Interest expense for the three months ended June 30, 2007 increased $20.2 million to $190.1 million, from $169.9 million for the three months ended June 30, 2006. This increase was primarily the result of an increase in the average cost of interest-bearing liabilities to 3.82% for the three months ended June 30, 2007, from 3.33% for the three months ended June 30, 2006. The increase in the average cost of interest-bearing liabilities was primarily due to the impact of the increase in interest rates on our certificates of deposit, Liquid CDs and borrowings, coupled with the increases in the average balances of Liquid CDs and certificates of deposit, which have a higher average cost than our other deposit products. The average balance of interest-bearing liabilities decreased $490.8 million to $19.90 billion for the three months ended June 30, 2007, from $20.39 billion for the three months ended June 30, 2006, primarily due to a decrease in the average balance of borrowings, partially offset by an increase in the average balance of deposits.
Interest expense on deposits increased $23.6 million to $114.1 million for the three months ended June 30, 2007, from $90.5 million for the three months ended June 30, 2006, primarily due to an increase in the average cost of total deposits to 3.42% for the three months ended June 30, 2007, from 2.80% for the three months ended June 30, 2006, coupled with an increase of $380.4 million in the average balance of total deposits. As previously discussed, the increase in the average cost of total deposits was primarily due to the impact of higher interest rates on our certificates of deposit and Liquid CDs, coupled with the increases in the average balances of these types of deposits. The increase in the average balance of total deposits was primarily the result of increases in the average balances of certificates of deposit and Liquid CDs, partially offset by decreases in the average balances of savings, money market and NOW and demand deposit accounts primarily as a result of continued competition for these types of deposits. As previously discussed, the decreases in savings and money market accounts were significantly lower than the quarterly decreases we had experienced during 2006.
Interest expense on certificates of deposit increased $14.5 million to $90.6 million for the three months ended June 30, 2007, from $76.1 million for the three months ended June 30, 2006, primarily due to an increase in the average cost to 4.69% for the three months ended June 30, 2007, from 4.07% for the three months ended June 30, 2006, coupled with an increase of $239.6 million in the average balance. During the three months ended June 30, 2007, $1.88 billion of certificates of deposit, with a weighted average rate of 4.75% and a weighted average maturity at inception of fifteen months, matured and $1.90 billion of certificates of deposit were issued or repriced, with a weighted average rate of 4.95% and a weighted average maturity at inception of eleven months. Interest expense on Liquid CDs increased $9.8 million to $20.2 million for the three months ended June 30, 2007, from $10.4 million for the three months ended June 30, 2006, primarily due to an increase of $693.3 million in the average balance, coupled with an increase in the average cost to 4.88% for the three months ended June 30, 2007, from 4.30% for the three months ended June 30, 2006. The increases in the average balances of certificates of deposit and Liquid CDs were primarily a result of the success of our marketing efforts and competitive pricing strategies which focused on attracting these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities.
Interest expense on borrowings for the three months ended June 30, 2007 decreased $3.3 million to $76.0 million, from $79.3 million for the three months ended June 30, 2006, resulting from a decrease of $871.2 million in the average balance, partially offset by an increase in the average
cost to 4.63% for the three months ended June 30, 2007, from 4.27% for the three months ended June 30, 2006. The decrease in the average balance of borrowings was primarily the result of our strategy in 2006 of reducing both the securities and borrowings portfolios through normal cash flow, while emphasizing deposit and loan growth. The increase in the average cost of borrowings reflects the upward repricing of borrowings which matured and were refinanced over the past year.
Interest expense for the six months ended June 30, 2007 increased $45.0 million to $374.5 million, from $329.5 million for the six months ended June 30, 2006. This increase was primarily the result of an increase in the average cost of interest-bearing liabilities to 3.76% for the six months ended June 30, 2007, from 3.22% for the six months ended June 30, 2006. The average balance of interest-bearing liabilities decreased $566.1 million to $19.90 billion for the six months ended June 30, 2007, from $20.46 billion for the six months ended June 30, 2006.
Interest expense on deposits increased $51.2 million to $224.5 million for the six months ended June 30, 2007, from $173.3 million for the six months ended June 30, 2006, primarily due to an increase in the average cost of total deposits to 3.38% for the six months ended June 30, 2007, from 2.68% for the six months ended June 30, 2006, coupled with an increase of $352.9 million in the average balance of total deposits.
Interest expense on certificates of deposit increased $31.5 million to $179.1 million for the six months ended June 30, 2007, from $147.6 million for the six months ended June 30, 2006, primarily due to an increase in the average cost to 4.64% for the six months ended June 30, 2007, from 3.93% for the six months ended June 30, 2006, coupled with an increase of $194.6 million in the average balance. During the six months ended June 30, 2007, $3.43 billion of certificates of deposit, with a weighted average rate of 4.69% and a weighted average maturity at inception of fifteen months, matured and $3.42 billion of certificates of deposit were issued or repriced, with a weighted average rate of 4.94% and a weighted average maturity at inception of eleven months. Interest expense on Liquid CDs increased $21.3 million to $38.8 million for the six months ended June 30, 2007, from $17.5 million for the six months ended June 30, 2006, primarily due to an increase of $743.8 million in the average balance, coupled with an increase in the average cost to 4.87% for the six months ended June 30, 2007, from 4.11% for the six months ended June 30, 2006.
Interest expense on borrowings for the six months ended June 30, 2007 decreased $6.3 million to $150.0 million, from $156.3 million for the six months ended June 30, 2006, resulting from a decrease of $919.0 million in the average balance, partially offset by an increase in the average cost to 4.53% for the six months ended June 30, 2007, from 4.14% for the six months ended June 30, 2006.
The principal reasons for the changes in the average costs and average balances of the various liabilities noted above for the six months ended June 30, 2007 are consistent with the principal reasons for the changes noted for the three months ended June 30, 2007, previously discussed.
Provision for Loan Losses
During the three and six months ended June 30, 2007 and 2006, no provision for loan losses was recorded. The allowance for loan losses was substantially unchanged and totaled $79.4 million at June 30, 2007 and $79.9 million at December 31, 2006. We believe our allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, giving consideration to the composition and size of our loan portfolio, charge-off
33
experience and non-accrual and non-performing loans. The composition of our loan portfolio has remained relatively consistent over the last several years. At June 30, 2007, our loan portfolio was comprised of 71% one-to-four family mortgage loans, 19% multi-family mortgage loans, 7% commercial real estate loans and 3% other loan categories. Our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. Our non-performing loans, which are comprised primarily of mortgage loans, increased $4.6 million to $64.0 million, or 0.41% of total loans, at June 30, 2007, from $59.4 million, or 0.40% of total loans, at December 31, 2006. This increase was primarily due to an increase of $12.3 million in non-performing one-to-four family mortgage loans, partially offset by a decrease of $8.9 million in non-performing multi-family mortgage loans. During the six months ended June 30, 2007, we sold $5.6 million of non-performing mortgage loans, primarily multi-family and commercial real estate loans.
We review our allowance for loan losses on a quarterly basis. Material factors considered during our quarterly review are our historical loss experience and the impact of current economic conditions. Our net charge-off experience was two basis points of average loans outstanding, annualized, for the three months ended June 30, 2007 and one basis point of average loans outstanding, annualized, for the six months ended June 30, 2007, compared to less than one basis point of average loans outstanding, annualized, for the three and six months ended June 30, 2006. Net loan charge-offs totaled $698,000 for the three months ended June 30, 2007, compared to $80,000 for the three months ended June 30, 2006, and $543,000 for the six months ended June 30, 2007, compared to $96,000 for the six months ended June 30, 2006.
We are closely monitoring the local and national real estate markets and other factors related to risks inherent in the loan portfolio. Despite the slowdown in the housing market, our loss experience in 2007 has been relatively consistent with our experience over the past several years. Furthermore, subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that we have ever actively pursued. Additionally, we continue to apply prudent underwriting standards. Based on our evaluation of the foregoing factors, our 2007 analyses indicated that our allowance for loan losses at June 30, 2007 was adequate and a provision for loan losses was not warranted.
The allowance for loan losses as a percentage of non-performing loans decreased to 124.07% at June 30, 2007, from 134.55% at December 31, 2006, primarily due to the increase in non-performing loans from December 31, 2006 to June 30, 2007. The allowance for loan losses as a percentage of total loans was 0.51% at June 30, 2007 and 0.53% at December 31, 2006.
For further discussion of the methodology used to evaluate the allowance for loan losses, see “Critical Accounting Policies” and for further discussion of non-performing loans, see “Asset Quality.”
Non-Interest Income
Non-interest income for the three months ended June 30, 2007 increased $553,000 to $26.3 million, from $25.7 million for the three months ended June 30, 2006, primarily due to an increase in other non-interest income, partially offset by a decrease in mortgage banking income, net. For the six months ended June 30, 2007, non-interest income increased $4.3 million to $48.9 million, from $44.6 million for the six months ended June 30, 2006, primarily due to an increase in other non-interest income, partially offset by decreases in mortgage banking income, net, and customer service fees.
34
Other non-interest income increased $1.4 million to $3.5 million for the three months ended June 30, 2007, from $2.1 million for the three months ended June 30, 2006, primarily due to a gain recognized related to insurance proceeds from an individual life insurance policy on a former executive. For the six months ended June 30, 2007, other non-interest income increased $6.8 million to $4.9 million, from a loss of $1.9 million for the six months ended June 30, 2006. This increase is primarily due to a $5.5 million charge for the termination of our interest rate swap agreements in March 2006, coupled with the previously discussed gain from insurance proceeds in the 2007 second quarter.
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 $923,000 to $1.2 million for the three months ended June 30, 2007, from $2.1 million for the three months ended June 30, 2006. For the six months ended June 30, 2007, mortgage banking income, net, decreased $1.8 million to $1.8 million, from $3.6 million for the six months ended June 30, 2006. These decreases were primarily due to decreases in the recovery of the valuation allowance for the impairment of MSR. For the three months ended June 30, 2007, we recorded a recovery of $530,000, compared to $1.3 million for the three months ended June 30, 2006. For the six months ended June 30, 2007, we recorded a recovery of $654,000, compared to $2.0 million for the six months ended June 30, 2006. The recoveries recorded for the three and six months ended June 30, 2007 and 2006 primarily reflect decreases in projected loan prepayment speeds.
Customer service fees decreased $1.7 million to $31.3 million for the six months ended June 30, 2007, from $33.0 million for the six months ended June 30, 2006. This decrease was primarily the result of decreases in insufficient fund fees related to transaction accounts, ATM fees and other checking charges.
Non-Interest Expense
Non-interest expense increased $3.5 million to $58.7 million for the three months ended June 30, 2007, from $55.2 million for the three months ended June 30, 2006, and increased $4.3 million to $115.8 million for the six months ended June 30, 2007, from $111.5 million for the six months ended June 30, 2006. These increases were primarily due to increases in compensation and benefits expense and other non-interest expense.
Compensation and benefits expense increased $1.5 million, to $30.0 million for the three months ended June 30, 2007, from $28.5 million for the three months ended June 30, 2006, and increased $2.4 million to $61.2 million for the six months ended June 30, 2007, from $58.8 million for the six months ended June 30, 2006. These increases were primarily due to increases in salaries, stock-based compensation and ESOP expense, partially offset by decreases in the net periodic cost of pension benefits. The increases in salaries expense primarily reflect normal performance increases over the past year. The increases in stock-based compensation expense reflect the additional expense related to restricted stock granted in December 2006. The increases in ESOP expense primarily reflect an increase in estimated shares to be released in 2007 as compared to 2006. The decreases in the net periodic cost of pension benefits are primarily the result of decreases in the amortization of the net actuarial loss.
Other expense increased $1.7 million to $9.8 million for the three months ended June 30, 2007, from $8.1 million for the three months ended June 30, 2006, and increased $2.0 million to $16.9 million for the six months ended June 30, 2007, from $14.9 million for the six months ended June 30, 2006. These increases were primarily due to increased legal fees and other costs as a
35
result of the goodwill litigation. See Note 6 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements (Unaudited),” for further discussion of the goodwill litigation.
Our percentage of general and administrative expense to average assets increased to 1.09% for the three months ended June 30, 2007, from 1.00% for the three months ended June 30, 2006, and increased to 1.08% for the six months ended June 30, 2007, from 1.01% for the six months ended June 30, 2006, primarily due to the previously discussed increases in non-interest expense, coupled with the decreases in average assets. The efficiency ratio, which represents general and administrative expense divided by the sum of net interest income plus non-interest income, was 53.78% for the three months ended June 30, 2007 and 52.82% for the six months ended June 30, 2007, compared to 43.46% for the three months ended June 30, 2006 and 43.31% for the six months ended June 30, 2006. The increases in the efficiency ratios for the three and six months ended June 30, 2007, compared to the three and six months ended June 30, 2006, were primarily due to the previously discussed decreases in net interest income.
Income Tax Expense
Income tax expense totaled $16.4 million for the three months ended June 30, 2007 and $33.6 million for the six months ended June 30, 2007, representing an effective tax rate of 32.5%. Income tax expense totaled $24.1 million for the three months ended June 30, 2006, representing an effective tax rate of 33.5%, and $49.3 million for the six months ended June 30, 2006, representing an effective tax rate of 33.8%. The decrease in the effective tax rate for 2007 was primarily the result of a decrease in pre-tax book income without any significant change in the amount of non-temporary differences, such as tax exempt income.
Asset Quality
One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Our concentration on one-to-four family mortgage lending and the maintenance of sound credit standards for new loan originations have resulted in our maintaining a low level of non-performing assets relative to the size of our loan portfolio. Through a variety of strategies, including, but not limited to, aggressive collection efforts and the marketing of non-performing loans and foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to maintain the strength of our financial condition.
36
Non-Performing Assets
The following table sets forth information regarding non-performing assets at the dates indicated.
| | | | | | | | |
(Dollars in Thousands) | | At June 30,
2007 | | | At December 31,
2006 | |
|
|
|
|
|
|
Non-accrual delinquent mortgage loans | | $ | 62,330 | | | $ | 58,110 | | |
Non-accrual delinquent consumer and other loans | | | 1,041 | | | | 818 | | |
Mortgage loans delinquent 90 days or more and still accruing interest (1) | | | 625 | | | | 488 | | |
|
|
|
|
|
|
|
|
|
|
Total non-performing loans | | | 63,996 | | | | 59,416 | | |
Real estate owned, net (2) | | | 1,925 | | | | 627 | | |
|
|
|
|
|
|
|
|
|
|
Total non-performing assets | | $ | 65,921 | | | $ | 60,043 | | |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | |
Non-performing loans to total loans | | | 0.41 | % | | | 0.40 | % | |
Non-performing loans to total assets | | | 0.30 | | | | 0.28 | | |
Non-performing assets to total assets | | | 0.30 | | | | 0.28 | | |
Allowance for loan losses to non-performing loans | | | 124.07 | | | | 134.55 | | |
Allowance for loan losses to total loans | | | 0.51 | | | | 0.53 | | |
| |
(1) | Mortgage 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. |
| |
(2) | 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. |
Non-performing assets increased $5.9 million to $65.9 million at June 30, 2007, from $60.0 million at December 31, 2006. Non-performing loans, the most significant component of non-performing assets, increased $4.6 million to $64.0 million at June 30, 2007, from $59.4 million at December 31, 2006. As previously discussed, these increases were primarily due to an increase in non-performing one-to-four family mortgage loans, partially offset by a decrease in non-performing multi-family mortgage loans. At June 30, 2007, approximately 39% of total non-performing loans are interest-only loans and approximately 39% of total non-performing loans are reduced documentation loans. At June 30, 2007, there were no non-performing interest-only multi-family and commercial real estate loans and we do not originate reduced documentation multi-family and commercial real estate loans. During the six months ended June 30, 2007, we sold $5.6 million of non-performing mortgage loans, primarily multi-family and commercial real estate loans. Our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. The ratio of non-performing loans to total loans was 0.41% at June 30, 2007 and 0.40% at December 31, 2006. Our ratio of non-performing assets to total assets was 0.30% at June 30, 2007 and 0.28% at December 31, 2006.
On June 29, 2007, the OTS and other bank regulatory authorities, or the Agencies, published the final Statement on Subprime Mortgage Lending, or the Statement, to address emerging issues and questions relating to certain subprime mortgage lending practices. In particular, the Agencies expressed concern with certain adjustable rate mortgage products with certain characteristics typically offered in the marketplace to subprime borrowers. Those characteristics included, but were not limited to, utilizing low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable index rate plus a margin for the remaining term of the loan and underwriting loans based upon limited or no documentation of borrowers’ income. The Statement does not establish a “bright-line” test as to what constitutes subprime lending. Within our loan portfolio, we have loans which have certain attributes found in subprime lending. However, subprime lending is not a market that we have ever actively
37
pursued. We do not, therefore, expect the Statement to have a material impact on our lending operations.
We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. At June 30, 2007, $14.7 million of mortgage loans classified as non-performing had missed only two payments, compared to $17.3 million at December 31, 2006. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted.
If all non-accrual loans at June 30, 2007 and 2006 had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $2.1 million for the six months ended June 30, 2007 and $1.7 million for the six months ended June 30, 2006. This compares to actual payments recorded as interest income, with respect to such loans, of $698,000 for the six months ended June 30, 2007 and $508,000 for the six months ended June 30, 2006.
In addition to non-performing loans, we had $926,000 of potential problem loans at June 30, 2007, compared to $734,000 at December 31, 2006. Such loans are 60-89 days delinquent as shown in the following table.
Delinquent Loans
The following table shows a comparison of delinquent loans at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At June 30, 2007 | | At December 31, 2006 | |
| |
|
| | 60-89 Days | | 90 Days or More | | 60-89 Days | | 90 Days or More | |
| |
|
(Dollars in Thousands) | | Number
of
Loans | | Amount | | Number
of
Loans | | Amount | | Number
of
Loans | | Amount | | Number
of
Loans | | Amount | |
|
Mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | |
One-to-four family | | | 3 | | $ | 5 | | | 189 | | $ | 53,467 | | | 2 | | $ | 92 | | | 159 | | $ | 41,124 | |
Multi-family | | | — | | | — | | | 13 | | | 5,756 | | | — | | | — | | | 21 | | | 14,627 | |
Commercial real estate | | | — | | | — | | | 5 | | | 2,995 | | | — | | | — | | | 5 | | | 2,847 | |
Construction | | | — | | | — | | | 1 | | | 737 | | | — | | | — | | | — | | | — | |
Consumer and other loans | | | 28 | | | 921 | | | 31 | | | 1,041 | | | 38 | | | 642 | | | 33 | | | 818 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total delinquent loans | | | 31 | | $ | 926 | | | 239 | | $ | 63,996 | | | 40 | | $ | 734 | | | 218 | | $ | 59,416 | |
|
|
Delinquent loans to total loans | | | | | | 0.01 | % | | | | | 0.41 | % | | | | | 0.00 | % | | | | | 0.40 | % |
38
Allowance for Loan Losses
The following table sets forth the change in our allowance for losses on loans for the six months ended June 30, 2007.
| | | | |
| | (In Thousands) | |
Balance at December 31, 2006 | | $ | 79,942 | | |
Provision charged to operations | | | — | | |
Charge-offs: | | | | | |
One-to-four family | | | (146 | ) | |
Multi-family | | | (73 | ) | |
Commercial real estate | | | (242 | ) | |
Consumer and other loans | | | (395 | ) | |
|
|
|
|
|
|
Total charge-offs | | | (856 | ) | |
|
|
|
|
|
|
Recoveries: | | | | | |
One-to-four family | | | 4 | | |
Commercial real estate | | | 197 | | |
Consumer and other loans | | | 112 | | |
|
|
|
|
|
|
Total recoveries | | | 313 | | |
|
|
|
|
|
|
Net charge-offs | | | (543 | ) | |
|
|
|
|
|
|
Balance at June 30, 2007 | | $ | 79,399 | | |
|
|
|
|
|
|
| |
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
As a financial institution, the primary component of our market risk is interest rate risk, or IRR. The objective of our IRR management policy is to maintain an appropriate mix and level of assets, liabilities and off-balance sheet items to enable us to meet our earnings and/or growth objectives, while maintaining specified minimum capital levels as required by the OTS, in the case of Astoria Federal, and as established by our Board of Directors. We use a variety of analyses to monitor, control and adjust our asset and liability positions, primarily interest rate sensitivity gap analysis, or gap analysis, and net interest income sensitivity, or NII sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in conformity with OTS requirements.
Gap Analysis
Gap analysis measures the difference between the amount of interest-earning assets anticipated to mature or reprice within specific time periods and the amount of interest-bearing liabilities anticipated to mature or reprice within the same time periods. Gap analysis 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 the analysis.
The following table, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2007 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 Gap Table includes $1.78 billion of callable borrowings classified according to their call dates, of which $600.0 million are callable within one year and at various times thereafter and $1.18 billion are callable within thirteen to twenty-four months and at various times thereafter. In addition, the Gap Table includes $900.0 million of callable borrowings classified according to their maturity dates, in the more than one year to three years category, which are callable within one year and at various times thereafter. The classifications of callable borrowings are based on our experience with, and expectations of, these types of instruments and the current interest rate environment.
39
| | | | | | | | | | | | | | | | |
| | At June 30, 2007 | |
| |
|
(Dollars in Thousands) | | One Year
or Less | | More than
One Year
to
Three Years | | More than
Three Years
to
Five Years | | More than
Five Years | | Total | |
|
Interest-earning assets: | | | | | | | | | | | | | | | | |
Mortgage loans (1) | | $ | 4,323,860 | | $ | 5,587,154 | | $ | 4,720,303 | | $ | 415,493 | | $ | 15,046,810 | |
Consumer and other loans (1) | | | 356,626 | | | 21,934 | | | 7,326 | | | — | | | 385,886 | |
Repurchase agreements | | | 44,482 | | | — | | | — | | | — | | | 44,482 | |
Securities available-for-sale | | | 90,245 | | | 670,898 | | | 622,435 | | | 103,721 | | | 1,487,299 | |
Securities held-to-maturity | | | 870,400 | | | 2,002,027 | | | 524,014 | | | 141 | | | 3,396,582 | |
FHLB-NY stock | | | — | | | — | | | — | | | 155,601 | | | 155,601 | |
|
Total interest-earning assets | | | 5,685,613 | | | 8,282,013 | | | 5,874,078 | | | 674,956 | | | 20,516,660 | |
Net unamortized purchase premiums and deferred costs (2) | | | 30,470 | | | 33,674 | | | 30,449 | | | 2,670 | | | 97,263 | |
|
Net interest-earning assets (3) | | | 5,716,083 | | | 8,315,687 | | | 5,904,527 | | | 677,626 | | | 20,613,923 | |
|
Interest-bearing liabilities: | | | | | | | | | | | | | | | | |
Savings | | | 258,170 | | | 430,422 | | | 430,422 | | | 906,118 | | | 2,025,132 | |
Money market | | | 166,077 | | | 102,924 | | | 102,924 | | | 5,530 | | | 377,455 | |
NOW and demand deposit | | | 115,663 | | | 231,338 | | | 231,338 | | | 911,285 | | | 1,489,624 | |
Liquid CDs | | | 1,664,176 | | | — | | | — | | | — | | | 1,664,176 | |
Certificates of deposit | | | 5,231,258 | | | 2,310,131 | | | 335,901 | | | 14,179 | | | 7,891,469 | |
Borrowings, net | | | 2,926,364 | | | 3,393,952 | | | — | | | 378,026 | | | 6,698,342 | |
|
Total interest-bearing liabilities | | | 10,361,708 | | | 6,468,767 | | | 1,100,585 | | | 2,215,138 | | | 20,146,198 | |
|
Interest sensitivity gap | | | (4,645,625 | ) | | 1,846,920 | | | 4,803,942 | | | (1,537,512 | ) | $ | 467,725 | |
|
Cumulative interest sensitivity gap | | $ | (4,645,625 | ) | $ | (2,798,705 | ) | $ | 2,005,237 | | $ | 467,725 | | | | |
|
| | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap as a percentage of total assets | | | (21.46 | )% | | (12.93 | )% | | 9.26 | % | | 2.16 | % | | | |
Cumulative net interest-earning assets as a percentage of interest-bearing liabilities | | | 55.17 | % | | 83.37 | % | | 111.18 | % | | 102.32 | % | | | |
| |
(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. |
| |
(3) | Includes securities available-for-sale at amortized cost. |
As indicated in the Gap Table, our one-year cumulative gap at June 30, 2007 was negative 21.46%. This compares to a one-year cumulative gap of negative 21.06% at December 31, 2006, which classified all callable borrowings according to their maturity dates. At June 30, 2007, if all callable borrowings had been classified according to their maturity dates, our one-year cumulative gap would have been negative 18.69%. The change in the one-year cumulative gap with all callable borrowings classified according to their maturity dates is primarily attributable to a decrease in borrowings due in one year or less at June 30, 2007, as compared to December 31, 2006, as a result of maturities which were repaid or refinanced into longer terms, partially offset by an increase in Liquid CDs.
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
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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 July 1, 2007 would decrease by approximately 7.54% from the base projection. At December 31, 2006, in the up 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2007 would have decreased by approximately 10.09% from the base projection. Assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points, and remain at that level thereafter, our projected net interest income for the twelve month period beginning July 1, 2007 would increase by approximately 0.17% from the base projection. At December 31, 2006, in the down 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2007 would have increased by approximately 4.34% from the base projection.
Various shortcomings are inherent in both the Gap Table and NII sensitivity analyses. Certain assumptions may not reflect the manner in which actual yields and costs respond to market changes. Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in interest rates may also affect our operating environment and operating strategies as well as those of our competitors. In addition, certain adjustable rate assets have limitations on the magnitude of rate changes over specified periods of time. Accordingly, although our NII sensitivity analyses may provide an indication of our IRR exposure, such analyses are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and our actual results will differ. Additionally, certain assets, liabilities and items of income and expense which may be affected by changes in interest rates, albeit to a much lesser degree, and which do not affect net interest income, are excluded from this analysis. These include income from bank owned life insurance and changes in the fair value of MSR. With respect to these items alone, and assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points, and remain at that level thereafter, our projected net income for the twelve month period beginning July 1, 2007 would increase by approximately $3.5 million. Conversely, assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points, and remain at that level thereafter, our projected net income for the twelve month period beginning July 1, 2007 would decrease by approximately $8.3 million with respect to these items alone.
For further information regarding our market risk and the limitations of our gap analysis and NII sensitivity analysis, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2006 Annual Report on Form 10-K.
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ITEM 4. | Controls and Procedures |
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and Monte N. Redman, our Executive Vice President and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2007. Based upon their evaluation, they each found that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
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There were no changes in our internal controls over financial reporting that occurred during the three months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION |
In the ordinary course of our business, we are routinely made defendant in or a party to pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity.
Goodwill Litigation
As previously discussed, we are a party to two actions 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.
On September 15, 2005, the U.S. Court of Federal Claims rendered a decision in the LISB goodwill litigation awarding us $435.8 million in damages from the U.S. government. No portion of the $435.8 million award was recognized in our consolidated financial statements. On December 14, 2005, the United States filed an appeal of such award and, on February 1, 2007, the Court of Appeals reversed such award. On April 2, 2007, we filed a petition for rehearing or rehearingen banc, which remains pending.
The other action is entitledAstoria Federal Savings and Loan Association vs. United States. The evidentiary phase of the trial in this action, which commenced on April 19, 2007 before the U.S. Court of Federal Claims, has been concluded. Post trial motions and closing arguments are expected to be concluded in the fourth quarter of 2007.
The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation. Legal expense related to these two actions has been recognized as it has been incurred.
McAnaney Litigation
In 2004, an action entitledDavid McAnaney and Carolyn McAnaney, individually and on behalf of all others similarly situated vs.Astoria Financial Corporation, et al. was commenced in the U.S. District Court for the Eastern District of New York, or the Court. The action, commenced as a class action, alleges that in connection with the satisfaction of certain mortgage loans made by Astoria Federal, The Long Island Savings Bank, FSB, which was acquired by Astoria Federal in 1998, and their related entities, customers were charged attorney document preparation fees, recording fees and facsimile fees allegedly in violation of the federal Truth in Lending Act, the Real Estate Settlement Procedures Act, or RESPA, the Fair Debt Collection Act, or FDCA, and the New York State Deceptive Practices Act, and alleging unjust enrichment and common law fraud.
Astoria Federal previously moved to dismiss the amended complaint, which motion was granted in part and denied in part, dismissing claims based on violations of RESPA and FDCA.
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The Court further determined that class certification would be considered prior to considering summary judgment. The Court, on September 19, 2006, granted the plaintiff’s motion for class certification. Astoria Federal has denied the claims set forth in the complaint. Both we and the plaintiffs have filed motions for summary judgment, which are currently pending before the Court. We currently do not believe this action will likely have a material adverse impact on our financial condition or results of operations. However, no assurance can be given at this time that this litigation will be resolved amicably, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material.
Changes in interest rates may reduce our net income.
Our earnings depend largely on the relationship between the yield on our interest-earning assets, primarily our mortgage loans and mortgage-backed securities, and the cost of our deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence market interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of non-performing assets. Fluctuations in market interest rates affect customer demand for our products and services. We are subject to interest rate risk to the degree that our interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest-earning assets.
In addition, the actual amount of time before mortgage loans and mortgage-backed securities are repaid can be significantly impacted by changes in mortgage prepayment rates and market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition.
Some of our borrowings contain features that would allow them to be called prior to their contractual maturity. This would generally occur during periods of rising interest rates. If this were to occur, we would need to either renew the borrowings at a potentially higher rate of interest, which would negatively impact our net interest income, or repay such borrowings. If we sell securities to fund the repayment of such borrowings, any decline in estimated market value with respect to the securities sold would be realized and could result in a loss upon such sale.
The flat-to-inverted yield curve which existed throughout 2006 continued in 2007. However, during the second quarter of 2007, medium- and long-term U.S. Treasury yields increased resulting in a slightly positively sloped, although still relatively flat, U.S. Treasury yield curve. This continued pattern of a relatively flat interest yield curve limits our growth opportunities and continues to put pressure on our net interest rate spread and net interest margin. As a result, we have continued to pursue our strategy of emphasizing deposit and loan growth while reducing the securities portfolio through normal cash flow.
Interest rates do and will continue to fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that will cause rates to change. Accordingly, no assurance can be given that our net interest margin and net interest income will not remain under pressure.
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Our results of operations are affected by economic conditions in the New York metropolitan area and other areas.
Our retail banking and a significant portion of our lending business (approximately 43% of our one-to-four family and 92% of our multi-family and commercial real estate mortgage loan portfolios at June 30, 2007) are concentrated in the New York metropolitan area, which includes New York, New Jersey and Connecticut. As a result of this geographic concentration, our results of operations largely depend upon economic conditions in this area as well as other areas.
Decreases in real estate values could adversely affect the value of property used as collateral for our loans. The average loan-to-value ratio of our mortgage loan portfolio is less than 65% based on current principal balances and original appraised values. However, no assurance can be given that the original appraised values are reflective of current market conditions. Adverse changes in the economy caused by inflation, recession, unemployment or other factors beyond our control may also have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. Consequently, deterioration in economic conditions, particularly in the New York metropolitan area, could have a material adverse impact on the quality of our loan portfolio, which could result in an increase in delinquencies, causing a decrease in our interest income as well as an adverse impact on our loan loss experience, causing an increase in our allowance for loan losses. Such deterioration could also adversely impact the demand for our products and services, and, accordingly, our results of operations.
There has been a slowdown in the housing market, both nationally and locally, as evidenced by reports of reduced levels of new and existing home sales, increased inventories of houses on the market, stagnant to declining property values, an increase in the length of time houses remain on the market and increased mortgage delinquency levels. No assurance can be given that these conditions will improve or will not worsen or that such conditions will not result in a decrease in our interest income or an adverse impact on our loan losses.
Multi-family and commercial real estate lending may expose us to increased lending risks.
While we are primarily a one-to-four family mortgage lender, we also originate multi-family and commercial real estate loans. At June 30, 2007, $4.07 billion, or 26%, of our total loan portfolio consisted of multi-family and commercial real estate loans. 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. 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.
We have originated multi-family and commercial real estate loans in areas other than the New York metropolitan area. Originations in states other than New York, New Jersey and Connecticut represented 19% of our total originations of multi-family and commercial real estate loans in the first half of 2007. At June 30, 2007, loans in states other than New York, New Jersey and Connecticut comprised 8% of the total multi-family and commercial real estate loan portfolio. We could be subject to additional risks with respect to multi-family and commercial real estate lending in areas other than the New York metropolitan area as we have less experience in these areas with this type of lending and less direct oversight of the local market and the borrowers’ operations.
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While we continue to originate multi-family and commercial real estate loans, we do not believe that recent market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending. Additionally, as a result of the recent market pricing and the additional risks associated with these loans, we are currently only originating multi-family and commercial real estate loans in the New York metropolitan area. The market for multi-family and commercial real estate loans does and will continue to change. Changes in market conditions may result in our election to aggressively pursue the originations of such loans in the future, including our resumption of originations outside of the New York metropolitan area.
We operate in a highly regulated industry, which limits the manner and scope of our business activities.
We are subject to extensive supervision, regulation and examination by the OTS and by the Federal Deposit Insurance Corporation. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the Deposit Insurance Fund and our depositors, and not to benefit our stockholders. This 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 capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, we must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.
On October 4, 2006, the Agencies published the Interagency Guidance on Nontraditional Mortgage Product Risks, or the Guidance. The Guidance describes sound practices for managing risk, as well as marketing, originating and servicing nontraditional mortgage products, which include, among other things, interest only loans. The Guidance sets forth supervisory expectations with respect to loan terms and underwriting standards, portfolio and risk management practices and consumer protection. For example, the Guidance indicates that originating interest only loans with reduced documentation is considered a layering of risk and that institutions are expected to demonstrate mitigating factors to support their underwriting decision and the borrower’s repayment capacity. Specifically, the Guidance indicates that a lender may accept a borrower’s statement as to the borrower’s income without obtaining verification only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity and that, for many borrowers, institutions should be able to readily document income.
Currently, we originate both interest only and interest only reduced documentation loans. We do not originate negative amortization or payment option adjustable rate mortgage loans. Reduced documentation loans include stated income, full asset, or SIFA, loans; stated income, stated asset, or SISA, loans; and Super Streamline loans. SIFA and SISA loans require a prospective borrower to complete a standard mortgage loan application while the Super Streamline product requires the completion of an abbreviated application and is, in effect, considered a “no documentation” loan. During the first half of 2007, originations of interest only loans totaled $1.59 billion, of which $1.51 billion were one-to-four family loans and $81.5 million were multi-family and commercial real estate loans. Included in the interest only one-to-four family loan originations were $342.7 million of interest only reduced documentation loans, substantially all of which were SIFA loans. At June 30, 2007, our mortgage loan portfolio included $7.01 billion of one-to-four family interest only loans and
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$602.3 million of multi-family and commercial real estate interest only loans. Non-performing interest only loans totaled $24.9 million at June 30, 2007.
We have evaluated the Guidance to determine our compliance and, as necessary, modified our risk management practices and underwriting guidelines. The guidance does not apply to all mortgage lenders with whom we compete for loans. Therefore, we cannot predict the impact the Guidance may have, if any, on our loan origination volumes in future periods.
For a summary of other risk factors relevant to our operations, see Part I, Item 1A, “Risk Factors,” in our 2006 Annual Report on Form 10-K. There are no other material changes in risk factors relevant to our operations since December 31, 2006 except as discussed above.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth the repurchases of our common stock by month during the three months ended June 30, 2007.
| | | | | | | | | | | | | | | | | | | | | |
Period | | Total
Number of
Shares
Purchased | | Average
Price Paid
per Share | | Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans | | Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans (1) | |
|
|
|
|
|
|
|
|
|
|
April 1, 2007 through April 30, 2007 | | | | 160,000 | | | | $ | 26.90 | | | | | 160,000 | | | | | 10,707,300 | | |
May 1, 2007 through May 31, 2007 | | | | 440,000 | | | | $ | 26.81 | | | | | 440,000 | | | | | 10,267,300 | | |
June 1, 2007 through June 30, 2007 | | | | 150,000 | | | | $ | 25.91 | | | | | 150,000 | | | | | 10,117,300 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | | | | 750,000 | | | | $ | 26.65 | | | | | 750,000 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) | Includes 10,000,000 shares that may be purchased under the twelfth stock repurchase plan, approved by our Board of Directors on April 18, 2007, which will commence immediately following the completion of the eleventh stock repurchase plan. |
All of the shares repurchased during the three months ended June 30, 2007 were repurchased under our eleventh stock repurchase plan, approved by our Board of Directors on December 21, 2005, which authorized the purchase, at management’s discretion, of 10,000,000 shares, or approximately 10% of our common stock then outstanding, through December 31, 2007 in open-market or privately negotiated transactions.
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ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
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ITEM 4. | Submission of Matters to a Vote of Security Holders |
Our Annual Meeting of shareholders, referred to as the Annual Meeting, was held May 16, 2007. At the Annual Meeting, our shareholders re-elected John J. Conefry, Jr. and Thomas V. Powderly as directors, each to serve for a three year term. In all cases, directors serve until their respective successors are duly elected and qualified. The shareholders also approved the Astoria Financial Corporation 2007 Non-Employee Director Stock Plan and ratified our appointment of KPMG LLP as our independent registered public accounting firm for our 2007 fiscal year.
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The number of votes cast with respect to each matter acted upon at the Annual Meeting was as follows:
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(a) | Election of Directors: |
| | | | | | | |
| | | For | | | Withheld | |
| | |
| | |
| |
| | | | | | | |
John J. Conefry, Jr. | | | 85,960,837 | | | 3,128,721 | |
Thomas V. Powderly | | | 78,153,485 | | | 10,936,073 | |
| |
| There were no broker held non-voted shares represented at the meeting with respect to this proposal. |
| |
(b) | Approval of the Astoria Financial Corporation 2007 Non-Employee Director Stock Plan: |
| | | | |
For: | | | 47,961,494 | |
Against: | | | 28,895,450 | |
Abstained: | | | 839,970 | |
| |
| There were 11,392,644 broker held non-voted shares represented at the meeting with respect to this proposal. |
| |
(c) | Ratification of the appointment of KPMG LLP as the independent registered public accounting firm of Astoria Financial Corporation for the 2007 fiscal year: |
| | | | |
For: | | | 87,959,350 | |
Against: | | | 722,754 | |
Abstained: | | | 407,454 | |
| |
| There were no broker held non-voted shares represented at the meeting with respect to this proposal. |
Not applicable.
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| | |
Exhibit No. | | Identification of Exhibit |
| |
|
|
31.1 | | Certifications of Chief Executive Officer. |
| | |
31.2 | | Certifications of Chief Financial Officer. |
| | |
32.1 | | Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. |
| | |
32.2 | | Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
| | | Astoria Financial Corporation |
| | | |
Dated: August 8, 2007 | By:/s/ | Monte N. Redman |
| | |
|
| | | | Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer) |
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Exhibit Index
| | |
Exhibit No. | | Identification of Exhibit |
| |
|
|
31.1 | | Certifications of Chief Executive Officer. |
| | |
31.2 | | Certifications of Chief Financial Officer. |
| | |
32.1 | | Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. |
| | |
32.2 | | Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. |
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