax expense was $120.0 million,
representing an effective tax rate of 34.8%, compared to $134.1 million,
representing an effective tax rate of 38.3%, for the year ended December 31,
2000. The reduction in the effective tax rate for the year ended December 31,
2001 was primarily due to tax benefits associated with the implementation of the
BOLI program in November 2000 and the reduction of the deferred tax valuation
allowance from a realization of a portion of the tax reserves for New York State
and New York City tax purposes.
55
ASSET QUALITY
Our non-performing assets continue to remain at very low levels in relation to
both the size of our loan portfolio and relative to our peers. Non-performing
assets decreased $4.5 million to $35.6 million at December 31, 2002, from $40.1
million at December 31, 2001. The ratio of non-performing loans to total loans
decreased to 0.29% at December 31, 2002, from 0.31% at December 31, 2001. The
ratio of non-performing assets to total assets decreased to 0.16% at December
31, 2002, from 0.18% at December 31, 2001. See Item 1, "Business" for further
discussion of our asset quality.
Non-Performing Assets
The following table sets forth information regarding non-performing assets. In
addition to the non-performing loans, we had approximately $1.5 million of
potential problem loans at December 31, 2002 compared to $3.2 million at
December 31, 2001. Such loans are 60-89 days delinquent as shown on page 57.
AT DECEMBER 31,
-----------------------------------------------------------
(Dollars in Thousands) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $ 31,997 $34,848 $34,332 $48,830 $100,302
Non-accrual delinquent consumer and other loans 1,485 991 903 1,626 5,995
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 1,035 1,277 952 2,913 4,776
- ----------------------------------------------------------------------------------------------------------------
Total non-performing loans 34,517 37,116 36,187 53,369 111,073
- ----------------------------------------------------------------------------------------------------------------
Real estate owned, net (3) 1,091 2,987 3,801 5,080 6,071
Investment in real estate, net (4) - - - - 3,266
- ----------------------------------------------------------------------------------------------------------------
Total real estate owned and investment in
real estate, net 1,091 2,987 3,801 5,080 9,337
- ----------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 35,608 $40,103 $39,988 $58,449 $120,410
- ----------------------------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.29% 0.31% 0.32% 0.52% 1.26%
Non-performing loans to total assets 0.16 0.16 0.16 0.24 0.54
Non-performing assets to total assets 0.16 0.18 0.18 0.26 0.58
(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.
(4) Investment in real estate is recorded at the lower of cost or fair value.
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 $2.3 million for each of the years ended December 31, 2002 and 2001
and $2.9 million for the year ended December 31, 2000. This compares to
actual payments recorded as interest income, with respect to such loans, of
$1.6 million for the year ended December 31, 2002, $1.8 million for the year
ended December 31, 2001 and $1.6 million for the year ended December 31,
2000.
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 $5.0 million at
December 31, 2002, $5.4 million at December 31, 2001, $5.2 million at
December 31, 2000, $6.7 million at December 31, 1999 and $6.9 million at
December 31, 1998.
56
Delinquent Loans
The following table shows a comparison of delinquent loans at December 31, 2002,
2001 and 2000.
PRINCIPAL BALANCE OF LOANS PAST DUE
-------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------- ----------------------
NUMBER NUMBER
(Dollar in Thousands) OF LOANS AMOUNT OF LOANS AMOUNT
- ------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002:
One-to-four family 12 $ 417 185 $ 30,130
Multi-family 1 192 6 2,114
Commercial real estate 2 324 1 788
Consumer and other loans 85 571 131 1,485
- ------------------------------------------------------------------------------------------
Total delinquent loans 100 $ 1,504 323 $ 34,517
- ------------------------------------------------------------------------------------------
Delinquent loans to total loans 0.01% 0.29%
AT DECEMBER 31, 2001:
One-to-four family 20 $ 1,269 222 $ 31,991
Multi-family 1 84 5 1,860
Commercial real estate 5 1,395 4 1,752
Construction - - 1 522
Consumer and other loans 102 491 104 991
- ------------------------------------------------------------------------------------------
Total delinquent loans 128 $ 3,239 336 $ 37,116
- ------------------------------------------------------------------------------------------
Delinquent loans to total loans 0.03% 0.31%
AT DECEMBER 31, 2000:
One-to-four family 31 $ 1,459 284 $ 32,529
Multi-family - - 2 990
Commercial real estate 2 791 2 1,535
Construction - - 1 230
Consumer and other loans 125 728 99 903
- ------------------------------------------------------------------------------------------
Total delinquent loans 158 $ 2,978 388 $ 36,187
- ------------------------------------------------------------------------------------------
Delinquent loans to total loans 0.03% 0.32%
Classified Assets
The following table sets forth the carrying value of our assets, exclusive of
general valuation allowances, classified as special mention, substandard or
doubtful at December 31, 2002. There were no assets classified as loss at
December 31, 2002.
SPECIAL MENTION SUBSTANDARD DOUBTFUL
------------------ ------------------ --------------------
NUMBER NUMBER NUMBER
(Dollars in Thousands) OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
- ---------------------------------------------------------------------------------------------------------
Loans:
One-to-four family - $ - 182 $ 29,627 4 $ 305
Multi-family 2 1,440 17 4,394 - -
Commercial real estate 3 4,479 8 7,150 - -
Construction 1 700 - - - -
Consumer and other loans 2 91 131 1,485 - -
- ---------------------------------------------------------------------------------------------------------
Total loans 8 6,710 338 42,656 4 305
- ---------------------------------------------------------------------------------------------------------
Real estate owned:
One-to-four family - - 12 1,095 - -
- ---------------------------------------------------------------------------------------------------------
Total classified assets 8 $ 6,710 350 $ 43,751 4 $ 305
- ---------------------------------------------------------------------------------------------------------
57
Allowance for Losses
The following table sets forth our allowance for losses on loans, REO and
investments in real estate at the dates indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of year $ 82,285 $ 79,931 $ 76,578 $ 74,403 $ 73,920
Provision charged to operations 2,307 4,028 4,014 4,119 15,380
Charge-offs:
One-to-four family (325) (506) (963) (1,554) (13,039)
Multi-family (83) (3) (8) (12) (769)
Commercial real estate (268) (464) - (686) (1,528)
Construction (281) - - (159) -
Consumer and other loans (1,251) (1,554) (1,678) (4,298) (3,824)
- ---------------------------------------------------------------------------------------------------------------------
Total charge-offs (2,208) (2,527) (2,649) (6,709) (19,160)
- ---------------------------------------------------------------------------------------------------------------------
Recoveries:
One-to-four family 241 263 802 1,540 1,616
Multi-family 83 - 136 270 516
Commercial real estate 291 - 496 1,591 -
Construction - 9 79 - 1,788
Consumer and other loans 547 581 475 1,364 489
- ---------------------------------------------------------------------------------------------------------------------
Total recoveries 1,162 853 1,988 4,765 4,409
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,046) (1,674) (661) (1,944) (14,751)
Adjustment to conform fiscal year of Long Island
Bancorp, Inc. to Astoria Financial Corporation - - - - (146)
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 83,546 $ 82,285 $ 79,931 $ 76,578 $ 74,403
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs during the year to average
loans outstanding during the year 0.01% 0.01% 0.01% 0.02% 0.17%
Allowance for loan losses to total loans
at end of year 0.69 0.68 0.70 0.74 0.84
Allowance for loan losses to non-performing
loans at end of year 242.04 221.70 220.88 143.49 66.99
ALLOWANCE FOR LOSSES ON REO
AND INVESTMENTS IN REAL ESTATE:
Balance at beginning of year $ - $ 3 $ 171 $ 689 $ 1,493
Provision (recovery) recorded to operations 4 (64) (109) (38) 1,108
Charge-offs - (17) (113) (587) (2,835)
Recoveries - 78 54 107 241
Adjustment to conform fiscal year of Long Island
Bancorp, Inc. to Astoria Financial Corporation - - - - 682
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 4 $ - $ 3 $ 171 $ 689
- ---------------------------------------------------------------------------------------------------------------------
The following table sets forth our allocation of the allowance for loan losses
by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. As previously mentioned, multi-family and
commercial real estate loans generally involve a greater degree of credit risk
than one-to-four family loans. The increases in the reserves allocated to
multi-family and commercial real estate loans reflect the overall increases in
the balances of those portfolios. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
reserve is a valuation reserve applicable to the entire loan portfolio.
58
AT DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------
% OF LOANS %OF LOANS % OF LOANS
TO TO TO
(Dollars in Thousands) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
- ----------------------------------------------------------------------------------------------------------------------
One-to-four family $ 45,485 76.86% $ 49,122 83.59% $ 49,826 86.79%
Multi-family 12,449 13.35 8,612 9.05 6,721 7.07
Commercial real estate 10,099 6.21 8,529 4.95 7,771 4.23
Construction 786 0.47 1,329 0.42 573 0.30
Consumer and other loans 14,727 3.11 14,693 1.99 15,040 1.61
- -------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 83,546 100.00% $ 82,285 100.00% $ 79,931 100.00%
===================================================================================================================
AT DECEMBER 31,
-----------------------------------------------------
1999 1998
-----------------------------------------------------
% OF LOANS % OF LOANS
TO TO
(Dollars in Thousands) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
- --------------------------------------------------------------------------------------
One-to-four family $ 44,556 88.07% $ 42,084 87.12%
Multi-family 5,086 6.02 3,426 5.16
Commercial real estate 8,440 3.89 8,004 4.72
Construction 2,325 0.34 2,533 0.43
Consumer and other loans 16,171 1.68 18,356 2.57
- -----------------------------------------------------------------------------------
Total allowance for loan losses $ 76,578 100.00% $ 74,403 100.00%
- -----------------------------------------------------------------------------------
IMPACT OF NEW AND PROPOSED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board, or 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 are 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
adoption of SFAS No. 145 during the year ended December 31, 2002 did not 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, "Business Combinations," and SFAS No. 142. In addition, this Statement
amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions, such as depositor- and borrower-relationship
intangible assets and credit card holder intangible assets. Consequently, those
intangible
59
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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," or FIN No. 45, which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees it has issued. FIN No. 45 also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are applicable prospectively to guarantees issued or modified after
December 31, 2002. The adoption of the disclosure provisions of FIN No. 45 did
not have an impact on our financial condition or results of operations. The
adoption of the recognition and measurement provisions of FIN No. 45 are not
expected to have a material impact on our financial condition or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for financial statements for fiscal years ending after December
15, 2002. The adoption of the disclosures provisions of SFAS No. 148 did not
have an impact on our financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of our
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is IRR. Net
interest income is the primary component of our net income. Net interest income
is the difference between the interest earned on our loans, securities and other
interest-earning assets and the interest expense incurred on our deposits and
borrowings. The yields, costs, and volumes of loans, securities, deposits and
borrowings, are directly affected by the levels of and changes in market
interest rates. Additionally, changes in interest rates also affect the related
cash flows of our assets and liabilities as the option to prepay assets or
withdraw liabilities remains with our customers, in most cases without penalty.
The objective of our
60
IRR management policy is to maintain an appropriate mix and level of assets,
liabilities and off-balance sheet items to enable us to meet our growth and/or
earnings objectives, while maintaining specified minimum capital levels as
required by the OTS, in the case of Astoria Federal, and as established by our
Board of Directors. We use a variety of analyses to monitor, control and adjust
our asset and liability positions, primarily interest rate sensitivity gap
analysis, or gap analysis, and Net Interest Income Sensitivity, or NII
Sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in
conformity with OTS requirements. In conjunction with performing these analyses
we also consider related factors including, but not limited to, our overall
credit profile, non-interest income and non-interest expense. We do not enter
into financial transactions or hold financial instruments for trading purposes.
GAP ANALYSIS
Gap analysis measures the difference between the amount of interest-earning
assets anticipated to mature or reprice within specific time periods and the
amount of interest-bearing liabilities anticipated to mature or reprice within
the same time periods. The table on page 62, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at December 31, 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 also
vary due to a number of other factors, including the regional economy in the
area where the underlying collateral is located, seasonal factors, demographic
variables and the assumability of the underlying mortgages. 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 $5.39 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 $397.6 million classified according to their call dates, of
which $296.6 million are callable within one year and at various times
thereafter. As indicated in the Gap Table, our one-year cumulative gap was
18.15%. This compares to a one-year cumulative gap of negative 0.34% at December
31, 2001, as previously reported. 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 second half of 2002,
coupled with the classification of callable securities according to their call
dates, which is consistent with our actual experience with these types of
securities during 2002. Our one-year cumulative gap at December 31, 2001 would
have been 2.84% if callable securities had been classified according to their
call dates. 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.
61
AT DECEMBER 31, 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) $ 4,395,406 $ 2,791,471 $ 2,912,579 $ 1,539,079 $ 11,638,535
Consumer and other loans (1) 345,836 26,862 - - 372,698
Federal funds sold and
repurchase agreements 510,252 - - - 510,252
Mortgage-backed and other
securities available-for-sale and
FHLB stock 2,121,454 306,615 350,879 261,183 3,040,131
Mortgage-backed and other securities
held-to-maturity 2,847,051 921,217 524,714 694,099 4,987,081
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,219,999 4,046,165 3,788,172 2,494,361 20,548,697
Net unamortized purchase premiums
and deferred costs (2) 61,040 27,905 24,197 17,314 130,456
- --------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 10,281,039 4,074,070 3,812,369 2,511,675 20,679,153
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 155,906 311,812 311,812 2,052,761 2,832,291
Money market 1,515,565 19,262 19,262 144,463 1,698,552
NOW and demand deposits 37,735 75,474 75,474 1,194,632 1,383,315
Certificates of deposit 2,434,274 1,747,489 898,424 72,851 5,153,038
Borrowed funds 2,199,276 3,903,552 192,552 2,525,800 8,821,180
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,342,756 6,057,589 1,497,524 5,990,507 19,888,376
- --------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 3,938,283 (1,983,519) 2,314,845 (3,478,832) $ 790,777
====================================================================================================================
Cumulative interest sensitivity gap $ 3,938,283 $ 1,954,764 $ 4,269,609 $ 790,777
====================================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets 18.15% 9.01% 19.68% 3.64%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 162.09% 115.76% 130.72% 103.98%
(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 January 1, 2003 would increase by approximately 1.10% from the base
62
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 January 1, 2003 would decrease by
approximately 1.09% 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 second half 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 decline at a slower
pace, 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 change over specified periods of time. Accordingly, although
our NII Sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from this analysis. These include, but are not limited to, BOLI, MSR, defined
benefit pension costs and the mark to market adjustments on certain derivative
instruments.
For information regarding our credit risk, see "Asset Quality," in Item 7,
"MD&A."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For our Consolidated Financial Statements, see index on page 70.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION
Information regarding directors and executive officers who are not directors of
the Registrant is presented in the tables under the heading "Board Nominees,
Directors and Executive Officers" and under the heading "Committees and Meetings
of the Board" in our definitive Proxy Statement to be dated April 8, 2003, for
our Annual Meeting of Shareholders to be held on May 21, 2003, which will be
filed with the SEC within 120 days from December 31, 2002, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive (and director) compensation is included under
the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values,"
"Pension Plans," "Director Compensation," "Employment Agreements," "Incentive
Option Plans," that portion of the "Report of the Compensation Committee on
Executive Compensation" entitled "Long-term Incentive Compensation," and
"Compensation Committee Interlocks and Insider Participation" in our definitive
Proxy Statement to be dated April 8, 2003 for our Annual Meeting of Shareholders
to be held on May 21, 2003, which will be filed with the SEC within 120 days
from December 31, 2002, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" and information
relating to compensation plans, including individual compensation arrangements,
under which equity securities of Astoria Financial Corporation are authorized
for issuance is included in our definitive Proxy Statement to be dated April 8,
2003 for our Annual Meeting of Shareholders to be held on May 21, 2003, which
will be filed with the SEC within 120 days from December 31, 2002, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is included
under the headings "Transactions with Certain Related Persons" and "Compensation
Committee Interlocks and Insider Participation" in our definitive Proxy
Statement to be dated April 8, 2003 for our Annual Meeting of Shareholders to be
held on May 21, 2003, which will be filed with the SEC within 120 days from
December 31, 2002, and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act,
as of March 7, 2003. Based upon their evaluation, they each found that our
disclosure controls and procedures were adequate to ensure that information
required to be disclosed in the reports we file and submit under the Exchange
Act is recorded, processed, summarized and reported as and when required.
There were no significant changes in our disclosure controls and procedures or
internal controls for financial reporting or other factors that could
significantly affect those controls subsequent to March 7,
64
2003, and we identified no significant deficiencies or material weaknesses
requiring corrective action with respect to such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page 70.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto under Item 8, "Financial
Statements and Supplementary Data."
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE REGISTRANT'S
FISCAL YEAR ENDED DECEMBER 31, 2002
(1) Report on Form 8-K dated November 12, 2002 which includes
under Item 9 of Form 8-K a press release dated November 5,
2002 announcing our participation in the 2002 Financial
Services Conference sponsored by Sandler O'Neill & Partners,
L.P. on November 13, 2002 and a written presentation which was
made available at the 2002 Financial Services Conference, on
our investor relations website and to interested investors and
analysts during the quarter ended December 31, 2002. This
report has been furnished but not filed pursuant to Regulation
FD.
(2) Report on Form 8-K dated October 17, 2002 and filed on
November 15, 2002 which includes under Item 5 of Form 8-K a
press release dated October 17, 2002 which includes highlights
of our financial results for the quarter ended September 30,
2002 and announces the declaration of a quarterly cash
dividend of $0.20 per common share.
(3) Report on Form 8-K dated October 8, 2002 which includes under
Item 9 of Form 8-K a press release dated October 8, 2002
announcing the sale of $200.0 million aggregate principal
amount of 5.75% Senior Notes due 2012 to qualified
institutional buyers under Rule 144A of the Securities Act.
This report has been furnished but not filed pursuant to
Regulation FD.
(c) EXHIBITS
See Index of Exhibits on page 107.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Astoria Financial Corporation
/s/ George L. Engelke, Jr. Date: March 19, 2003
------------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
NAME DATE
/s/ George L. Engelke, Jr. March 19, 2003
------------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
/s/ Gerard C. Keegan March 19, 2003
------------------------------------------------
Gerard C. Keegan
Vice Chairman, Chief Administrative
Officer and Director
/s/ Monte N. Redman March 19, 2003
------------------------------------------------
Monte N. Redman
Executive Vice President and Chief Financial Officer
/s/ Andrew M. Burger March 19, 2003
------------------------------------------------
Andrew M. Burger
Director
/s/ John J. Conefry, Jr. March 19, 2003
------------------------------------------------
John J. Conefry, Jr.
Director
/s/ Denis J. Connors March 19, 2003
------------------------------------------------
Denis J. Connors
Director
/s/ Robert J. Conway March 19, 2003
------------------------------------------------
Robert J. Conway
Director
/s/ Thomas J. Donahue March 19, 2003
------------------------------------------------
Thomas J. Donahue
Director
/s/ Peter C. Haeffner, Jr. March 19, 2003
------------------------------------------------
Peter C. Haeffner, Jr.
Director
66
/s/ Ralph F. Palleschi March 19, 2003
------------------------------------------------
Ralph F. Palleschi
Director
/s/ Lawrence W. Peters March 19, 2003
------------------------------------------------
Lawrence W. Peters
Director
/s/ Thomas V. Powderly March 19, 2003
------------------------------------------------
Thomas V. Powderly
Director
/s/ Leo J. Waters March 19, 2003
------------------------------------------------
Leo J. Waters
Director
/s/ Donald D. Wenk March 19, 2003
------------------------------------------------
Donald D. Wenk
Director
67
CERTIFICATIONS
I, George L. Engelke, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Astoria Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 21, 2003
/s/ George L. Engelke, Jr.
- --------------------------------------------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Astoria Financial Corporation
68
I, Monte N. Redman, certify that:
1. I have reviewed this annual report on Form 10-K of Astoria Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 21, 2003
/s/ Monte N. Redman
- --------------------------------------------------------------
Monte N. Redman
Executive Vice President and Chief Financial Officer
Astoria Financial Corporation
69
CONSOLIDATED FINANCIAL STATEMENTS OF
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................ 71
Consolidated Statements of Financial Condition at December 31, 2002 and 2001............ 72
Consolidated Statements of Income for the years ended December 31, 2002, 2001
and 2000.............................................................................. 73
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000...................................................... 74
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000......................................................................... 75
Notes to Consolidated Financial Statements.............................................. 76
70
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Astoria Financial Corporation and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Astoria Financial
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Notes 1(i) and 10 to the consolidated financial statements,
effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
Melville, New York
January 23, 2003
71
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31,
----------------------------
(In Thousands, Except Share Data) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 167,605 $ 144,694
Federal funds sold and repurchase agreements 510,252 1,309,164
Available-for-sale securities:
Encumbered 2,096,619 3,176,977
Unencumbered 695,962 372,206
- ---------------------------------------------------------------------------------------------------------------
2,792,581 3,549,183
Held-to-maturity securities, fair value of $5,100,565 and $4,468,200,
respectively:
Encumbered 4,059,947 4,201,503
Unencumbered 981,310 262,425
- ---------------------------------------------------------------------------------------------------------------
5,041,257 4,463,928
Federal Home Loan Bank of New York stock, at cost 247,550 250,450
Loans held-for-sale 62,669 43,390
Loans receivable 12,059,361 12,167,261
Allowance for loan losses (83,546) (82,285)
- ---------------------------------------------------------------------------------------------------------------
Loans receivable, net 11,975,815 12,084,976
Mortgage servicing rights, net 20,411 35,295
Accrued interest receivable 88,908 96,273
Premises and equipment, net 157,297 149,753
Goodwill 185,151 185,151
Bank owned life insurance 358,898 242,751
Other assets 89,435 112,698
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 21,697,829 $ 22,667,706
===============================================================================================================
LIABILITIES:
Deposits $ 11,067,196 $ 10,903,693
Reverse repurchase agreements 6,285,000 7,385,000
Federal Home Loan Bank of New York advances 2,064,000 1,914,000
Other borrowings, net 472,180 522,795
Mortgage escrow funds 104,353 116,395
Accrued expenses and other liabilities 151,102 283,237
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 20,143,831 21,125,120
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 84,805,817 and 90,766,744
shares outstanding, respectively) 1,110 1,110
Additional paid-in capital 840,186 822,652
Retained earnings 1,368,062 1,207,742
Treasury stock (26,190,775 and 20,229,848 shares, at cost, respectively) (639,579) (459,471)
Accumulated other comprehensive income (loss) 9,800 (1,967)
Unallocated common stock held by ESOP (27,581) (29,480)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,553,998 1,542,586
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 21,697,829 $ 22,667,706
===============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
72
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
(In Thousands, Except Share Data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Mortgage loans $ 788,928 $ 818,759 $ 769,544
Consumer and other loans 17,623 17,853 18,237
Mortgage-backed securities 377,623 462,621 577,808
Other securities 69,211 107,315 132,426
Federal funds sold and repurchase agreements 12,877 32,015 19,919
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,266,262 1,438,563 1,517,934
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 288,000 399,989 410,101
Borrowed funds 513,838 581,616 613,252
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 801,838 981,605 1,023,353
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 464,424 456,958 494,581
Provision for loan losses 2,307 4,028 4,014
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 462,117 452,930 490,567
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Customer service fees 60,190 52,027 43,600
Other loan fees 7,696 6,864 5,195
Net gain on sales of securities 10,772 - -
Mortgage banking income, net (2,261) 7,515 9,501
Net gain on disposition of banking offices - - 3,976
Income from bank owned life insurance 21,398 16,848 1,565
Other 9,612 6,851 5,409
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 107,407 90,105 69,246
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
General and administrative:
Compensation and benefits 106,704 92,823 87,722
Occupancy, equipment and systems 53,125 52,390 51,019
Federal deposit insurance premiums 1,996 1,996 2,079
Advertising 4,806 4,947 8,234
Other 29,196 26,611 40,986
- -------------------------------------------------------------------------------------------------------------------------------
Total general and administrative 195,827 178,767 190,040
Extinguishment of debt 2,202 - -
Amortization of goodwill - 19,078 19,078
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 198,029 197,845 209,118
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 371,495 345,190 350,695
Income tax expense 123,066 120,036 134,146
- -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 248,429 225,154 216,549
Cumulative effect of accounting change, net of tax - (2,294) -
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 248,429 $ 222,860 $ 216,549
===============================================================================================================================
Basic earnings per common share:
Income before accounting change $ 2.90 $ 2.43 $ 2.20
Cumulative effect of accounting change, net of tax - (0.03) -
- -------------------------------------------------------------------------------------------------------------------------------
Net basic earnings per common share $ 2.90 $ 2.40 $ 2.20
===============================================================================================================================
Diluted earnings per common share:
Income before accounting change $ 2.85 $ 2.38 $ 2.16
Cumulative effect of accounting change, net of tax - (0.03) -
- -------------------------------------------------------------------------------------------------------------------------------
Net diluted earnings per common share $ 2.85 $ 2.35 $ 2.16
===============================================================================================================================
Basic weighted average common shares 83,514,927 90,450,157 95,905,712
Diluted weighted average common and
common equivalent shares 84,919,651 92,174,012 97,434,678
See accompanying Notes to Consolidated Financial Statements.
73
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
ADDITIONAL
PREFERRED COMMON PAID-IN
(In Thousands, Except Share Data) TOTAL STOCK STOCK CAPITAL
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 1,196,912 $ 2,000 $ 1,110 $ 799,859
Comprehensive income:
Net income 216,549 - - -
Other comprehensive income, net of tax:
Net unrealized gain on securities 223,155 - - -
------------
Comprehensive income 439,704
------------
Common stock repurchased (5,215,892 shares) (84,553) - - -
Dividends on common and preferred stock
and amortization of purchase premium (54,846) - - (1,304)
Exercise of stock options and related tax benefit
(1,041,082 shares issued) 10,509 - - 4,712
Amortization relating to allocation of ESOP
stock and earned portion of RRP stock and
related tax benefit 5,437 - - 3,535
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 1,513,163 2,000 1,110 806,802
Comprehensive income:
Net income 222,860 - - -
Other comprehensive income, net of tax:
Net unrealized gain on securities 115,091 - - -
Amortization of unrealized loss on securities
transferred to held-to-maturity 3,985 - - -
------------
Comprehensive income 341,936
------------
Common stock repurchased (10,303,600 shares) (289,087) - - -
Dividends on common and preferred stock
and amortization of purchase premium (61,321) - - (1,304)
Exercise of stock options and related tax benefit
(1,783,236 shares issued) 29,890 - - 10,791
Amortization relating to allocation of ESOP stock 8,005 - - 6,363
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 1,542,586 2,000 1,110 822,652
Comprehensive income:
Net income 248,429 - - -
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities 5,340 - - -
Amortization of unrealized loss on securities
transferred to held-to-maturity 8,317 - - -
Net unrealized loss on cash flow hedging
instrument (1,871) - - -
Minimum pension liability adjustment (19) - - -
------------
Comprehensive income 260,196
------------
Common stock repurchased (7,283,400 shares) (211,103) - - -
Dividends on common and preferred stock
and amortization of purchase premium (70,160) - - (1,304)
Exercise of stock options and related tax benefit
(1,322,473 shares issued) 22,256 - - 10,514
Amortization relating to allocation of ESOP stock 10,223 - - 8,324
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 1,553,998 $ 2,000 $ 1,110 $ 840,186
================================================================================================================================
ACCUMULATED UNALLOCATED
OTHER COMMON
RETAINED TREASURY COMPREHENSIVE STOCK HELD
(In Thousands, Except Share Data) EARNINGS STOCK (LOSS) INCOME BY ESOP
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 908,236 $ (137,071) $ (344,198) $ (33,024)
Comprehensive income:
Net income 216,549 - - -
Other comprehensive income, net of tax:
Net unrealized gain on securities - - 223,155 -
Comprehensive income
Common stock repurchased (5,215,892 shares) - (84,553) - -
Dividends on common and preferred stock
and amortization of purchase premium (53,542) - - -
Exercise of stock options and related tax benefit
(1,041,082 shares issued) (12,195) 17,992 - -
Amortization relating to allocation of ESOP
stock and earned portion of RRP stock and
related tax benefit - - - 1,902
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 1,059,048 (203,632) (121,043) (31,122)
Comprehensive income:
Net income 222,860 - - -
Other comprehensive income, net of tax:
Net unrealized gain on securities - - 115,091 -
Amortization of unrealized loss on securities
transferred to held-to-maturity - - 3,985 -
Comprehensive income
Common stock repurchased (10,303,600 shares) - (289,087) - -
Dividends on common and preferred stock
and amortization of purchase premium (60,017) - - -
Exercise of stock options and related tax benefit
(1,783,236 shares issued) (14,149) 33,248 - -
Amortization relating to allocation of ESOP stock - - - 1,642
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 1,207,742 (459,471) (1,967) (29,480)
Comprehensive income:
Net income 248,429 - - -
Other comprehensive income (loss), net of tax:
Net unrealized gain on securities - - 5,340 -
Amortization of unrealized loss on securities
transferred to held-to-maturity - - 8,317 -
Net unrealized loss on cash flow hedging
instrument - - (1,871) -
Minimum pension liability adjustment - - (19) -
Comprehensive income
Common stock repurchased (7,283,400 shares) - (211,103) - -
Dividends on common and preferred stock
and amortization of purchase premium (68,856) - - -
Exercise of stock options and related tax benefit
(1,322,473 shares issued) (19,253) 30,995 - -
Amortization relating to allocation of ESOP stock - - - 1,899
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 1,368,062 $ (639,579) $ 9,800 $ (27,581)
====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
74
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
(In Thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 248,429 $ 222,860 $ 216,549
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization (accretion) of premiums, discounts and deferred costs 12,469 (34,784) (58,971)
Net provision for loan and real estate losses 2,311 3,964 3,905
Depreciation and amortization 10,581 12,648 12,627
Net gain on sales of loans and securities (17,417) (3,276) (866)
Net gain on disposition of banking offices - - (3,976)
Originations of loans held-for-sale, net of proceeds from sales (12,634) (24,415) (677)
Amortization of goodwill - 19,078 19,078
Cumulative effect of accounting change, net of tax - 2,294 -
Amortization of allocated and earned shares from ESOP and RRP 10,223 8,005 5,372
Decrease in accrued interest receivable 7,365 13,166 1,229
Mortgage servicing rights amortization and valuation allowance,
net of capitalized amounts 14,884 5,667 7,407
Income from bank owned life insurance, net of insurance
proceeds received (16,147) 8,814 (1,565)
Decrease in other assets 15,980 9,060 11,279
(Decrease) increase in accrued expenses and other liabilities (118,623) (20,858) 19,645
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 157,421 222,223 231,036
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of loans held-for-investment (3,870,703) (2,923,361) (1,893,325)
Loan purchases through third parties (1,546,535) (1,438,257) (842,283)
Principal payments on loans held-for-investment 5,478,798 3,583,935 1,585,371
Principal payments on mortgage-backed securities held-to-maturity 3,745,503 1,434,395 219,869
Principal payments on mortgage-backed securities available-for-sale 2,348,406 1,571,022 1,544,673
Purchases of mortgage-backed securities held-to-maturity (4,608,574) (1,741,702) -
Purchases of mortgage-backed securities available-for-sale (2,235,329) (288,811) -
Purchases of other securities held-to-maturity (9,978) - -
Purchases of other securities available-for-sale (21,022) (2,005) (6,040)
Proceeds from calls and maturities of other securities held-to-maturity 316,980 475,019 9,059
Proceeds from calls and maturities of other securities available-for-sale 256,211 220,431 40,396
Redemption (purchase) of FHLB stock 2,900 34,800 (20,000)
Proceeds from sales of mortgage-backed securities available-for-sale 449,327 - -
Proceeds from sales of real estate owned, net 3,643 6,235 9,716
Proceeds from disposition of banking offices - - 21,293
Purchases of premises and equipment, net of proceeds from sales (18,125) (7,819) (7,719)
Purchase of bank owned life insurance (100,000) - (250,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 191,502 923,882 411,010
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 163,503 831,995 517,073
Net decrease in reverse repurchase agreements (1,100,000) (400,000) (1,491,800)
Net increase in FHLB of New York advances 150,000 4,000 300,000
Net decrease in other borrowings (53,567) (104,092) (13,174)
Decrease in mortgage escrow funds (12,042) (92) (3,863)
Cash paid for cash flow hedging instrument (3,297) - -
Repurchase of common stock (211,103) (289,087) (84,553)
Cash dividends paid to stockholders (70,160) (61,321) (54,846)
Cash received for options exercised 11,742 19,099 5,797
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,124,924) 502 (825,366)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (776,001) 1,146,607 (183,320)
Cash and cash equivalents at beginning of year 1,453,858 307,251 490,571
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 677,857 $ 1,453,858 $ 307,251
===================================================================================================================================
Supplemental disclosures:
Cash paid during the year:
Interest $ 815,627 $ 983,890 $ 1,028,809
===================================================================================================================================
Income taxes $ 112,652 $ 88,133 $ 100,429
===================================================================================================================================
Additions to real estate owned $ 1,971 $ 5,585 $ 8,940
==================================================================================================================================
Securities transferred from available-for-sale
to held-to-maturity $ - $ 2,878,767 $ -
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
75
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting and reporting policies of Astoria Financial
Corporation and subsidiaries conform to accounting principles generally accepted
in the United States of America, or GAAP, and are used in preparing and
presenting these consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and our wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association, and its subsidiaries, or Astoria Federal; Astoria
Capital Trust I; and AF Insurance Agency, Inc. As used in this annual report,
"we," "us" and "our" refer to Astoria Financial Corporation and its consolidated
subsidiaries, including Astoria Federal, Astoria Capital Trust I and AF
Insurance Agency, Inc., depending on the context. All significant inter-company
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The determination of our allowance for loan losses, the
valuation of MSR and judgments regarding goodwill and securities impairment are
particularly critical because they involve a higher degree of complexity and
subjectivity and require estimates and assumptions about highly uncertain
matters. Actual results may differ from our estimates and assumptions. Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation.
(b) Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold and repurchase agreements with
original maturities of three months or less. Astoria Federal is required by the
Federal Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement totaled $37.2 million at
December 31, 2002 and $32.8 million at December 31, 2001.
(c) Repurchase Agreements (Securities Purchased Under Agreements to Resell)
We purchase securities under agreements to resell (repurchase agreements). These
agreements represent short-term loans and are reflected as an asset in the
consolidated statements of financial condition. We may sell, loan or otherwise
dispose of such securities to other parties in the normal course of our
operations. Substantially the same securities are to be resold at the maturity
of the repurchase agreements.
(d) Securities
Management determines the appropriate classification of debt and equity
securities at the time of acquisition. Our available-for-sale portfolio is
carried at estimated fair value, with any unrealized gains and losses, net of
taxes, reported as accumulated other comprehensive income 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.
Premiums and discounts are recognized as adjustments to interest income using
the interest method over the remaining period to contractual maturity, adjusted
for estimated prepayments when applicable. Gains and losses on the sale of all
securities are determined using the specific identification method and are
reflected in earnings when realized. For the years ended December 31, 2002 and
2001, we did not maintain a trading portfolio. We conduct a periodic review and
evaluation of the securities portfolio to determine if the fair value of any
security has declined below its carrying value and whether such decline is other
than temporary. If such decline is deemed other than temporary, the security is
written down to a new cost basis and the resulting loss is charged to earnings.
76
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(e) Loans Held-for-Sale
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors on a servicing released or retained basis. Generally, the sale of such
loans is arranged through a master commitment on a mandatory delivery or best
efforts basis. In addition, student loans are sold to the United States Student
Loan Marketing Association generally before repayment begins during the grace
period of the loan.
Loans held-for-sale are carried at the lower of cost or estimated fair value, as
determined on an aggregate basis. Net unrealized losses, if any, are recognized
in a valuation allowance by charges to operations. Premiums and discounts and
origination fees and costs on loans held-for-sale are deferred and recognized as
a component of the gain or loss on sale. Gains and losses on sales of loans
held-for-sale are recognized on settlement dates and are determined by the
difference between the sale proceeds and the carrying value of the loans.
(f) Loans Receivable, net
Loans receivable are carried at the unpaid principal balances, net of
unamortized premiums and discounts and deferred loan origination costs and fees,
which are recognized as yield adjustments using the interest method. We
generally amortize these amounts over the contractual life of the related loans,
adjusted for estimated prepayments when applicable.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due. In addition, we reverse all previously accrued and
uncollected interest through a charge to interest income. While loans are in
non-accrual status, interest due is monitored and income is recognized only to
the extent cash is received until a return to accrual status is warranted. In
some circumstances we continue to accrue interest on loans delinquent 90 days or
more as to their maturity date but not their interest due.
The allowance for loan losses is increased by charges to earnings and decreased
by charge-offs, net of recoveries. Pursuant to our policy, loan losses are
charged-off in the period the loans, or portions thereof, are deemed
uncollectible. Our periodic evaluation of the adequacy of the allowance is based
on our past loan loss experience, trends in portfolio volume, quality, maturity
and composition, the status and amount of impaired and other non-performing and
past-due loans, known and inherent risks in the portfolio, adverse situations
that may affect a borrower's ability to repay, the estimated fair value of any
underlying collateral and current and prospective, as well as specific and
general, economic conditions.
We review certain loans for individual impairment and groups of smaller balance
loans based on homogeneous pools. Loans we individually review for impairment
are limited to multi-family mortgage loans, commercial real estate loans,
construction loans, loans modified in a troubled debt restructuring and selected
large one-to-four family mortgage loans. A loan is considered impaired when,
based upon current information and events, it is probable that we will be unable
to collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Impaired loans are principally measured
using the market price of the loan, if one exists, the estimated fair value of
the collateral, for collateral dependent loans, or the present value of expected
future cash flows. Interest income on impaired non-accrual loans is recognized
on a cash basis while interest income on all other impaired loans is recognized
on an accrual basis.
(g) Mortgage Servicing Rights, net
We recognize as separate assets the rights to service mortgage loans. The right
to service loans for others is generally obtained by either the sale of loans
with servicing retained or the open market purchase of MSR. The initial
recognition of originated MSR is based upon an allocation of the total cost of
the related loans between the loans and the servicing rights based on their
relative estimated fair values. The estimated fair value of MSR is based upon
quoted market prices of similar loans which we sell servicing released.
Purchased MSR are recorded at cost, although we generally do not purchase MSR.
The cost of MSR is amortized over the estimated remaining lives of the loans
serviced. MSR are carried at cost, and impairment, if any, is recognized through
a valuation allowance. Fees earned for servicing loans are reported as income
when the related mortgage loan payments are collected.
77
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
We assess impairment of our MSR based on the estimated fair value of those
rights on a stratum-by-stratum basis with any impairment recognized through a
valuation allowance for each impaired stratum. We stratify our MSR by underlying
loan type (primarily fixed and adjustable) and interest rate. The estimated fair
values of each MSR stratum are obtained through independent third party
valuations through an analysis of future cash flows, incorporating numerous
assumptions including servicing income, servicing costs, market discount rates,
prepayment speeds, default rates and other market driven data. Individual
allowances for each stratum are then adjusted in subsequent periods to reflect
changes in the measurement of impairment.
(h) Premises and Equipment, net
Land is carried at cost. Buildings and improvements, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and improvements and furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the term of the related leases or
the estimated useful lives of the improved property.
(i) Goodwill
Effective January 1, 2002, we ceased recording amortization of goodwill in
accordance with SFAS No. 142. Goodwill is presumed to have an indefinite useful
life and should not be amortized, but rather tested, at least annually, for
impairment. For purposes of our goodwill impairment testing, we have identified
a single reporting unit. We use the quoted market price of our common stock on
our impairment testing date as the basis for determining the fair value of our
one reporting unit. If the fair value of our one reporting unit exceeds its
carrying amount, further evaluation is not necessary. However, if the fair value
of our one reporting unit is less than its carrying amount, further evaluation
is required to compare the implied fair value of the reporting unit's goodwill
to its carrying amount to determine if a write-down of goodwill is required.
Prior to January 1, 2002, goodwill was amortized using the straight line method
over varying periods of up to fifteen years and was periodically evaluated for
impairment in response to changes in circumstances and events.
(j) Bank Owned Life Insurance
BOLI is carried at its cash surrender value and is classified as a non-interest
earning asset. Increases in the cash surrender value are recorded as
non-interest income in the consolidated statements of income and insurance
proceeds received are recorded as a reduction of the cash surrender value.
(k) Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure is
initially recorded at the lower of cost or fair value, less estimated selling
costs. Thereafter, we maintain an allowance for decreases in value which are
charged to income along with any additional expenses incurred on the property.
Fair value is estimated through current appraisals. Write-downs required at the
time of acquisition are charged to the allowance for loan losses. Real estate
owned, net, which is included in other assets, amounted to $1.1 million at
December 31, 2002 and $3.0 million at December 31, 2001.
(l) Reverse Repurchase Agreements (Securities Sold Under Agreements to
Repurchase)
We enter into sales of securities under agreements to repurchase with selected
dealers and banks. Such agreements are accounted for as secured financing
transactions since we maintain effective control over the transferred securities
and the transfer meets the other criteria for such accounting. Obligations to
repurchase securities sold are reflected as a liability in our consolidated
statements of financial condition. The securities underlying the agreements are
delivered to a custodial account for the benefit of the dealer or bank with whom
each transaction is executed. The dealers or banks, who may sell, loan or
otherwise dispose of such securities to other parties in the normal course of
their operations, agree to resell us substantially the same securities at the
maturities of the agreements. We retain the right of substitution of collateral
throughout the terms of the agreements. The securities underlying the agreements
are classified as encumbered securities in our statements of financial
condition.
78
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(m) Derivative Instruments
As part of our asset/liability management program, we utilize, from
time-to-time, interest rate caps, floors or swaps to reduce our sensitivity to
interest rate fluctuations. These agreements are derivative instruments which
are recorded as either assets or liabilities in the consolidated statements of
financial condition at fair value. Changes in the fair values of derivatives are
reported in our results of operations or other comprehensive income depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in those fair values or cash flows
that are attributable to the hedged risk, both at inception of the hedge and on
an ongoing basis.
Derivatives which qualify for hedge accounting treatment are designated as
either a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (a cash flow hedge). For fair value hedges,
changes in the fair values of the derivative instruments and the assets or
liabilities being hedged are recognized in our results of operations. For cash
flow hedges, changes in the fair values of the derivative instruments are
reported in other comprehensive income. The gains and losses on derivative
instruments that are reported in other comprehensive income are reflected in the
results of operations in the periods in which the results of operations are
impacted by the variability of the cash flows of the hedged item. We establish,
at the inception of the hedge, the method we will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge (the amount by which hedge gains
or losses do not entirely offset corresponding losses or gains on the hedged
item). The ineffective portion of any hedge is recognized in our results of
operations.
We also have derivative instruments with no hedging designations. Changes in the
fair values of these derivatives which do not qualify for hedge accounting
treatment are recognized as income or expense in our results of operations. Net
interest income is increased or decreased by amounts receivable or payable with
respect to the interest rate caps, floors or swaps. We do not use derivatives
for trading purposes.
(n) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Earnings Per Common Share, or EPS
Basic EPS is computed by dividing net income less preferred dividends by the
weighted-average common shares outstanding during the year. The weighted-average
common shares outstanding includes the average number of shares of common stock
outstanding adjusted for the weighted average number of unallocated shares held
by the Employee Stock Ownership Plan, or ESOP, and, for years prior to 2001, the
Recognition and Retention Plan, or RRP.
Diluted EPS is computed using the same method as basic EPS, but reflects the
potential dilution that would occur if stock options were exercised and
converted into common stock. The dilutive effect of unexercised stock options is
calculated using the treasury stock method. When applying the treasury stock
method, our average stock price is utilized, and we add to the proceeds of
assumed option exercises the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
(p) Employee Benefits
Astoria Federal has a qualified, non-contributory defined benefit pension plan,
or the Pension Plan, covering employees meeting specified eligibility criteria.
Astoria Federal's policy is to fund pension costs in accordance with the minimum
funding requirement. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
79
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In addition, Astoria Federal has non-qualified and unfunded supplemental
retirement plans covering certain officers and directors. We also sponsor a
defined benefit health care plan that provides for postretirement medical and
dental coverage to select individuals. The costs of postretirement benefits are
accrued during an employee's active working career.
We record compensation expense related to the ESOP at an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the reporting period plus cash contributions made to participant
accounts. For EPS disclosures, ESOP shares that have been committed to be
released are considered outstanding. ESOP shares that have not been committed to
be released are excluded from outstanding shares on a weighted average basis for
EPS calculations. The difference between the fair value of shares for the period
and the cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in capital.
(q) Stock Option Plans
We apply the intrinsic value method of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
option plans. Accordingly, no stock-based employee compensation cost is
reflected in net income, as all options granted under our stock option plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant.
In December 2002, the FASB issued SFAS No. 148 which amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results and
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
provisions of SFAS No. 148 are effective for financial statements for fiscal
years ended after December 15, 2002. We have revised certain disclosures related
to our stock option plans as a result of our adoption of SFAS No. 148.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
(In Thousands, Except Per Share Data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Net income:
As reported $ 248,429 $ 222,860 $ 216,549
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 4,338 3,797 2,286
--------- --------- ---------
Pro forma $ 244,091 $ 219,063 $ 214,263
--------- --------- ---------
Basic earnings per common share:
As reported $ 2.90 $ 2.40 $ 2.20
--------- --------- ---------
Pro forma $ 2.85 $ 2.36 $ 2.17
--------- --------- ---------
Diluted earnings per common share:
As reported $ 2.85 $ 2.35 $ 2.16
--------- --------- ---------
Pro forma $ 2.80 $ 2.31 $ 2.14
--------- --------- ---------
(r) Segment Reporting
As a community-oriented financial institution, substantially all of our
operations involve the delivery of loan and deposit products to customers. We
make operating decisions and assess performance based on an ongoing review
80
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
of these community banking operations, which constitute our only operating
segment for financial reporting purposes.
(2) REPURCHASE AGREEMENTS
Repurchase agreements averaged $183.5 million during the year ended December 31,
2002 and $78.9 million during the year ended December 31, 2001. The maximum
amount of such agreements outstanding at any month end was $279.9 million during
the year ended December 31, 2002 and $248.4 million during the year ended
December 31, 2001. As of December 31, 2002, three repurchase agreements totaling
$279.9 million were outstanding. As of December 31, 2001, three repurchase
agreements totaling $248.4 million were outstanding. The fair value of the
securities held under these agreements was $286.8 million as of December 31,
2002 and $257.4 million as of December 31, 2001. None of the securities held
under these agreements were sold or repledged during the years ended December
31, 2002 and 2001.
(3) SECURITIES
The amortized cost and estimated fair value of securities available-for-sale and
held-to-maturity at December 31, 2002 and 2001 are as follows:
AT DECEMBER 31, 2002
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In Thousands) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates $ 241,146 $ 8,369 $ (56) $ 249,459
REMICs and CMOs:
Agency issuance 608,076 8,561 (85) 616,552
Non-agency issuance 1,581,475 7,001 (854) 1,587,622
- --------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,430,697 23,931 (995) 2,453,633
- --------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 132,011 1,437 - 133,448
FNMA and FHLMC preferred stock 140,015 667 (4,000) 136,682
Corporate debt and other securities 67,854 1,492 (528) 68,818
- --------------------------------------------------------------------------------------------------------------
Total other securities 339,880 3,596 (4,528) 338,948
- --------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 2,770,577 $ 27,527 $ (5,523) $ 2,792,581
- --------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates $ 24,534 $ 1,656 $ - $ 26,190
REMICs and CMOs:
Agency issuance 3,595,244 51,348 (569) 3,646,023
Non-agency issuance 1,306,113 8,619 (1,383) 1,313,349
- --------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,925,891 61,623 (1,952) 4,985,562
- --------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 65,776 242 - 66,018
Obligations of states and political
subdivisions 39,611 - - 39,611
Corporate debt securities 9,979 - (605) 9,374
- --------------------------------------------------------------------------------------------------------------
Total other securities 115,366 242 (605) 115,003
- --------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 5,041,257 $ 61,865 $ (2,557) $ 5,100,565
- --------------------------------------------------------------------------------------------------------------
81
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
AT DECEMBER 31, 2001
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In Thousands) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates $ 450,742 $ 12,180 $ (174) $ 462,748
REMICs and CMOs:
Agency issuance 1,402,241 8,125 (8,273) 1,402,093
Non-agency issuance 1,132,384 18,093 (355) 1,150,122
- --------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,985,367 38,398 (8,802) 3,014,963
- --------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 362,888 376 (3,703) 359,561
FNMA and FHLMC preferred stock 120,015 61 (8,800) 111,276
Corporate debt and other securities 68,292 257 (5,166) 63,383
- --------------------------------------------------------------------------------------------------------------
Total other securities 551,195 694 (17,669) 534,220
- --------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 3,536,562 $ 39,092 $ (26,471) $ 3,549,183
- --------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates $ 36,620 $ 924 $ (1) $ 37,543
REMICs and CMOs:
Agency issuance 2,979,357 16,197 (19,774) 2,975,780
Non-agency issuance 1,043,110 9,418 (3,102) 1,049,426
- --------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,059,087 26,539 (22,877) 4,062,749
- --------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 362,034 2,317 (1,723) 362,628
Obligations of states and political
subdivisions 42,807 16 - 42,823
- --------------------------------------------------------------------------------------------------------------
Total other securities 404,841 2,333 (1,723) 405,451
- --------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 4,463,928 $ 28,872 $ (24,600) $ 4,468,200
- --------------------------------------------------------------------------------------------------------------
During the quarter ended June 30, 2001, we transferred agency REMIC and CMO
securities with an amortized cost of $2.90 billion and a market value of $2.88
billion from available-for-sale to held-to-maturity. The net unrealized loss,
which is being amortized over the life of the securities transferred, was $22.6
million at the date of the transfer and is included, net of taxes, in
accumulated other comprehensive income. The balance of the net unrealized loss
on the securities transferred from available-for-sale to held-to-maturity
totaled $1.3 million at December 31, 2002 and $15.7 million at December 31,
2001.
During the year ended December 31, 2002, proceeds from sales of securities from
the available-for-sale portfolio were $449.3 million and gross realized gains
were $10.8 million. There were no sales of securities from the
available-for-sale portfolio during the years ended December 31, 2001 and 2000.
The amortized cost and estimated fair value of debt securities at December 31,
2002, by contractual maturity, excluding mortgage-backed securities, are shown
on page 83. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties. In addition, issuers of certain securities have the right to call
obligations with or without prepayment penalties. As of December 31, 2002, the
amortized cost of the callable securities in our portfolio totaled $397.6
million, of which $296.6 million are callable within one year and at various
times thereafter.
82
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
AT DECEMBER 31, 2002
-------------------------------
ESTIMATED
AMORTIZED FAIR
(In Thousands) COST VALUE
- ----------------------------------------------------------------------------------------------
Available-for-sale:
Due in one year or less $ 1,000 $ 1,020
Due after one year through five years 2,145 2,196
Due after five years through ten years 5,000 5,575
Due after ten years 191,620 193,375
- ----------------------------------------------------------------------------------------------
Total available-for-sale $ 199,765 $ 202,166
- ----------------------------------------------------------------------------------------------
Held-to-maturity:
Due after one year through five years $ 9,979 $ 9,374
Due after ten years 105,387 105,629
- ----------------------------------------------------------------------------------------------
Total held-to-maturity $ 115,366 $ 115,003
- ----------------------------------------------------------------------------------------------
The balance of accrued interest receivable for mortgage-backed securities
totaled $34.1 million at December 31, 2002 and $35.6 million at December 31,
2001. The balance of accrued interest receivable for other securities totaled
$1.4 million at December 31, 2002 and $2.0 million at December 31, 2001.
(4) LOANS RECEIVABLE, NET
Loans receivable, net, are summarized as follows:
AT DECEMBER 31,
---------------------------------------------
(In Thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 9,209,360 $ 10,105,063
Multi-family 1,599,985 1,094,312
Commercial real estate 744,623 598,334
Construction 56,475 50,739
- --------------------------------------------------------------------------------------------------------------
11,610,443 11,848,448
Net deferred loan origination costs 2,983 4,975
Net unamortized premiums 66,734 70,711
- --------------------------------------------------------------------------------------------------------------
Total mortgage loans 11,680,160 11,924,134
- --------------------------------------------------------------------------------------------------------------
Consumer and other loans:
Home equity 323,494 189,259
Passbook 7,502 9,012
Other 41,642 41,923
- -------------------------------------------------------------------------------------------------------------
372,638 240,194
Net deferred loan origination costs 6,033 2,627
Net unamortized premiums 530 306
- --------------------------------------------------------------------------------------------------------------
Total consumer and other loans 379,201 243,127
- --------------------------------------------------------------------------------------------------------------
Total loans 12,059,361 12,167,261
Allowance for loan losses (83,546) (82,285)
- --------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 11,975,815 $ 12,084,976
- --------------------------------------------------------------------------------------------------------------
Accrued interest receivable on all loans totaled $53.4 million at December 31,
2002 and $58.3 million at December 31, 2001.
Included in loans receivable were non-accrual loans totaling $33.5 million at
December 31, 2002 and $35.8 million at December 31, 2001. 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 $2.3 million for each
of the years ended December 31, 2002 and 2001 and $2.9 million for the year
ended December 31, 2000. This compares to actual payments recorded as interest
income, with respect to such loans, of $1.6 million for the year ended December
31, 2002, $1.8 million for the year ended December 31, 2001, and $1.6 million
for the year ended December 31, 2000. Loans delinquent 90 days or more and still
accruing interest totaled $1.0 million at
83
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
December 31, 2002 and $1.3 million at December 31, 2001. These loans are
delinquent 90 days or more as to their maturity date but not their interest due.
The following table summarizes information regarding our impaired mortgage
loans:
AT DECEMBER 31, 2002
---------------------------------------------
ALLOWANCE
RECORDED FOR LOAN NET
(In Thousands) INVESTMENT LOSSES INVESTMENT
- --------------------------------------------------------------------------------------------------
One-to-four family $ 5,680 $ (220) $ 5,460
Multi-family, commercial real estate
and construction 10,882 (1,380) 9,502
- -------------------------------------------------------------------------------------------------
Total impaired mortgage loans $ 16,562 $ (1,600) $ 14,962
- -------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001
---------------------------------------------
ALLOWANCE
RECORDED FOR LOAN NET
(In Thousands) INVESTMENT LOSSES INVESTMENT
- --------------------------------------------------------------------------------------------------
One-to-four family $ 4,827 $ (471) $ 4,356
Multi-family, commercial real estate
and construction 10,641 (1,987) 8,654
- -------------------------------------------------------------------------------------------------
Total impaired mortgage loans $ 15,468 $ (2,458) $ 13,010
- -------------------------------------------------------------------------------------------------
Our average recorded investment in impaired loans was $15.7 million for the year
ended December 31, 2002, $17.2 million for the year ended December 31, 2001 and
$21.4 million for the year ended December 31, 2000. Interest income recognized
on impaired loans, which was not materially different from cash-basis interest
income, amounted to $1.3 million for the year ended December 31, 2002, $1.1
million for the year ended December 31, 2001 and $1.3 million for the year ended
December 31, 2000.
(5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
(In Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Balance at beginning of year $ 82,285 $ 79,931 $ 76,578
Provision charged to operations 2,307 4,028 4,014
Charge-offs (net of recoveries of $1,162,
$853 and $1,988, respectively) (1,046) (1,674) (661)
- -------------------------------------------------------------------------------------------------
Balance at end of year $ 83,546 $ 82,285 $ 79,931
- -------------------------------------------------------------------------------------------------
(6) MORTGAGE SERVICING RIGHTS
We service mortgage loans for investors with aggregate unpaid principal balances
of $2.67 billion at December 31, 2002 and $3.32 billion at December 31, 2001,
which are not reflected in the accompanying consolidated statements of financial
condition.
84
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
MSR activity is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
(In Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------
Amortized cost at beginning of year $ 39,196 $ 43,532 $ 49,008
Additions 6,090 5,202 1,100
Amortization (10,193) (9,538) (6,576)
- -------------------------------------------------------------------------------------
Amortized cost at end of year 35,093 39,196 43,532
Valuation allowance (14,682) (3,901) (2,570)
- -------------------------------------------------------------------------------------
MSR, net $ 20,411 $ 35,295 $ 40,962
- -------------------------------------------------------------------------------------
At December 31, 2002, our MSR, net, had an estimated fair value of $20.4 million
and were valued based on expected future cash flows considering a weighted
average discount rate of 9.62%, a weighted average constant prepayment rate on
mortgages of 23.11% and a weighted average life of 3.5 years. As of December 31,
2002, estimated future MSR amortization through 2007 is as follows: $12.4
million for 2003, $8.2 million for 2004, $5.2 million for 2005, $3.3 million for
2006 and $2.1 million for 2007. Actual results may vary depending upon the level
of repayments on the loans currently serviced.
Mortgage banking income, net is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
(In Thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Loan servicing fees $ 12,068 $ 15,108 $ 17,142
Net gain on sales of loans 6,645 3,276 866
Amortization of MSR (10,193) (9,538) (6,576)
Provision for valuation allowance on MSR (10,781) (1,331) (1,931)
- -----------------------------------------------------------------------------------------------------
Total mortgage banking income, net $ (2,261) $ 7,515 $ 9,501
- -----------------------------------------------------------------------------------------------------
We have reclassified certain line items in arriving at the current presentation
of mortgage banking income, net. Net gain on sales of loans, which was
previously disclosed as a separate line item in non-interest income, is now
included in mortgage banking income, net. Additionally, amortization of MSR and
provision for valuation allowance on MSR, which were previously classified as
net amortization of MSR, a component of non-interest expense, have been
reclassified into mortgage banking income, net.
(7) DEPOSITS
Deposits are summarized as follows:
AT DECEMBER 31,
-----------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENT AVERAGE PERCENT
(Dollars in Thousands) RATE BALANCE OF TOTAL RATE BALANCE OF TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Core deposits:
Savings 0.50% $ 2,832,291 25.59% 1.25% $ 2,588,143 23.74%
Money market 1.00 1,698,552 15.35 2.24 1,955,286 17.93
NOW 0.25 805,255 7.28 0.50 671,741 6.16
Non-interest bearing NOW
and demand deposit - 578,060 5.22 - 528,225 4.84
------------- ---------- ------------- ------
Total core deposits 5,914,158 53.44 5,743,395 52.67
Certificates of deposit 3.95 5,153,038 46.56 4.84 5,160,298 47.33
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 2.14% $ 11,067,196 100.00% 3.02% $ 10,903,693 100.00%
- ---------------------------------------------------------------------------------------------------------------------
The aggregate amount of certificates of deposit with balances equal to or
greater than $100,000 was $870.8 million at December 31, 2002 and $838.0 million
at December 31, 2001.
85
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Certificates of deposit at December 31, 2002 have scheduled maturities as
follows:
WEIGHTED PERCENT
AVERAGE OF
YEAR RATE BALANCE TOTAL
- -------------------------------------------------------------------------------------
(In Thousands)
2003 2.88% $ 2,434,274 47.24%
2004 4.35 1,185,870 23.01
2005 5.86 561,619 10.90
2006 5.17 451,090 8.76
2007 4.84 447,334 8.68
2008 and thereafter 5.20 72,851 1.41
- -------------------------------------------------------------------------------------
Total certificates of deposit 3.95% $ 5,153,038 100.00%
- -------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(In Thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Savings $ 29,096 $ 46,283 $ 51,112
Money market 32,512 65,484 71,290
Interest-bearing NOW 3,176 5,097 5,439
Certificates of deposit 223,216 283,125 282,260
- ------------------------------------------------------------------------------------------------------
Total interest expense on deposits $ 288,000 $ 399,989 $ 410,101
- ------------------------------------------------------------------------------------------------------
(8) BORROWED FUNDS
Borrowed funds are summarized as follows:
AT DECEMBER 31,
---------------------------------------------------------------
2002 2001
---------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
(Dollars in Thousands) AMOUNT RATE AMOUNT RATE
- ---------------------------------------------------------------------------------------------------------
Reverse repurchase agreements $ 6,285,000 5.39% $ 7,385,000 5.56%
FHLB-NY advances 2,064,000 4.42 1,914,000 6.10
Other borrowings, net 472,180 7.22 522,795 7.78
- ---------------------------------------------------------------------------------------------------------
Total borrowed funds, net $ 8,821,180 5.26% $ 9,821,795 5.78%
- ---------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements
At December 31, 2002 and 2001, all of the outstanding reverse repurchase
agreements had original contractual maturities between two and ten years and
were primarily secured by mortgage-backed securities or U.S. Government agency
securities. Reverse repurchase agreements with the Federal Home Loan Bank of New
York, or FHLB-NY, may also be secured by certain qualifying mortgage loans
pursuant to a blanket collateral agreement with the FHLB-NY. The following is a
summary of information relating to reverse repurchase agreements:
AT DECEMBER 31,
--------------------------------
(In Thousands) 2002 2001
- -------------------------------------------------------------------------------------------------
Amortized cost of collateral (including accrued interest):
Mortgage-backed securities $ 6,003,205 $ 6,666,526
Obligations of the U.S. Government and agencies 190,892 723,159
Mortgage loans 442,288 -
Fair value of collateral (including accrued interest):
Mortgage-backed securities 6,065,980 6,695,931
Obligations of the U.S. Government and agencies 192,429 720,389
Mortgage loans 463,337 -
86
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
(Dollars in Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Average balance during the year $ 6,840,342 $ 7,586,370 $ 8,280,005
Maximum balance at any month end during the year 7,285,000 7,785,000 8,986,800
Balance outstanding at end of the year 6,285,000 7,385,000 7,785,000
Weighted average interest rate during the year 5.47% 5.57% 5.41%
Weighted average interest rate at end of the year 5.39 5.56 5.68
In December 2002, we prepaid a $100.0 million reverse repurchase agreement which
had a fixed interest rate of 5.82%. We incurred a $2.2 million prepayment
penalty which is classified as a component of non-interest expense on our
consolidated statement of income.
Reverse repurchase agreements at December 31, 2002 have contractual maturities
as follows:
YEAR AMOUNT
- ----------------------------------
(In Thousands)
2003 $ 750,000
2004 3,155,000
2005 200,000
2006 -
2007 50,000
2008 2,130,000
- ----------------------------------
Total $ 6,285,000
==================================
Of the $750.0 million of reverse repurchase agreements maturing in 2003, $350.0
million are due in 30 to 90 days and $400.0 million are due after 90 days. At
December 31, 2002, $5.24 billion of reverse repurchase agreements are callable
in 2003 and at various times thereafter, of which $5.14 billion mature after
December 31, 2003.
FHLB-NY Advances
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are
secured by all of our stock in the FHLB-NY, certain qualifying mortgage loans
and mortgage-backed and other securities not otherwise pledged in an amount at
least equal to 110% of the advances outstanding. The following is a summary of
information relating to FHLB-NY advances:
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
(Dollars in Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Average balance during the year $ 1,853,534 $ 1,893,967 $ 1,911,928
Maximum balance at any month end during the year 2,364,000 2,064,000 2,110,010
Balance outstanding at end of the year 2,064,000 1,914,000 1,910,000
Weighted average interest rate during the year 5.54% 5.99% 5.70%
Weighted average interest rate at end of the year 4.42 6.10 5.79
FHLB-NY advances at December 31, 2002 have contractual maturities as follows:
YEAR AMOUNT
- -------------------------------------
(In Thousands)
2003 $ 1,450,000
2004 260,000
2005 250,000
2006 4,000
2007 100,000
- -------------------------------------
Total $ 2,064,000
=====================================
87
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Of the $1.45 billion of FHLB-NY advances maturing in 2003, $500.0 million are
due in less than 30 days and $950.0 million are due after 90 days. At December
31, 2002, $700.0 million of FHLB-NY advances are callable in 2003 and at various
times thereafter, of which $250.0 million mature after December 31, 2003.
At December 31, 2002, we had available a 12-month commitment for overnight and
one month lines of credit with the FHLB-NY totaling $100.0 million. Both lines
of credit are generally priced at the federal funds rate plus 10.0 basis points
and reprice daily.
Other Borrowings, net
During the quarter ended December 31, 2002, we issued $250.0 million of senior
unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes
were placed with a limited number of institutional investors under Rule 144A of
the Securities Act. In December 2002, we filed an exchange offer registration
statement with the SEC to allow the note holders to exchange the notes for a new
issue of substantially identical notes registered under the Securities Act,
which are designated as our 5.75% Senior Notes due 2012, Series B. The
registration statement became effective on December 30, 2002. As of January 30,
2003, all of the outstanding notes had been tendered for exchange. We may redeem
all or part of the notes at any time at a "make-whole" redemption price,
together with accrued interest to the redemption date. The carrying amount of
the 5.75% senior unsecured notes, net of deferred costs, was $246.5 million at
December 31, 2002.
On July 3, 2001, we issued $100.0 million of senior unsecured notes. The notes,
which were issued in a private placement, mature in 2008, bear a fixed interest
rate of 7.67%, were placed with a limited number of institutional investors and
are not registered with the SEC. The notes require annual principal payments of
$20.0 million per year beginning in 2004. The carrying amount of the 7.67%
senior unsecured notes, net of deferred costs, was $99.2 million at December 31,
2002 and $99.1 million at December 31, 2001.
On October 28, 1999, our wholly-owned finance subsidiary, Astoria Capital Trust
I, issued $125.0 million aggregate liquidation amount of 9.75% Capital
Securities due November 1, 2029, Series A, referred to as the Series A Capital
Securities. Effective April 26, 2000, $120.0 million aggregate liquidation
amount of the Series A Capital Securities were exchanged for a like amount of
9.75% Capital Securities due November 1, 2029, Series B, also issued by Astoria
Capital Trust I, referred to as the Series B Capital Securities. The Series A
Capital Securities and Series B Capital Securities have substantially identical
terms except that the Series B Capital Securities have been registered with the
SEC. Together they are referred to as the Capital Securities. Astoria Financial
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Astoria Capital Trust I under the trust agreement.
The Capital Securities are prepayable, in whole or in part, at our option on or
after November 1, 2009 at declining premiums to maturity.
In November 2002, we entered into two interest rate swap agreements, designated
as fair value hedges, that had the effect of converting the Capital Securities
from a 9.75% fixed rate instrument into a variable rate, LIBOR-based instrument.
In order to meet the criteria for hedge accounting treatment, the Capital
Securities, net of deferred costs, have been reclassified to other borrowings
and the Capital Securities expense previously classified as non-interest expense
has been reclassified to interest expense. All prior periods have been restated
to conform to the current year's presentation. In addition, the carrying amount
of the Capital Securities has been adjusted to fair value to satisfy hedge
accounting requirements. See Note 11 for additional information on the interest
rate swap agreements. The carrying amount of the Capital Securities, net of
deferred costs, was $126.4 million at December 31, 2002 and $123.2 million at
December 31, 2001.
In June 2002, our $300.0 million five year medium-term note matured. The
carrying amount of the medium-term note, net, was $300.5 million at December 31,
2001.
88
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Other borrowings at December 31, 2002 have contractual maturities as follows:
YEAR AMOUNT
- ---------------------------------------------
(In Thousands)
2004 $ 20,000
2005 20,000
2006 20,000
2007 20,000
2008 and thereafter 395,000
- ---------------------------------------------
Total $ 475,000
- ---------------------------------------------
Interest expense on borrowed funds is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
(In Thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------
Reverse repurchase agreements $ 379,377 $ 428,435 $ 455,250
FHLB-NY advances 103,232 114,014 109,683
Other borrowings 31,229 39,167 48,319
- ---------------------------------------------------------------------------------
Total interest expense on borrowed funds $ 513,838 $ 581,616 $ 613,252
- ---------------------------------------------------------------------------------
(9) STOCKHOLDERS' EQUITY
We have outstanding 2,000,000 shares of 12% Noncumulative Perpetual Preferred
Stock, Series B, or Series B Preferred Stock, which were issued in 1997 in
connection with the acquisition of The Greater. The Series B Preferred Stock,
which has a par value of $1.00 per share and a liquidation preference of $25.00
per share, may be redeemed at our option, in whole or in part, on or after
October 1, 2003, at an initial price of $27.25 per share and declining ratably
to $25.00 per share on October 1, 2013. Dividends on the Series B Preferred
Stock are not cumulative but, if declared by us, are payable quarterly.
During the year ended December 31, 2002, we completed our eighth stock
repurchase plan, which was approved by our Board of Directors on September 17,
2001 and authorized the purchase, at management's discretion, of up to
10,000,000 shares, or approximately 11% of our common stock then outstanding. On
October 16, 2002, our Board of Directors approved our ninth stock repurchase
plan authorizing the purchase, at management's discretion, of 10,000,000 shares,
or approximately 11% of our common stock then outstanding, over a two year
period in open-market or privately negotiated transactions. Under these plans,
during 2002, we repurchased 7,283,400 shares of our common stock at an aggregate
cost of $211.1 million, of which 318,000 shares were acquired pursuant to our
ninth stock repurchase plan.
In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared
a dividend of one preferred share purchase right, or Right, for each outstanding
share of our common stock. Each Right, initially, will entitle stockholders to
buy a one one-hundredth interest in a share of a new series of our preferred
stock at an exercise price of $100.00 upon the occurrence of certain events
described in the Rights Plan. We have reserved 1,225,000 shares of our Series A
Preferred Stock for the Rights Plan.
We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant
to the Plan, which became effective on December 1, 1995, 300,000 shares of
authorized and unissued shares are reserved for use by the Plan, should the need
arise. To date all shares required by the Plan have been acquired in open market
purchases.
At the time of its conversion from a federally-chartered mutual savings and loan
association to a federally-chartered capital stock savings and loan association,
Astoria Federal established a liquidation account with a balance equal to the
retained earnings reflected in its June 30, 1993 statement of financial
condition. As part of the acquisitions of LIB, The Greater and Fidelity, Astoria
Federal established liquidation accounts equal to the account balances
previously maintained by these acquired institutions for eligible account
holders. These liquidation accounts are reduced to the extent that eligible
account holders reduce their qualifying deposits. In the unlikely event of a
complete liquidation of Astoria Federal, each eligible account holder will be
entitled to receive a distribution from the liquidation accounts in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. Astoria Federal is not permitted to declare or pay dividends on its
capital stock or
89
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
repurchase any of its outstanding stock if it would cause Astoria Federal's
stockholders' equity to be reduced below the amounts required for the
liquidation accounts or applicable regulatory capital requirements.
(10) GOODWILL
Effective January 1, 2002, we ceased recording goodwill amortization 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.
Additionally, on September 30, 2002 we performed our annual goodwill impairment
test. As of both impairment test dates, we determined the fair value of our one
reporting unit to be in excess of its carrying value. Accordingly, as of both
the date of our adoption of SFAS No. 142 and our annual impairment test date,
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 YEAR ENDED DECEMBER 31,
--------------------------------------------
(In Thousands, Except Per Share Data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Net income:
Reported net income $ 248,429 $ 222,860 $ 216,549
Add back: goodwill amortization - 19,078 19,078
- ---------------------------------------------------------------------------------------------------
Adjusted net income $ 248,429 $ 241,938 $ 235,627
- ---------------------------------------------------------------------------------------------------
Basic earnings per common share:
Reported net income $ 2.90 $ 2.40 $ 2.20
Goodwill amortization - 0.21 0.20
- ---------------------------------------------------------------------------------------------------
Adjusted net income $ 2.90 $ 2.61 $ 2.40
- ---------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Reported net income $ 2.85 $ 2.35 $ 2.16
Goodwill amortization - 0.21 0.20
- ---------------------------------------------------------------------------------------------------
Adjusted net income $ 2.85 $ 2.56 $ 2.36
- ---------------------------------------------------------------------------------------------------
(11) DERIVATIVE INSTRUMENTS
As further discussed below, we use a variety of derivative instruments in
connection with our overall interest rate risk management strategy. We are
exposed to credit risk in the event of non-performance by counterparties to
derivative instruments. In the event of default by a counterparty, we would be
subject to an economic loss that corresponds to the cost to replace the
agreement. We control the credit risk associated with our derivative instruments
through dealing only with counterparties with the highest credit ratings,
establishing counterparty exposure limits and monitoring procedures.
Fair Value Hedges
During 2002, we entered into two interest swap agreements designated and
accounted for as fair value hedges aggregating $125.0 million (notional amount)
to effectively convert our $125.0 million Capital Securities from a fixed to a
variable rate instrument to protect the fair value of our Capital Securities due
to changes in interest rates. Under these agreements, we receive a fixed
interest rate of 9.75% and pay a floating interest rate which is tied to the
three-month LIBOR plus 400 basis points. The maturity dates, call features and
other critical terms of these derivative instruments match the terms of the
Capital Securities and as such, at inception and going forward, we assume no
ineffectiveness in accounting for these hedges. As a result, no net gains or
losses have been recognized in earnings with respect to these hedges. At
December 31, 2002, a $3.0 million asset was recorded which represents the fair
value of the interest rate swap agreements. A corresponding adjustment was made
to the carrying amount of the Capital Securities to recognize the change in
their fair value. See Note 8 for additional information regarding our Capital
Securities.
90
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Cash Flow Hedges
In September of 2002, in connection with our issuance of the 5.75% senior
unsecured notes, we entered into an interest rate lock agreement designated and
accounted for as a cash flow hedge of a forecasted transaction to fix the U.S.
treasury benchmark component of the eventual pricing on the notes. The 5.75%
senior unsecured notes were priced based on the prevailing applicable treasury
rate plus a spread, which were determined at the time the offering was
finalized. The critical terms of the agreement were negotiated to match the
terms of the forecasted transaction and as such, at inception and through the
date the note pricing was finalized, we assumed no ineffectiveness. Changes in
the fair value of the agreement were recorded in accumulated other comprehensive
income. The agreement was settled at the same time as the notes and the
unrealized loss of $1.9 million, net of taxes, included in accumulated other
comprehensive income as of December 31, 2002 is being reclassified into interest
expense as a yield adjustment in the same periods in which the related interest
on the 5.75% senior unsecured notes effects earnings. The unrealized loss, net
of tax, to be reclassified to our results of operations during 2003 totals
$191,000. See Note 8 for additional information regarding our 5.75% senior
unsecured notes.
Free-Standing Derivative Instruments
During the years ended December 31, 2002 and 2001 we purchased interest rate cap
agreements to provide a global hedge against rising interest rates and
subsequent increases in our cost of funds. In an interest rate cap agreement, we
receive the excess of a designated market interest rate (three-month LIBOR) over
a specified strike rate, as applied to the specified notional amount, in
exchange for the payment of a premium to a counterparty. The interest cap
agreements, which did not qualify for hedge accounting treatment, are included
in other assets at their fair values. Changes in the fair values of the
agreements are included in non-interest expense. The agreements have various
maturity dates from July 2004 to January 2005. The following is a summary of
information relating to the interest rate cap agreements:
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
(Dollars in Thousands) 2002 2001
- -----------------------------------------------------------------------
Notional amount $ 300,000 $ 250,000
Estimated fair value 95 3,394
Non-interest expense (income) 3,824 (597)
Weighted average cap rate 5.25% 5.20%
In connection with our mortgage banking activities, the Company had certain
free-standing derivative instruments at December 31, 2002 and 2001. We had
commitments to fund loans held-for-sale and commitments to sell loans which are
considered derivative instruments under SFAS No. 133. The fair values of these
derivative instruments are immaterial.
Upon adoption of SFAS No. 133 and SFAS No. 138 on January 1, 2001, we held
interest rate swaps, which we entered into in 1998, with a notional amount of
$450.0 million hedging the fair value of our medium term notes totaling $450.0
million. As a result of the implementation of SFAS No. 133 and SFAS No. 138, we
recognized a $2.3 million charge, net of taxes, in January 2001 as a cumulative
effect of a change in accounting principle. In April 2001, $150.0 million of our
medium term notes matured and $450.0 million of interest rate swaps were
terminated. In June 2002, the remaining $300.0 million of our medium term notes
matured. Gains and losses recognized on the 1998 interest rate swaps for the
year ended December 31, 2001 were immaterial.
(12) COMMITMENTS AND CONTINGENCIES
Lease Commitments
At December 31, 2002, we were obligated through 2035 under various
non-cancelable operating leases on buildings and land used for office space and
banking purposes. These operating leases contain escalation clauses which
provide for increased rental expense, based primarily on increases in real
estate taxes and cost-of-living indices. Rent expense under the operating leases
was $5.6 million for the year ended December 31, 2002, $5.3 million for the year
ended December 31, 2001 and $5.1 million for the year ended December 31, 2000.
91
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The minimum rental payments due under the terms of the non-cancelable operating
leases as of December 31, 2002 are summarized below:
YEAR AMOUNT
- -------------------------------------
(In Thousands)
2003 $ 6,470
2004 6,531
2005 6,295
2006 6,036
2007 5,714
2008 and thereafter 46,923
- ------------------------------------
$ 77,969
- ------------------------------------
Outstanding Commitments
We had outstanding commitments as follows:
AT DECEMBER 31,
------------------------
(In Thousands) 2002 2001
- -----------------------------------------------------------------------------------
Mortgage loans - commitments to extend credit $ 675,879 $ 855,358
Mortgage loans - commitments to purchase 68,813 62,078
Home equity loans - unused lines of credit 226,334 147,226
Consumer and commercial loans - unused lines of credit 110,602 104,476
Commitments to sell loans 125,538 80,561
Commitments to purchase securities 504,016 -
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate creditworthiness on a
case-by-case basis. Our maximum exposure to credit risk is represented by the
contractual amount of the instruments.
Assets Sold with Recourse
We are obligated under various recourse provisions associated with certain first
mortgage loans sold in past years. The principal balance of loans sold with
recourse amounted to $561.7 million at December 31, 2002 and $585.3 million at
December 31, 2001. Although we do not believe that our recourse obligations
subject us to risk of material loss in the future, we have established recourse
reserves totaling $534,000 at December 31, 2002 and $826,000 at December 31,
2001.
We have two collateralized repurchase obligations due to the sale of certain
long-term fixed rate municipal revenue bonds and Federal Housing Administration
project loans to investment trust funds for proceeds that approximated par
value. The trust funds have put options that require us to repurchase the
securities or loans for specified amounts prior to maturity under certain
specified circumstances, as defined in the agreements. The outstanding option
balance on the two agreements totaled $48.2 million at December 31, 2002 and
$53.8 million at December 31, 2001. Various agency mortgage-backed securities,
with an amortized cost of $83.0 million and a fair value of $85.1 million at
December 31, 2002, have been pledged as collateral.
Guarantees
In November 2002, the FASB issued FIN No. 45 which addresses the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees it has issued. FIN No. 45 also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN No. 45 are effective for
92
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
financial statements of interim or annual periods ending after December 15,
2002. The recognition and measurement provisions are applicable prospectively to
guarantees issued or modified after December 31, 2002.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. At December 31, 2002, we had
$474,000 in outstanding standby letters of credit which were fully
collateralized.
Litigation
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse affect on
our financial condition, operating results or liquidity.
We are a party to two actions pending against the United States, involving
assisted acquisitions made in the early 1980's and supervisory goodwill
accounting utilized in connection therewith, which could result in a gain. The
ultimate outcomes of such actions are uncertain and there can be no assurance
that we will benefit financially from such litigation.
(13) INCOME TAXES
Income tax expense attributable to income before cumulative effect of accounting
change is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
(In Thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Current
Federal $ 104,401 $ 104,710 $ 99,248
State and local 6,273 5,278 4,010
- ------------------------------------------------------------------------------------------
Total current 110,674 109,988 103,258
- ------------------------------------------------------------------------------------------
Deferred
Federal 11,126 7,833 21,115
State and local 1,266 2,215 9,773
- ------------------------------------------------------------------------------------------
Total deferred 12,392 10,048 30,888
- ------------------------------------------------------------------------------------------
Total income tax expense attributable to income
before cumulative effect of accounting change $ 123,066 $ 120,036 $ 134,146
- ------------------------------------------------------------------------------------------
Total income tax expense differed from the amounts computed by applying the
federal income tax rate to income before cumulative effect of accounting change
as a result of the following:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
(In Thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Expected income tax expense at statutory federal rate $ 130,023 $ 120,820 $ 122,742
State and local taxes, net of federal tax benefit 4,901 4,870 5,407
Amortization of goodwill - 6,677 6,677
Tax exempt income (8,451) (6,897) (1,577)
Reversal of deferred tax valuation allowance - (6,141) -
Other, net (3,407) 707 897
- ----------------------------------------------------------------------------------------------
Total income tax expense attributable to income
before cumulative effect of accounting change $ 123,066 $ 120,036 $ 134,146
- ----------------------------------------------------------------------------------------------
93
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
AT DECEMBER 31,
--------------------------
(In Thousands) 2002 2001
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 12,318 $ 19,938
Allowances and tax reserves 21,699 22,234
Compensation and benefits 13,234 12,901
Tax credits 3,129 3,129
Mark-to-market - IRC Section 475 2,567 2,567
Net unrealized loss on securities available-for-sale - 2,968
Accrued acquisition related expenses 841 2,996
Other 2,762 2,590
- ----------------------------------------------------------------------------------------
Total gross deferred tax assets 56,550 69,323
Valuation allowance (3,396) (3,396)
- ----------------------------------------------------------------------------------------
Deferred tax assets 53,154 65,927
- ----------------------------------------------------------------------------------------
Deferred tax liabilities:
Book premiums in excess of tax (7,727) (7,769)
Net unrealized gains on securities available-for-sale (7,321) -
Mortgage loans (25,956) (18,857)
Premises and equipment (5,145) (5,064)
Basis difference in home equity investment (1,465) (1,465)
Mortgage servicing rights (1,022) (5,587)
Other (70) (503)
- ----------------------------------------------------------------------------------------
Total gross deferred tax liabilities (48,706) (39,245)
- ----------------------------------------------------------------------------------------
Net deferred tax assets $ 4,448 $ 26,682
- ----------------------------------------------------------------------------------------
We believe that future results of operations will be sufficient to enable us to
recognize our net deferred tax assets. The valuation allowance for deferred tax
assets of $3.4 million at December 31, 2002 relates primarily to the portion of
the tax reserves which may not be realized for New York State and New York City
tax purposes. At December 31, 2002, we had alternative minimum tax credit
carryforwards for federal tax purposes of approximately $3.1 million. Federal
income tax net operating loss carryforwards of approximately $35.2 million will
expire in 2012.
Astoria Federal's retained earnings at December 31, 2002 and 2001 include base
year bad debt reserves, which amounted to approximately $159.1 million, for
which no federal income tax liability has been recognized. This represents the
balance of the bad debt reserves created for tax purposes as of December 31,
1987. These amounts are subject to recapture in the unlikely event that Astoria
Federal (1) makes distributions in excess of current and accumulated earnings
and profits, as calculated for federal income tax purposes, (2) redeems its
stock, or (3) liquidates.
94
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(14) EARNINGS PER COMMON SHARE
The following table is a reconciliation of basic and diluted EPS:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS(1) EPS EPS(2) EPS EPS(3)
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $ 248,429 $ 248,429 $ 225,154 $ 225,154 $ 216,549 $ 216,549
Preferred dividends declared (6,000) (6,000) (6,000) (6,000) (6,000) (6,000)
- ----------------------------------------------------------------------------------------------------------------------
242,429 242,429 219,154 219,154 210,549 210,549
Cumulative effect of accounting
change, net of tax - - (2,294) (2,294) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders $ 242,429 $ 242,429 $ 216,860 $ 216,860 $ 210,549 $ 210,549
- ----------------------------------------------------------------------------------------------------------------------
Total weighted average basic
common shares outstanding 83,515 83,515 90,450 90,450 95,906 95,906
Effect of dilutive securities:
Options - 1,405 - 1,724 - 1,529
- ----------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 83,515 84,920 90,450 92,174 95,906 97,435
- ----------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Income before cumulative effect
of accounting change $ 2.90 $ 2.85 $ 2.43 $ 2.38 $ 2.20 $ 2.16
Cumulative effect of accounting
change, net of tax - - (0.03) (0.03) - -
- ----------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 2.90 $ 2.85 $ 2.40 $ 2.35 $ 2.20 $ 2.16
- ----------------------------------------------------------------------------------------------------------------------
(1) Options to purchase 30,000 shares of common stock at $29.88 per share were
outstanding as of December 31, 2002, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2002.
(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 December 31, 2001,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the year ended December 31, 2001.
(3) Options to purchase 3,096,204 shares of common stock at prices between
$16.13 per share and $29.88 per share were outstanding as of December 31,
2000, but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the year ended December 31, 2000.
95
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(15) COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) at December 31,
2002 and 2001 and the changes during the year ended December 31, 2002 are as
follows:
AT CURRENT AT
DECEMBER 31, PERIOD DECEMBER 31,
(In Thousands) 2001 CHANGE 2002
- -------------------------------------------------------------------------------------------------------------
Net unrealized gain on securities available-for-sale $ 7,125 $ 5,340 $ 12,465
Net unrealized loss on securities transferred to held-to-maturity (9,092) 8,317 (775)
Net unrealized loss on cash flow hedging instrument - (1,871) (1,871)
Minimum pension liability adjustment - (19) (19)
- --------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive (loss) income $ (1,967) $ 11,767 $ 9,800
- --------------------------------------------------------------------------------------------------------------
The components of comprehensive income, other than net income, are as follows:
BEFORE TAX TAX AFTER TAX
(In Thousands) AMOUNT (EXPENSE) BENEFIT AMOUNT
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
Net unrealized gains on securities available-for-sale:
Net unrealized holding gains on securities arising during the year $ 20,002 $ (7,459) $ 12,543
Reclassification adjustment for gains included in net income (10,772) 3,569 (7,203)
------------------------------------------
9,230 (3,890) 5,340
Amortization of net unrealized loss on securities transferred to
held-to-maturity 14,350 (6,033) 8,317
Net unrealized loss on derivative accounted for as cash flow hedge:
Unrealized loss arising during the year (3,297) 1,386 (1,911)
Reclassification adjustment for losses included in net income 69 (29) 40
------------------------------------------
(3,228) 1,357 (1,871)
Minimum pension liability adjustment (32) 13 (19)
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 20,320 $ (8,553) $ 11,767
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
Net unrealized holding gains on securities arising during the year $ 198,905 $ (83,814) $ 115,091
Amortization of net unrealized loss on securities transferred
to held-to-maturity 6,875 (2,890) 3,985
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 205,780 $ (86,704) $ 119,076
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Net unrealized holding gains on securities arising during the year
and other comprehensive income $ 396,251 $ (173,096) $ 223,155
- --------------------------------------------------------------------------------------------------------------------
96
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(16) BENEFIT PLANS
Pension Plans and Other Postretirement Benefits
The following tables set forth information regarding our defined benefit pension
plans and other postretirement benefits plan.
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- -------------------------
AT OR FOR THE YEAR ENDED AT OR FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
(In Thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------- -------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 132,879 $ 126,537 $ 13,446 $ 12,566
Service cost 2,142 1,925 305 187
Interest cost 9,263 8,979 1,031 895
Amendments (185) - - -
Actuarial loss 9,969 3,640 2,146 1,060
Benefits paid (8,932) (8,202) (1,408) (1,262)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 145,136 132,879 15,520 13,446
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 152,554 170,787 - -
Actual return on plan assets (15,576) (10,482) - -
Employer contribution 847 451 1,408 1,262
Benefits paid (8,932) (8,202) (1,408) (1,262)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 128,893 152,554 - -
- ---------------------------------------------------------------------------------------------------------------------
Funded status (16,243) 19,675 (15,520) (13,446)
Unrecognized net actuarial loss (gain) 44,349 6,985 (3,742) (6,107)
Unrecognized prior service cost 1,015 1,360 205 246
Unrecognized transition asset (139) (243) - -
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 28,982 $ 27,777 $ (19,057) $ (19,307)
- ---------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
statements of financial condition consist of:
Prepaid benefit cost $ 43,003 $ 41,069 $ - $ -
Accrued benefit liability (14,248) (13,471) (19,057) (19,307)
Intangible asset 195 179 - -
Accumulated other comprehensive loss (pre-tax basis) 32 - - -
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 28,982 $ 27,777 $ (19,057) $ (19,307)
- ---------------------------------------------------------------------------------------------------------------------
EXPECTED RETURN RATE OF
WEIGHTED-AVERAGE ASSUMPTIONS: DISCOUNT RATE ON PLAN ASSETS COMPENSATION INCREASE
--------------- ------------- ----------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
PENSION BENEFIT PLANS:
Astoria Federal Pension Plan 6.75% 7.25% 8.00% 8.00% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 N/A N/A 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 N/A N/A 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
OTHER POSTRETIREMENT BENEFIT PLAN:
Astoria Federal Retiree Health Care Plan 6.75 7.25 N/A N/A N/A N/A
97
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
For measurement purposes for the Astoria Federal Retiree Health Care Plan, an
8.5% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2002. The rate was assumed to decrease gradually to
5.0% for 2009 and remain at that level thereafter.
The components of net periodic (benefit) cost are as follows:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------------------- ---------------------------------
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------------- ---------------------------------
(In Thousands) 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------- ---------------------------------
Service cost $ 2,142 $ 1,925 $ 1,674 $ 305 $ 187 $ 201
Interest cost 9,263 8,979 8,661 1,031 895 915
Expected return on plan assets (11,866) (13,331) (13,676) - - -
Amortization of prior service cost (benefit) 161 (403) (525) 41 41 41
Recognized net actuarial loss (gain) 46 (367) (2,193) (219) (437) (541)
Amortization of transition asset (104) (104) (104) - - -
- -------------------------------------------------------------------------------- ---------------------------------
Net periodic (benefit) cost $ (358) $ (3,301) $ (6,163) $1,158 $ 686 $ 616
- -------------------------------------------------------------------------------- ---------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
(In Thousands) POINT INCREASE POINT DECREASE
- ---------------------------------------------------------------------------------------------
Effect on total service and interest cost components $ 155 $ (124)
Effect on the postretirement benefit obligation 1,248 (1,023)
Included in the tables of Pension Benefits on page 97 and above are the Astoria
Federal Excess Benefit and Supplemental Benefit Plans, Astoria Federal
Directors' Retirement Plan, The Greater Directors' Retirement Plan and the LIB
Directors' Retirement Plan, which are unfunded plans. The projected benefit
obligation and accumulated benefit obligation for these plans are as follows:
AT DECEMBER 31,
-------------------------
(In Thousands) 2002 2001
- --------------------------------------------------------------------------
Projected benefit obligation $ 16,324 $ 14,665
Accumulated benefit obligation 11,776 10,955
Incentive Savings Plan
Astoria Federal maintains a 401(k) incentive savings plan, or the 401(k) Plan,
which provides for contributions by both Astoria Federal and its participating
employees. Under the 401(k) Plan, which is a qualified, defined contribution
pension plan, participants may contribute up to 15% of their pre-tax base
salary, not to exceed $11,000 for the calendar year ended December 31, 2002.
Matching contributions, if any, may be made at the discretion of Astoria
Federal. No such contributions were made for 2002, 2001 and 2000. Participants
vest immediately in their own contributions and after a period of five years for
Astoria Federal contributions.
Employee Stock Ownership Plan
Astoria Federal maintains an ESOP for its eligible employees, which is also a
defined contribution pension plan. To fund the purchase of the ESOP shares, the
ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%,
mature on December 31, 2029 and are collateralized by our common stock purchased
with the loan proceeds. Astoria Federal makes scheduled discretionary
contributions to fund debt service. Astoria Federal's contributions, prior to
2010, may be reduced by dividends paid on unallocated shares and investment
earnings realized on such dividends. Dividends paid on unallocated shares, which
reduced Astoria Federal's contribution to the ESOP, totaled $4.1 million for the
year ended December 31, 2002 and $3.5 million for the year ended December 31,
2001. The ESOP loans had an aggregate outstanding principal balance of $35.7
million at December 31, 2002 and $37.2 million at December 31, 2001.
98
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Shares purchased by the ESOP are held in trust for allocation among participants
as the loans are repaid. Pursuant to the loan agreements, the number of shares
released annually is based upon a specified percentage of aggregate eligible
payroll for our covered employees. Shares allocated to participants totaled
345,518 for the year ended December 31, 2002, 279,546 for the year ended
December 31, 2001 and 351,442 for the year ended December 31, 2000. As of
December 31, 2002, 5,018,500 shares which had a fair value of $136.3 million
remain unallocated. In addition to shares allocated, Astoria Federal makes an
annual cash contribution to participant accounts. This cash contribution totaled
$1.4 million for the year ended December 31, 2002, $1.3 million for the year
ended December 31, 2001 and $1.0 million for the year ended December 31, 2000,
and will total not less than $1.2 million each year through 2009. After 2009, an
annual cash contribution equal to all dividends paid on unallocated shares
remaining will be made through the maturity or repayment of the loans.
We recorded compensation expense relating to the ESOP of $11.7 million for the
year ended December 31, 2002, $9.3 million for the year ended December 31, 2001
and $6.3 million for the year ended December 31, 2000, which was equal to the
shares allocated by the ESOP multiplied by the average estimated fair value of
our common stock during the year of allocation, plus the cash contribution made
to participant accounts.
(17) STOCK OPTION PLANS
In 1999, we adopted the 1999 Stock Option Plan for Officers and Employees of
Astoria Financial Corporation, or the 1999 Employee Option Plan, and the 1999
Stock Option Plan for Outside Directors of Astoria Financial Corporation, or the
1999 Directors' Option Plan. As a result of the adoption of these option plans,
all previous employee and director option plans were frozen and no further
option grants were made pursuant to those plans. The number of shares reserved
for issuance under the 1999 Employee Option Plan was 5,000,000 and the number of
shares reserved for issuance under the 1999 Directors' Option Plan was 350,000.
Remaining shares reserved for issuance of future grants under the employee and
directors' option plans were 520,400 shares at December 31, 2002, 1,949,500
shares at December 31, 2001 and 3,044,200 shares at December 31, 2000.
Options granted under the 1999 Employee Option Plan have a maximum term of ten
years and vest three years after the grant date. Under option plans involving
grants to employees, all options granted immediately vest and are exercisable in
the event the optionee terminates his/her employment due to death, disability,
retirement or in the event we experience a change of control as defined in such
plans. Under option plans involving grants to outside directors, all options
granted have a maximum term of ten years and are exercisable immediately on
their grant date, except options granted under the 1993 Stock Option Plan for
Outside Directors, which vested over three years. Options granted under all
plans were granted in tandem with limited stock appreciation rights exercisable
only in the event we experience a change of control, as defined by the plans.
Activity in our option plans is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
- -----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year: 6,893,950 $ 17.59 7,657,202 $ 14.95 7,669,230 $ 12.34
Granted 1,429,100 27.03 1,094,700 25.21 1,182,400 24.24
Forfeited (2,800) (24.84) (58,890) (21.36) (130,216) (19.83)
Expired (151,802) (6.91) (116) (19.19) (11,490) (24.34)
Exercised (1,326,564) (8.94) (1,798,946) (10.86) (1,052,722) (5.66)
---------- ---------- ---------
Outstanding at end of year 6,841,884 21.48 6,893,950 17.59 7,657,202 14.95
========== ========== =========
Options exercisable at end of year 2,451,284 3,314,250 5,003,602
99
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table summarizes information about our stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------
$ 5.00 to $14.62 991,622 1.99 years $ 8.02 971,622 $ 7.92
14.94 to 21.06 1,192,830 6.24 15.91 327,030 18.48
22.53 to 24.84 1,653,248 7.33 24.13 576,248 22.79
25.16 to 25.44 1,126,700 8.66 25.25 84,000 25.22
27.00 to 29.88 1,877,484 8.74 27.52 492,384 29.00
--------- ---------
$ 5.00 to $29.88 6,841,884 6.97 21.48 2,451,284 17.65
========= =========
The following table summarizes the weighted-average fair value of stock options
granted. The weighted-average fair value of options was calculated to determine
the effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
GRANTED FAIR VALUE GRANTED FAIR VALUE GRANTED FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Employees 1,385,100 1,042,700 1,138,400
Outside directors 44,000 52,000 44,000
--------- --------- ---------
1,429,100 $ 5.85 1,094,700 $ 6.48 1,182,400 $ 6.48
========= ======= ========= ======= ========= =======
The weighted-average fair value of option grants was estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---------------------------------------
Dividend yield 2.94% 2.35% 2.10%
Expected stock price volatility 26.21 26.06 26.50
Risk-free interest rate based
upon equivalent-term U.S.
Treasury rates 3.29 4.45 4.77
Expected option lives 5.97 years 5.96 years 5.96 years
The weighted-average fair value of options was calculated using the above
assumptions, based on our judgments regarding future option exercise experience
and market conditions. These assumptions are subjective in nature, involve
uncertainties and therefore cannot be determined with precision. The
Black-Scholes option pricing model also contains certain inherent limitations
when applied to options which are not immediately exercisable and are not traded
on public markets.
(18) REGULATORY MATTERS
Federal law requires that savings associations, such as Astoria Federal,
maintain minimum capital requirements. These capital standards are required to
be no less stringent than standards applicable to national banks. At December
31, 2002, Astoria Federal was in compliance with all regulatory capital
requirements.
100
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table sets forth the regulatory capital calculations for Astoria
Federal.
AT DECEMBER 31, 2002
-----------------------------------------------------------------------------
CAPITAL ACTUAL EXCESS
(Dollars in Thousands) REQUIREMENT % CAPITAL % CAPITAL %
- --------------------------------------------------------------------------------------------------------
Tangible $ 318,529 1.50% $ 1,536,305 7.23% $ 1,217,776 5.73%
Leverage 849,412 4.00 1,536,305 7.23 686,893 3.23
Risk-based 839,271 8.00 1,619,851 15.44 780,580 7.44
AT DECEMBER 31, 2001
-----------------------------------------------------------------------------
CAPITAL ACTUAL EXCESS
(Dollars in Thousands) REQUIREMENT % CAPITAL % CAPITAL %
- --------------------------------------------------------------------------------------------------------
Tangible $ 334,030 1.50% $ 1,309,138 5.88% $ 975,108 4.38%
Leverage 890,747 4.00 1,309,138 5.88 418,391 1.88
Risk-based 809,311 8.00 1,391,423 13.75 582,112 5.75
Astoria Federal's Tier I risked-based capital ratio was 14.64% at December 31,
2002 and 12.94% at December 31, 2001.
The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The regulators adopted rules which require them
to take action against undercapitalized institutions, based upon the five
categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose total risk-based capital ratio is 10% or greater, Tier
1 risk-based capital ratio is 6% or greater, leverage capital ratio is 5% or
greater and is not subject to any written agreement, order, capital directive or
prompt corrective action directive issued by the Federal Deposit Insurance
Corporation shall be considered a "well capitalized" institution. As of December
31, 2002 and 2001, Astoria Federal was a "well capitalized" institution.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of our financial instruments are most commonly derived
from quoted market prices available in formal trading marketplaces. In many
cases, financial instruments we hold are not bought or sold in formal trading
marketplaces. Accordingly, in cases where quoted market prices are not
available, fair values are derived or estimated based on a variety of valuation
techniques. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates do
not reflect any possible tax ramifications, estimated transaction costs, or any
premium or discount that could result from offering for sale at one time our
entire holdings of a particular financial instrument. Because no market exists
for a certain portion of our financial instruments, fair value estimates are
based on judgments regarding future loss experience, current economic
conditions, risk characteristics, and other such factors. These estimates are
subjective in nature, involve uncertainties and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
For these reasons and others, the estimated fair value disclosures presented
herein do not represent our entire underlying value. As such, readers are
cautioned in using this information for purposes of evaluating our financial
condition and/or value either alone or in comparison with any other company.
101
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table summarizes the carrying amounts and estimated fair
values of our financial instruments.
AT DECEMBER 31,
-----------------------------------------------------------------
2002 2001
-----------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(In Thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Federal funds sold and
repurchase agreements $ 510,252 $ 510,252 $ 1,309,164 $ 1,309,164
Securities available-for-sale 2,792,581 2,792,581 3,549,183 3,549,183
Securities held-to-maturity 5,041,257 5,100,565 4,463,928 4,468,200
FHLB-NY stock 247,550 247,550 250,450 250,450
Loans held-for-sale 62,669 63,870 43,390 43,927
Loans receivable, net 11,975,815 12,548,717 12,084,976 12,401,177
MSR, net 20,411 20,413 35,295 41,967
Interest rate caps 95 95 3,394 3,394
Interest rate swaps 2,998 2,998 - -
FINANCIAL LIABILITIES:
Deposits 11,067,196 11,279,584 10,903,693 11,035,102
Borrowed funds, net 8,821,180 9,466,988 9,821,795 10,285,616
Methods and assumptions used to estimate fair values are as follows:
Federal funds sold and repurchase agreements
The carrying amounts of federal funds sold and repurchase agreements
approximate fair values since all mature in one month or less.
Securities available-for-sale and held-to-maturity
Fair values for securities are based on published or securities
dealers' estimated market values.
FHLB-NY stock
The carrying amount of FHLB-NY stock equals cost. The fair value of
FHLB-NY stock approximates the carrying amount.
Loans held-for-sale
The fair value of loans held-for-sale was determined by outstanding
investor commitments, or in the absence of such commitments, current
investor yield requirements.
Loans receivable, net
Fair values of loans are calculated by discounting the expected future
cash flows of pools of loans with similar characteristics. The loans
are first segregated by type, such as one-to-four family, multi-family,
commercial real estate, construction and consumer and other, and then
further segregated into fixed and adjustable rate and seasoned and
nonseasoned categories. Expected future cash flows are then projected
based on contractual cash flows, adjusted for prepayments. Prepayment
estimates are based on a variety of factors including our experience
with respect to each loan category, the effect of current economic and
lending conditions and regional statistics for each loan category, if
available. The discount rates used are based on market rates for new
loans of similar type and purpose, adjusted, when necessary, for
factors such as servicing cost, credit risk and term.
As mentioned previously, this technique of estimating fair value is
extremely sensitive to the assumptions and estimates used. While we
have attempted to use assumptions and estimates which are the most
reflective of the loan portfolio and the current market, a greater
degree of subjectivity is inherent in determining these fair values
than those fair values obtained from formal trading marketplaces.
102
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
MSR, net
The fair value of MSR is obtained through independent third party valuations
through an analysis of future cash flows, incorporating numerous assumptions
including servicing income, servicing costs, market discount rates, prepayment
speeds, default rates and other market driven data.
Interest rate caps and swaps
Fair values for interest rate caps and swaps are based on securities dealers'
estimated market values.
Deposits
The fair values of deposits with no stated maturity, such as savings accounts,
NOW accounts, money market accounts and demand deposits, are equal to the amount
payable on demand. The fair values of certificates of deposit are based on
discounted contractual cash flows using rates which approximate the rates we
offer for deposits of similar remaining maturities.
Borrowed funds, net
Fair value estimates are based on securities dealers' estimated market values,
when available, or discounted contractual cash flows using rates which
approximate the rates offered for borrowings of similar remaining maturities.
Outstanding commitments
Outstanding commitments include (1) commitments to extend credit and unadvanced
lines of credit for which fair values were estimated based on an analysis of the
interest rates and fees currently charged to enter into similar transactions,
considering the remaining terms of the commitments and the creditworthiness of
the potential borrowers, (2) commitments to sell residential mortgage loans for
which fair values were estimated based on current secondary market prices for
commitments with similar terms and (3) commitments to purchase securities for
which fair values were based on securities dealers' estimated market values. Due
to the short-term nature of our outstanding commitments, the fair values of
these commitments are immaterial to our financial condition.
(20) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed parent company only financial statements reflect our
investments in our wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc. using the equity method of accounting:
ASTORIA FINANCIAL CORPORATION - CONDENSED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31,
--------------------------------------
(In Thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 3 $ 3,315
Federal funds sold and repurchase agreements 279,867 248,374
Other securities available-for-sale 143 135
ESOP loans receivable 35,662 37,176
Accrued interest receivable 22 84
Other assets 3,506 7,295
Investment in Astoria Federal 1,742,031 1,506,548
Investment in Astoria Capital Trust I 3,929 3,929
Investment in AF Insurance Agency, Inc. 1,210 616
- --------------------------------------------------------------------------------------------------------------
Total assets $ 2,066,373 $ 1,807,472
- --------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Other borrowings $ 476,046 $ 226,173
Other liabilities 3,980 6,635
Dividends payable 2,000 2,000
Amounts due to subsidiaries 30,349 30,078
Stockholders' equity 1,553,998 1,542,586
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,066,373 $ 1,807,472
- --------------------------------------------------------------------------------------------------------------
103
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
ASTORIA FINANCIAL CORPORATION - CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
(In Thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold, repurchase
agreements and other securities $ 2,990 $ 2,837 $ 2,171
ESOP loans receivable 2,226 2,292 2,533
- ------------------------------------------------------------------------------------------------------------
Total interest income 5,216 5,129 4,704
Interest expense on borrowed funds 22,644 18,861 17,213
- ------------------------------------------------------------------------------------------------------------
Net interest expense 17,428 13,732 12,509
- ------------------------------------------------------------------------------------------------------------
Non-interest income 1,330 - -
Cash dividends from subsidiaries 60,377 502,935 137,630
- ------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 1,521 1,380 2,058
Other 1,721 1,554 1,853
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense 3,242 2,934 3,911
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed (overdistributed) earnings of subsidiaries 41,037 486,269 121,210
Income tax benefit 7,885 6,757 6,661
- ------------------------------------------------------------------------------------------------------------
Income before equity in undistributed (overdistributed)
earnings of subsidiaries 48,922 493,026 127,871
- ------------------------------------------------------------------------------------------------------------
Equity in undistributed (overdistributed) earnings
of subsidiaries (1) 199,507 (270,166) 88,678
- ------------------------------------------------------------------------------------------------------------
Net income $ 248,429 $ 222,860 $216,549
- ------------------------------------------------------------------------------------------------------------
(1) The equity in overdistributed earnings of subsidiaries for the year ended
December 31, 2001 represents dividends paid to us in excess of our
subsidiaries' current year earnings.
104
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
ASTORIA FINANCIAL CORPORATION - CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
(In Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 248,429 $ 222,860 $ 216,549
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in (undistributed) overdistributed earnings of
subsidiaries (199,507) 270,166 (88,678)
Decrease (increase) in accrued interest receivable 62 (57) 1
Amortization of premiums and deferred costs 512 589 712
Decrease (increase) in other assets net of other liabilities
and amounts due subsidiaries 7,654 5,777 (5,461)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 57,150 499,335 123,123
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal payments on ESOP loans receivable 1,514 1,022 1,281
Proceeds from maturities of securities available-for sale - 500 -
Investment in AF Insurance Agency, Inc. - - (10)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,514 1,522 1,271
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in other borrowings 246,433 59,030 (850)
Cash paid for cash flow hedging instrument (3,297) - -
Repurchase of common stock (211,103) (289,087) (84,553)
Cash received for options exercised 11,742 19,099 5,797
Cash dividends paid to stockholders (74,258) (64,752) (57,889)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (30,483) (275,710) (137,495)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 28,181 225,147 (13,101)
Cash and cash equivalents at beginning of the year 251,689 26,542 39,643
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 279,870 $ 251,689 $ 26,542
- --------------------------------------------------------------------------------------------------------------
105
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------
FIRST SECOND THIRD FOURTH
(In Thousands, Except Per Share Data) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
Interest income $ 330,890 $ 326,275 $ 313,380 $ 295,717
Interest expense 215,963 203,906 197,256 184,713
- ---------------------------------------------------------------------------------------------------------------
Net interest income 114,927 122,369 116,124 111,004
Provision for loan losses 1,004 1,002 301 -
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 113,923 121,367 115,823 111,004
Non-interest income 26,960 24,328 25,212 30,907
- ---------------------------------------------------------------------------------------------------------------
Total income 140,883 145,695 141,035 141,911
- ---------------------------------------------------------------------------------------------------------------
General and administrative expense 48,129 50,275 48,582 48,841
Extinguishment of debt - - - 2,202
- ---------------------------------------------------------------------------------------------------------------
Income before income tax expense 92,754 95,420 92,453 90,868
Income tax expense 31,536 31,489 30,237 29,804
- ---------------------------------------------------------------------------------------------------------------
Net income $ 61,218 $ 63,931 $ 62,216 $ 61,064
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.70 $ 0.74 $ 0.73 $ 0.73
Diluted earnings per common share $ 0.69 $ 0.73 $ 0.72 $ 0.73
FOR THE YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------
FIRST SECOND THIRD FOURTH
(In Thousands, Except Per Share Data) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
Interest income $ 372,553 $ 362,989 $ 358,721 $ 344,300
Interest expense 252,296 247,980 247,600 233,729
- ---------------------------------------------------------------------------------------------------------------
Net interest income 120,257 115,009 111,121 110,571
Provision for loan losses 1,002 1,023 1,001 1,002
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 119,255 113,986 110,120 109,569
Non-interest income 19,597 23,786 24,090 22,632
- ---------------------------------------------------------------------------------------------------------------
Total income 138,852 137,772 134,210 132,201
- ---------------------------------------------------------------------------------------------------------------
General and administrative expense 45,721 45,329 43,646 44,071
Amortization of goodwill 4,770 4,769 4,770 4,769
- ---------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 88,361 87,674 85,794 83,361
Income tax expense 31,651 30,489 29,342 28,554
- ---------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 56,710 57,185 56,452 54,807
Cumulative effect of accounting change, net of tax (2,294) - - -
- ---------------------------------------------------------------------------------------------------------------
Net income $ 54,416 $ 57,185 $ 56,452 $ 54,807
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Income before accounting change $ 0.60 $ 0.61 $ 0.61 $ 0.62
Cumulative effect of accounting change, net of tax (0.03) - - -
- ---------------------------------------------------------------------------------------------------------------
Net basic earnings per common share $ 0.57 $ 0.61 $ 0.61 $ 0.62
Diluted earnings per common share:
Income before accounting change $ 0.58 $ 0.59 $ 0.60 $ 0.61
Cumulative effect of accounting change, net of tax (0.03) - - -
- ---------------------------------------------------------------------------------------------------------------
Net diluted earnings per common share $ 0.55 $ 0.59 $ 0.60 $ 0.61
106
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS
EXHIBIT IDENTIFICATION OF EXHIBIT
2.1 Agreement and Plan of Merger dated as of the 2nd day of April 1998 by
and between Astoria Financial Corporation and Long Island Bancorp,
Inc., as amended. (1)
3.1 Certificate of Incorporation of Astoria Financial Corporation, as
amended effective as of June 3, 1998. (2)
3.2 Bylaws of Astoria Financial Corporation. (3)
4.1 Astoria Financial Corporation Specimen Stock Certificate. (4)
4.2 Federal Stock Charter of Astoria Federal Savings and Loan Association.
(5)
4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended. (5)
4.4 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock. (6)
4.5 Amended Certificate of Designations, Preferences and Rights of Series A
Junior Participating Preferred Stock. (7)
4.6 Rights Agreement between Astoria Financial Corporation and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, dated as of July 17,
1996, as amended. (6)
4.7 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by and
between Astoria Financial Corporation and ChaseMellon Shareholder
Services L.L.C. (1)
4.8 Amendment No. 2 to Rights Agreement, dated as of September 15, 1999 by
and between Astoria Financial Corporation and ChaseMellon Shareholder
Services L.L.C., as Rights Agent. (8)
4.9 Form of Rights Certificate. (6)
4.10 Certificate of Designations, Preferences and Rights of 12%
Noncumulative, Perpetual Preferred Stock, Series B. (9)
4.11 Astoria Financial Corporation Specimen 12% Noncumulative, Perpetual
Preferred Stock, Series B Certificate. (10)
4.12 Indenture, dated as of October 28, 1999, between Astoria Financial
Corporation and Wilmington Trust Company, as Debenture Trustee,
including as Exhibit A thereto the Form of Certificate of Exchange
Junior Subordinated Debentures. (11)
4.13 Form of Certificate of Junior Subordinated Debenture. (11)
4.14 Form of Certificate of Exchange Junior Subordinated Debenture. (11)
107
EXHIBIT IDENTIFICATION OF EXHIBIT
4.15 Amended and Restated Declaration of Trust of Astoria Capital Trust I,
dated as of October 28, 1999. (11)
4.16 Common Securities Guarantee Agreement of Astoria Financial Corporation,
dated as of October 28, 1999. (11)
4.17 Form of Certificate Evidencing Common Securities of Astoria Capital
Trust I. (11)
4.18 Form of Exchange Capital Security Certificate for Astoria Capital Trust
I. (11)
4.19 Series A Capital Securities Guarantee Agreement of Astoria Financial
Corporation, dated as of October 28, 1999. (11)
4.20 Form of Series B Capital Securities Guarantee Agreement of Astoria
Financial Corporation. (11)
4.21 Form of Capital Security Certificate of Astoria Capital Trust I. (11)
4.22 Indenture between Astoria Financial Corporation and Wilmington Trust
Company, as Debenture Trustee, dated as of October 16, 2002, relating
to the Senior Notes due 2012. (12)
4.23 Form of 5.75% Senior Note due 2012, Series B. (12)
4.24 Astoria Financial Corporation Automatic Dividend Reinvestment and Stock
Purchase Plan. (13)
10.1 Agreement dated as of December 28, 2000 by and between Astoria Federal
Savings and Loan Association, Astoria Financial Corporation, the
Astoria Federal Savings and Loan Association Employee Stock Ownership
Plan Trust and The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust. (5)
10.2 Amended and Restated Loan Agreement by and between Astoria Federal
Savings and Loan Association Employee Stock Ownership Plan Trust and
Astoria Financial Corporation made and entered into as of January 1,
2000. (5)
10.3 Promissory Note of Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust dated January 1, 2000. (5)
10.4 Pledge Agreement made as of January 1, 2000 by and between Astoria
Federal Savings and Loan Association Employee Stock Ownership Plan
Trust and Astoria Financial Corporation. (5)
10.5 Amended and Restated Loan Agreement by and between The Long Island
Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria
Financial Corporation made and entered into as of January 1, 2000. (5)
10.6 Promissory Note of The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust dated January 1, 2000. (5)
108
EXHIBIT IDENTIFICATION OF EXHIBIT
10.7 Pledge Agreement made as of January 1, 2000 by and between The Long
Island Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria
Financial Corporation. (5)
Exhibits 10.8 through 10.46 are management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Form
10-K pursuant to Item 15(c) of this report.
10.8 Astoria Federal Savings and Loan Association and Astoria Financial
Corporation Directors' Retirement Plan, as amended and restated
effective February 21, 1996. (14)
10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement Benefit
Plan, as amended. (3)
10.10 Astoria Financial Corporation Death Benefit Plan for Outside Directors.
(14)
10.11 Deferred Compensation Plan for Directors of Astoria Financial
Corporation. (14)
10.12 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as
amended. (10)
10.13 Astoria Financial Corporation 1993 Stock Option Plan For Outside
Directors, as amended. (10)
10.14 1996 Stock Option Plan for Officers and Employees of Astoria Financial
Corporation, as amended. (10)
10.15 1996 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, as amended. (10)
10.16 1999 Stock Option Plan for Officers and Employees of Astoria Financial
Corporation. (15)
10.17 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation. (15)
10.18 Amendment to Section 4.5 of the 1999 Stock Option Plan for Outside
Directors of Astoria Financial Corporation. (5)
10.19 Astoria Federal Savings and Loan Association Annual Incentive Plan for
Select Executives. (3)
10.20 Astoria Financial Corporation Executive Officer Annual Incentive Plan.
(15)
10.21 Astoria Financial Corporation Amended and Restated Employment Agreement
with George L. Engelke, Jr., dated as of January 1, 2000. (16)
109
EXHIBIT IDENTIFICATION OF EXHIBIT
10.22 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with George L. Engelke, Jr., dated as of January
1, 2000. (16)
10.23 Astoria Financial Corporation Amended and Restated Employment Agreement
with Gerard C. Keegan, dated as of January 1, 2000. (16)
10.24 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Gerard C. Keegan, dated as of January 1,
2000. (16)
10.25 Employment Termination and Release Agreement by and among John J.
Conefry, Jr., Astoria Federal Savings and Loan Association and Astoria
Financial Corporation. (5)
10.26 Astoria Financial Corporation Amended and Restated Employment Agreement
with Arnold K. Greenberg dated as of January 1, 2000. (16)
10.27 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Arnold K. Greenberg, dated as of January 1,
2000. (16)
10.28 Astoria Financial Corporation Amended and Restated Employment Agreement
with Thomas W. Drennan dated as of January 1, 2000. (16)
10.29 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Thomas W. Drennan, dated as of January 1,
2000. (16)
10.30 Astoria Financial Corporation Amended and Restated Employment Agreement
with Monte N. Redman dated as of January 1, 2000. (16)
10.31 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Monte N. Redman, dated as of January 1, 2000.
(16)
10.32 Astoria Financial Corporation Amended and Restated Employment Agreement
with Alan P. Eggleston dated as of January 1, 2000. (16)
10.33 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Alan P. Eggleston, dated as of January 1,
2000. (16)
10.34 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Josie Callari. (16)
10.35 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Robert J. Destefano. (16)
110
EXHIBIT IDENTIFICATION OF EXHIBIT
10.36 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Frank E. Fusco. (16)
10.37 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Gary T. McCann. (16)
10.38 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Robert T. Volk. (16)
10.39 Change of Control Severance Agreement, dated as of January 1, 2000, by
and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Ira M. Yourman. (16)
10.40 Change of Control Severance Agreement, dated as of December 20, 2000,
by and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Harold R. Leistmann. (5)
10.41 Change of Control Severance Agreement, dated as of December 20, 2000,
by and among Astoria Federal Savings and Loan Association, Astoria
Financial Corporation and Brian T. Edwards. (5)
10.42 Retirement Medical and Dental Benefit Policy for Senior Officers. (10)
10.43 Form of Option Conversion Agreement by and between Astoria Financial
Corporation and Former Officer or Director of Long Island Bancorp, Inc.
dated September 30, 1998. (17)
10.44 Option Conversion Certificates of Robert J. Conway, Lawrence W. Peters,
Leo J. Waters and Donald D. Wenk. (3)
10.45 Trust Agreement, dated as of January 31, 1995 between Astoria Financial
Corporation and State Street Bank and Trust Company. (18)
10.46 Option Conversion Agreement by and between Astoria Financial
Corporation and Gerard C. Keegan. (10)
11.1 Statement regarding computation of earnings per share. (*)
12.1 Statement regarding computation of ratios. (*)
21.1 Subsidiaries of Astoria Financial Corporation. (*)
23 Consent of Independent Auditors. (*)
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.
(*)
111
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.
(*)
99.3 Proxy Statement for the Annual Meeting of Shareholders to be held on
May 21, 2003, which will be filed with the SEC within 120 days from
December 31, 2002, is incorporated herein by reference.
* Filed herewith. Copies of exhibits will be provided to shareholders
upon written request to Astoria Financial Corporation, Investor
Relations Department, One Astoria Federal Plaza, Lake Success, New York
11042 at a charge of $0.10 per page. Copies are also available at no
charge through the SEC website: www.sec.gov/edaux/searches.htm.
(1) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K/A, dated April 2, 1998, filed with the Securities
and Exchange Commission on April 10, 1998, as amended by the First
Amendment, incorporated by reference to the Registrant's Current Report
on Form 8-K, dated May 29, 1998 and the Second Amendment, incorporated
by reference to the Registrant's Current Report on Form 8-K, dated July
10, 1998.
(2) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with
the Securities and Exchange Commission on September 10, 1998.
(3) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, filed
with the Securities and Exchange Commission on March 24, 1999.
(4) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, filed
with the Securities and Exchange Commission on March 28, 1997.
(5) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, filed
with the Securities and Exchange Commission on March 26, 2001.
(6) Incorporated by reference to Astoria Financial Corporation's
Registration Statement on Form 8-K/A dated July 17, 1996, filed with
the Securities and Exchange Commission on July 23, 1996.
(7) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, filed
with the Securities and Exchange Commission on March 26, 2002.
(8) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed
with the Securities and Exchange Commission on November 13, 1999.
(9) Incorporated by reference to Form S-4 Registration Statement, filed
with the Securities and Exchange Commission on June 24, 1997.
112
(10) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, filed
with the Securities and Exchange Commission on March 25, 1998.
(11) Incorporated by reference to Form S-4 Registration Statement, filed
with the Securities and Exchange Commission on February 18, 2000.
(12) Incorporated by reference to Form S-4 Registration Statement, filed
with the Securities and Exchange Commission on December 6, 2002.
(13) Incorporated by reference to Form 424B3 Prospectus Supplement, filed
with the Securities and Exchange Commission on February 1, 2000.
(14) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, filed
with the Securities and Exchange Commission on March 29, 1996.
(15) Incorporated by reference to Astoria Financial Corporation's Form 14-A
Definitive Proxy Statement filed on April 8, 1999.
(16) Incorporated by reference to Astoria Financial Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, filed
with the Securities and Exchange Commission on March 24, 2000.
(17) Incorporated by reference to Astoria Financial Corporation's
Registration Statement on Form S-8, dated September 30, 1998, filed
with the Securities and Exchange Commission on September 30, 1998.
(18) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K, dated January 31, 1995, filed with the Securities
and Exchange Commission on February 10, 1995.
113