UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 327-3000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, July 31, 2003
----------------------- -------------------------------------------
.01 Par Value 80,435,217
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PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at June 30, 2003 2
and December 31, 2002
Consolidated Statements of Income for the Three and Six Months 3
Ended June 30, 2003 and June 30, 2002
Consolidated Statement of Changes in Stockholders' Equity for the 4
Six Months Ended June 30, 2003
Consolidated Statements of Cash Flows for the Six Months Ended 5
June 30, 2003 and June 30, 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 38
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
At At
June 30, December 31,
(In Thousands, Except Share Data) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 142,361 $ 167,605
Federal funds sold and repurchase agreements 117,722 510,252
Available-for-sale securities:
Encumbered 2,201,309 2,096,619
Unencumbered 1,029,537 695,962
- -----------------------------------------------------------------------------------------------------------------------
3,230,846 2,792,581
Held-to-maturity securities, fair value of $5,684,777 and $5,100,565,
respectively:
Encumbered 4,588,927 4,059,947
Unencumbered 1,047,164 981,310
- -----------------------------------------------------------------------------------------------------------------------
5,636,091 5,041,257
Federal Home Loan Bank of New York stock, at cost 231,200 247,550
Loans held-for-sale, net 73,095 62,669
Loans receivable:
Mortgage loans, net 11,631,846 11,680,160
Consumer and other loans, net 411,804 379,201
- -----------------------------------------------------------------------------------------------------------------------
12,043,650 12,059,361
Allowance for loan losses (83,390) (83,546)
- -----------------------------------------------------------------------------------------------------------------------
Loans receivable, net 11,960,260 11,975,815
Mortgage servicing rights, net 13,844 20,411
Accrued interest receivable 85,806 88,908
Premises and equipment, net 159,456 157,297
Goodwill 185,151 185,151
Bank owned life insurance 360,580 358,898
Other assets 86,477 89,435
- -----------------------------------------------------------------------------------------------------------------------
Total assets $22,282,889 $21,697,829
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Savings $ 2,927,603 $ 2,832,291
Money market 1,385,165 1,698,552
NOW and demand deposit 1,510,949 1,383,315
Certificates of deposit 5,485,449 5,153,038
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 11,309,166 11,067,196
Reverse repurchase agreements 6,735,000 6,285,000
Federal Home Loan Bank of New York advances 1,979,000 2,064,000
Other borrowings, net 477,039 472,180
Mortgage escrow funds 120,559 104,353
Accrued expenses and other liabilities 134,510 151,102
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 20,755,274 20,143,831
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 80,672,623 and 84,805,817 shares
outstanding, respectively) 1,110 1,110
Additional paid-in capital 846,285 840,186
Retained earnings 1,431,620 1,368,062
Treasury stock (30,323,969 and 26,190,775 shares, at cost, respectively) (744,819) (639,579)
Accumulated other comprehensive income 18,075 9,800
Unallocated common stock held by ESOP (4,850,252 and 5,018,500
shares, respectively) (26,656) (27,581)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,527,615 1,553,998
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,282,889 $21,697,829
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------------
(In Thousands, Except Share Data) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 117,866 $ 163,449 $244,795 $ 329,958
Multifamily, commercial real estate and
construction 49,449 38,781 95,665 75,070
Consumer and other loans 4,960 4,117 9,732 7,919
Mortgage-backed securities 88,213 97,225 182,261 197,721
Other securities 8,280 19,449 18,129 39,105
Federal funds sold and repurchase agreements 465 3,254 1,217 7,392
- --------------------------------------------------------------------------------------------------------------------
Total interest income 269,233 326,275 551,799 657,165
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 57,189 75,543 115,430 153,770
Borrowed funds 115,793 128,363 231,110 266,099
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 172,982 203,906 346,540 419,869
- --------------------------------------------------------------------------------------------------------------------
Net interest income 96,251 122,369 205,259 237,296
Provision for loan losses - 1,002 - 2,006
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 96,251 121,367 205,259 235,290
- --------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 15,759 15,347 30,592 29,278
Other loan fees 2,041 1,558 3,867 3,680
Net gain of sales of securities 8,029 - 10,165 -
Mortgage banking income, net (376) 600 60 4,028
Income from bank owned life insurance 5,049 5,982 10,248 10,244
Other 1,041 841 2,506 4,058
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 31,543 24,328 57,438 51,288
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 27,604 26,289 56,368 52,357
Occupancy, equipment and systems 15,159 13,052 29,774 26,227
Federal deposit insurance premiums 468 499 960 1,004
Advertising 1,744 1,531 3,242 2,558
Other 6,865 8,904 13,462 16,258
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 51,840 50,275 103,806 98,404
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense 75,954 95,420 158,891 188,174
Income tax expense 25,065 31,489 51,605 63,025
- --------------------------------------------------------------------------------------------------------------------
Net income 50,889 63,931 107,286 125,149
Preferred dividends declared (1,500) (1,500) (3,000) (3,000)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 49,389 $ 62,431 $104,286 $ 122,149
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.64 $ 0.74 $ 1.34 $ 1.44
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.64 $ 0.73 $ 1.33 $ 1.41
- --------------------------------------------------------------------------------------------------------------------
Dividends per common share $ 0.22 $ 0.20 $ 0.42 $ 0.37
- --------------------------------------------------------------------------------------------------------------------
Basic weighted average common shares 76,861,759 84,216,057 77,945,438 84,843,610
Diluted weighted average common and common equivalent shares 77,470,793 85,946,408 78,620,070 86,490,683
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2003
Accumu- Unallo-
lated cated
Other Common
Additional Compre- Stock
Preferred Common Paid-in Retained Treasury hensive Held
(In Thousands, Except Share Data) Total Stock Stock Capital Earnings Stock Income by ESOP
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,553,998 $2,000 $1,110 $840,186 $1,368,062 $(639,579) $ 9,800 $(27,581)
Comprehensive income:
Net income 107,286 - - - 107,286 - - -
Other comprehensive income, net of tax:
Net unrealized gain on securities 7,404 - - - - - 7,404 -
Amortization of net unrealized loss
on cash flow hedging instruments 96 - - - - - 96 -
Amortization of unrealized loss
on securities transferred to
held-to-maturity 775 - - - - - 775 -
----------
Comprehensive income 115,561
----------
Common stock repurchased
(4,654,000 shares) (117,987) - - - - (117,987) - -
Dividends on common and preferred
stock and amortization of purchase
premium (35,732) - - (652) (35,080) - - -
Exercise of stock options and
related tax benefit
(520,806 shares issued) 7,494 - - 3,395 (8,648) 12,747 - -
Amortization relating to allocation
of ESOP stock 4,281 - - 3,356 - - - 925
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $1,527,615 $2,000 $1,110 $846,285 $1,431,620 $(744,819) $18,075 $(26,656)
=============================================================================================================================
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30,
---------------------------------
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 107,286 $ 125,149
Adjustments to reconcile net income to net cash provided
by operating activities:
Net premium amortization on mortgage loans and mortgage-backed securities 58,845 19,419
Other net discount accretion (877) (25,068)
Net provision for loan and real estate losses 5 2,006
Depreciation and amortization 6,066 5,462
Net gain on sales of loans and securities (16,137) (2,846)
Originations of loans held-for-sale, net of proceeds from sales (4,454) 27,319
Amortization relating to allocation of ESOP stock 4,281 4,389
Decrease in accrued interest receivable 3,102 768
Mortgage servicing rights amortization and valuation
allowance, net of capitalized amounts 6,567 2,034
Income from bank owned life insurance, net of insurance proceeds received (1,682) (10,244)
Decrease (increase) in other assets 6,344 (50,084)
Decrease in accrued expenses and other liabilities (16,195) (26,805)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 153,151 71,499
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (2,643,404) (1,891,187)
Loan purchases through third parties (705,724) (752,523)
Principal payments on loans receivable 3,337,775 2,269,757
Principal payments on mortgage-backed securities held-to-maturity 2,476,517 1,340,028
Principal payments on mortgage-backed securities available-for-sale 1,147,360 986,294
Purchases of mortgage-backed securities held-to-maturity (3,160,014) (1,912,575)
Purchases of mortgage-backed securities available-for-sale (2,535,035) -
Purchases of other securities available-for-sale (600) (502)
Proceeds from calls and maturities of other securities held-to-maturity 67,045 107,158
Proceeds from calls and maturities of other securities available-for-sale 132,693 675
Proceeds from sales of mortgage-backed securities available-for-sale 829,680 -
Net redemptions of FHLB of New York stock 16,350 24,977
Proceeds from sales of real estate owned, net 1,101 2,856
Purchases of premises and equipment, net of proceeds from sales (8,225) (8,127)
Purchase of bank owned life insurance - (100,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,044,481) 66,831
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 241,970 333,709
Net increase (decrease) in reverse repurchase agreements 450,000 (500,000)
Net decrease in FHLB of New York advances (85,000) (249,550)
Net decrease in other borrowings - (300,000)
Net increase in mortgage escrow funds 16,206 17,082
Common stock repurchased (117,987) (84,587)
Cash dividends paid to stockholders (35,732) (34,373)
Cash received for options exercised 4,099 5,591
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 473,556 (812,128)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (417,774) (673,798)
Cash and cash equivalents at beginning of period 677,857 1,453,858
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 260,083 $ 780,060
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the period:
Interest $ 348,600 $ 430,225
- ----------------------------------------------------------------------------------------------------------------------
Income taxes $ 48,397 $ 57,246
- ----------------------------------------------------------------------------------------------------------------------
Additions to real estate owned $ 593 $ 1,068
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal; Astoria Capital Trust I; and AF Insurance Agency, Inc. As used in this
quarterly report, "we," "us" and "our" refer to Astoria Financial Corporation
and its consolidated subsidiaries, including Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc. All significant inter-company accounts and
transactions have been eliminated in consolidation.
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of June 30, 2003 and December
31, 2002, our results of operations for the three and six months ended June 30,
2003 and 2002, changes in our stockholders' equity for the six months ended June
30, 2003 and our cash flows for the six months ended June 30, 2003 and 2002. In
preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities for the consolidated statements of financial condition as of June
30, 2003 and December 31, 2002, and amounts of revenues and expenses in the
consolidated statements of income for the three and six months ended June 30,
2003 and 2002. The results of operations for the three and six months ended June
30, 2003 are not necessarily indicative of the results of operations to be
expected for the remainder of the year or for any other interim periods. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission, or SEC.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2002 audited consolidated financial statements and related notes
included in our 2002 Annual Report on Form 10-K.
6
2. Earnings Per Share, or EPS
The following table is a reconciliation of basic and diluted EPS.
For the Three Months Ended June 30,
-----------------------------------------------------------------
2003 2002
-----------------------------------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS(1) EPS EPS
- --------------------------------------------------------------------------------------------------------------------
Net income $ 50,889 $ 50,889 $ 63,931 $ 63,931
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 49,389 $ 49,389 $ 62,431 $ 62,431
- --------------------------------------------------------------------------------------------------------------------
Total weighted average basic
common shares outstanding 76,862 76,862 84,216 84,216
Effect of dilutive securities:
Options - 609 - 1,730
- --------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 76,862 77,471 84,216 85,946
- --------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 0.64 $ 0.64 $ 0.74 $ 0.73
- --------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
-----------------------------------------------------------------
2003 2002
-----------------------------------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS(2) EPS EPS
- --------------------------------------------------------------------------------------------------------------------
Net income $107,286 $107,286 $125,149 $125,149
Preferred dividends declared (3,000) (3,000) (3,000) (3,000)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $104,286 $104,286 $122,149 $122,149
- --------------------------------------------------------------------------------------------------------------------
Total weighted average basic
common shares outstanding 77,945 77,945 84,844 84,844
Effect of dilutive securities:
Options - 675 - 1,647
- --------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 77,945 78,620 84,844 86,491
- --------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 1.34 $ 1.33 $ 1.44 $ 1.41
- --------------------------------------------------------------------------------------------------------------------
(1) Options to purchase 1,946,484 shares of common stock at prices between
$25.44 per share and $29.88 per share were outstanding as of June 30, 2003,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the three months ended June 30, 2003.
(2) Options to purchase 1,926,484 shares of common stock at prices between
$26.24 per share and $29.88 per share were outstanding as of June 30, 2003,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the six months ended June 30, 2003.
3. Mortgage Servicing Rights, or MSR
MSR are carried at amortized cost, and impairment, if any, is recognized through
a valuation allowance. MSR, at amortized cost, totaled $31.2 million at June 30,
2003 and $35.1 million at December 31, 2002. The valuation allowance totaled
$17.4 million at June 30, 2003 and $14.7 million at December 31, 2002. The cost
of MSR is amortized over the estimated remaining lives of the loans serviced.
MSR amortization totaled $3.8 million for the three months ended June 30, 2003
and $1.9 million for the three months ended June 30, 2002. MSR amortization
totaled $7.6 million for the six months ended June 30, 2003 and $4.0 million for
the six months ended
7
June 30, 2002. As of June 30, 2003, estimated future MSR amortization through
2008 is as follows: $6.0 million for the remainder of 2003, $9.7 million for
2004, $5.8 million for 2005, $3.4 million for 2006, $2.1 million for 2007 and
$1.3 million for 2008. Actual results may vary depending upon the level of
repayments on the loans currently serviced.
4. Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the Three Months Ended June 30,
-----------------------------------
(In Thousands, Except Per Share Data) 2003 2002
- -----------------------------------------------------------------------------------------------
Net income:
As reported $50,889 $63,931
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,235 1,043
------- -------
Pro forma $49,654 $62,888
======= =======
Basic earnings per common share:
As reported $0.64 $0.74
===== =====
Pro forma $0.63 $0.73
===== =====
Diluted earnings per common share:
As reported $0.64 $0.73
===== =====
Pro forma $0.62 $0.71
===== =====
For the Six Months Ended June 30,
---------------------------------
(In Thousands, Except Per Share Data) 2003 2002
- -------------------------------------------------------------------------------------------------
Net income:
As reported $107,286 $125,149
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 2,613 2,231
-------- --------
Pro forma $104,673 $122,918
======== ========
Basic earnings per common share:
As reported $1.34 $1.44
===== =====
Pro forma $1.30 $1.41
===== =====
Diluted earnings per common share:
As reported $1.33 $1.41
===== =====
Pro forma $1.29 $1.39
===== =====
8
5. Adoption of New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN 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 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 45 were 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
recognition and measurement provisions of FIN 45 did not have a material impact
on our financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46. FIN 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties (referred to as
"variable interest entities"). FIN 46 is to be applied immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. For
variable interest entities in which an enterprise held a variable interest that
it acquired before February 1, 2003, FIN 46 is to be applied in the first fiscal
year or interim period beginning after June 15, 2003, and may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The adoption of FIN 46 did not have a material impact on our
financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and should generally be applied prospectively. The provisions of
SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
the provisions of SFAS No. 149 which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on our
financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which requires
issuers of certain financial instruments, falling within the scope of SFAS No.
150, with characteristics of both liabilities and equity to be classified and
measured as liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
9
beginning of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption, SFAS No. 150 is to
be implemented by reporting the cumulative effect of a change in an accounting
principle. Restatement is not permitted. The adoption of SFAS No. 150 did not
have a material impact on our financial condition or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, 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:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest
margins;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
10
General
We are a Delaware corporation organized as the unitary savings and loan
association holding company of Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. Astoria Federal's principal business
is attracting retail deposits from the general public and investing those
deposits, together with funds generated from operations, principal repayments on
loans and securities, and borrowed funds, primarily in one-to-four family
mortgage loans, mortgage-backed securities, multi-family mortgage loans and
commercial real estate loans. To a 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, 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.
Non-interest expense consists of general and administrative expense which
includes compensation and benefits expense; occupancy, equipment and systems
expense; federal deposit insurance premiums; advertising; and other non-interest
expense. Our earnings are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates and U.S.
Treasury yield curves, government policies and actions of regulatory
authorities.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and property and casualty insurance agency. Through contractual
agreements with various third party marketing organizations, AF Insurance
Agency, Inc. provides insurance products primarily to the customers of Astoria
Federal. 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 SEC.
Such reports are also available on the SEC's website at www.sec.gov.
Critical Accounting Policies
Note 1 to our Audited Consolidated Financial Statements for the year ended
December 31, 2002 included in our Annual Report on Form 10-K for the year ended
December 31, 2002, as supplemented by our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003 and
11
this report, contains a summary of our significant accounting policies. Various
elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments.
Certain assets are carried in our consolidated statements of financial condition
at fair value or 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 MSR and judgments regarding goodwill and securities impairment are our most
critical accounting policies because they are important to the presentation of
our financial condition and results of operations, involve a higher degree of
complexity and require management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters. The
use of different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
The following is a description of our critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical accounting policies and their application are reviewed quarterly with
the Audit Committee of our Board of Directors.
Allowance for Loan Losses
Our allowance for loan losses is established and maintained through a provision
for loan losses based on our evaluation of the risks inherent in our loan
portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The
allowance is comprised of both specific valuation allowances and general
valuation allowances.
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process including the procedures for
impairment testing under SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance. Pursuant to our
policy, loan losses are charged-off in the period the loans, or portions
thereof, are deemed uncollectible. The determination of the loans on which full
collectibility is not reasonably assured, the estimates of the fair value of the
underlying collateral, and the assessments of economic and regulatory conditions
are subject to assumptions and judgments by management. Specific valuation
allowances could differ materially as a result of changes in these assumptions
and judgments.
General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with our lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. The determination of the adequacy of the valuation
allowance takes into consideration a variety of factors. We segment our loan
portfolio into like categories by composition and size and perform analyses
against each category. These include historical loss experience and delinquency
levels and trends. We also consider the growth in the portfolio as well as our
credit administration and asset management philosophies and procedures. In
addition, we evaluate and consider the impact that existing and projected
economic and market conditions may have on the portfolio as well as known and
inherent risks in the portfolio. Finally, we evaluate and consider the allowance
ratios and coverage percentages of both peer group and regulatory agency data.
After evaluating these variables, we determine appropriate allowance coverage
percentages for each of our portfolio segments and the appropriate level of our
allowance for loan losses.
12
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 for loan losses. 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" in this document and under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," in our Annual Report on Form 10-K for the year ended December 31,
2002.
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
impairment. The estimated fair values of each MSR stratum are obtained through
independent third party valuations based upon an analysis of future cash flows,
incorporating numerous assumptions including servicing income, servicing costs,
market discount rates, prepayment speeds, default rates and other market driven
data. 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 presumed to have an indefinite useful life and is not 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
13
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired. According to SFAS No. 142, "Goodwill
and Other Intangible Assets," quoted market prices in active markets are the
best evidence of fair value and are to be used as the basis for the measurement,
when available. Other acceptable valuation methods include present value
measurement or measurements based on multiples of earnings or revenue or similar
performance measures.
For purposes of our goodwill impairment testing, we identified a single
reporting unit. On September 30, 2002 we performed our annual goodwill
impairment test. We determined the fair value of our one reporting unit to be in
excess of its carrying value, using the quoted market price of our common stock
on our impairment testing date as the basis for determining the fair value. As
of our annual impairment test date, there was no indication of goodwill
impairment. Goodwill would be tested for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. As of June 30, 2003,
there have been no such events or changes in circumstances. Differences in the
identification of reporting units and the use of valuation techniques could
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. The market values of our
securities, particularly our fixed rate mortgage-backed securities which
comprise 94.0% of our total securities portfolio at June 30, 2003, 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. 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.
Estimated fair values for securities are based on published or securities
dealers' market values. 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. There were no securities write downs during the six months ended
June 30, 2003.
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 $7.16 billion for the six months ended June 30, 2003 and
$4.70 billion for the six months ended June 30, 2002. The increase in loan and
security repayments was primarily the result of the continued high level of
mortgage loan refinance activity caused by the continued low interest rate
environment. Medium- and long-term U.S. Treasury rates (maturities of two to ten
years) declined on average approximately 155 basis points since June 30, 2002.
Additionally, the Federal Open Market Committee, or FOMC, reduced the federal
funds rate by a total of 50 basis points during the latter half of 2002 and an
additional 25 basis points in June 2003.
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 $153.2 million during the six months ended June 30, 2003 and $71.5
million during the six months ended June 30, 2002. During the six months ended
June 30, 2003, net borrowings increased $369.9 million and net deposits
increased $242.0
14
million. While we have reduced our borrowings to deposit ratio as well as our
overall level of borrowings over the past several years, during the first
quarter of 2003 we borrowed an additional $500.0 million with a weighted average
rate of 2.58% and a weighted average maturity of 3.2 years to help protect
against the impact on interest expense of future interest rate increases. During
the three months ended June 30, 2003, interest rates continued to decline, the
U.S. Treasury yield curve continued to flatten, cash flows increased and
reinvestment yields dropped significantly. As a result, we determined that
additional leverage would not be prudent at this time and, in fact, we repaid
$195.0 million of matured borrowings. We also extended $300.0 million of
borrowings at a weighted average rate of 2.29% and a weighted average maturity
of 3.7 years to help protect against potential increases in interest rates. All
other borrowings that matured during the quarter were rolled over into
short-term borrowings. During the six months ended June 30, 2002, net borrowings
decreased $1.05 billion, while net deposits increased $333.7 million. The
decrease in net borrowings was consistent with our strategy of repositioning the
balance sheet through, in part, a shift in our liability mix toward deposits,
particularly lower costing and less interest rate sensitive core deposits,
consisting of savings, money market, NOW and demand deposits. The net increases
in deposits for the six months ended June 30, 2003 and 2002 reflect our
continued emphasis on attracting customer deposits through competitive rates,
extensive product offerings and quality service. Despite continued intense local
competition for checking accounts, we have been successful in growing our NOW
and demand deposits, including our business checking deposits, due in large part
to our concerted sales and marketing efforts, including our PEAK Process which
was introduced in 2002. See page 20 for further detail regarding deposit
activity.
Typically, our primary use of funds is for the origination and purchase of
mortgage loans. However, during the six months ended June 30, 2003, despite
strong loan originations, our purchases of mortgage-backed securities exceeded
our originations and purchases of mortgage loans. During the six months ended
June 30, 2003, our gross originations and purchases of mortgage loans totaled
$3.52 billion, including originations of loans held-for-sale totaling $319.1
million, compared to $2.71 billion, including originations of loans
held-for-sale totaling $212.0 million, during the six months ended June 30,
2002. The strong levels of loan originations and purchases for both the six
months ended June 30, 2003 and 2002 are attributable to the continued low
interest rate environment which has resulted in continued high levels of
mortgage refinance activity. The decline in medium- and long-term U.S. Treasury
rates during the past twelve months resulted in a significant increase in loan
and mortgage-backed securities repayments during the six months ended June 30,
2003 compared to the six months ended June 30, 2002. We utilized our cash flows
in excess of mortgage and other loan fundings to purchase mortgage-backed
securities. Additionally, during the three months ended March 31, 2003, we
borrowed an additional $500.0 million which was also used primarily for the
purchase of mortgage-backed securities. Purchases of mortgage-backed securities
totaled $5.70 billion during the six months ended June 30, 2003 and $1.91
billion during the six months ended June 30, 2002. As previously discussed,
given the current low interest rate environment and the flattening of the U.S.
Treasury yield curve from the previous quarter, we decided not to add leverage
to the balance sheet and, during the three months ended June 30, 2003, both our
mortgage-backed securities and our borrowings portfolios decreased. We will
continue to evaluate the alternative of using cash flows in excess of mortgage
and other loan fundings to further reduce borrowings as well as to purchase
mortgage-backed 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 $260.1 million at June 30, 2003, compared to $677.9 million at
December 31, 2002. This decrease reflects the net effect of our operating,
investing
15
and financing activities, in particular, our use of funds for the purchase of
mortgage-backed securities and the repayment of borrowings. Borrowings maturing
over the next twelve months total $5.08 billion with a weighted average rate of
4.74%. We have the flexibility to either repay or rollover such borrowings as
they mature. 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. In addition, we have $2.71 billion
in certificates of deposit with a weighted average rate of 2.59% maturing over
the next twelve months. We expect to retain or replace a significant portion of
such deposits based on our competitive pricing and historical experience.
The following table details borrowing and certificate of deposit maturities over
the next twelve months and their weighted average rates:
Borrowings Certificates of Deposit
---------------------------- --------------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- --------------------------------------------------------------------------- ----------------------------
Contractual Maturity:
Third quarter 2003 $ 965 2.63% $ 725 2.08%
Fourth quarter 2003 800 5.81 660 2.74
First quarter 2004 2,810 4.97 752 2.84
Second quarter 2004 500 5.80 574 2.76
------ ------
Total $5,075 4.74 $2,711 2.59
====== ======
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 tends to
occur. In addition, as mortgage interest rates decrease, some 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.
Additional sources of liquidity at the holding company level have included
issuances of securities into the capital markets, including private issuances of
trust preferred securities and senior debt. We may continue to access the
capital markets in the future. We also continue to receive periodic capital
distributions from Astoria Federal, consistent with applicable laws and
regulations.
Stockholders' equity decreased to $1.53 billion at June 30, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $118.0 million and dividends declared of
$35.7 million. These decreases were partially offset by net income of $107.3
million, an increase in accumulated other comprehensive income, net of tax, of
$8.3 million, the effect of stock options exercised and related tax benefit of
$7.5 million and the amortization of the allocated portion of shares held by the
employee stock ownership plan, or ESOP, of $4.3 million.
On June 2, 2003, we paid a quarterly cash dividend of $0.22 per share on shares
of our common stock outstanding as of the close of business on May 15, 2003
totaling $16.9 million. During the three months ended June 30, 2003, we declared
a cash dividend on our Series B Preferred Stock totaling $1.5 million. On July
16, 2003, we declared a quarterly cash dividend of $0.22 per share on shares of
our common stock payable on September 2, 2003 to stockholders of record as of
the close of business on August 15, 2003.
16
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. During the six
months ended June 30, 2003, we repurchased 4,654,000 shares of our common stock
at an aggregate cost of $118.0 million. In total, as of June 30, 2003, 4,972,000
shares of our common stock, at an aggregate cost of $126.5 million, have been
purchased under the ninth stock repurchase plan.
At June 30, 2003, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.59%, leverage
capital ratio of 7.59% and total risk-based capital ratio of 16.13%. 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 June 30, 2003, we
had outstanding commitments to originate and purchase loans totaling $1.12
billion; outstanding unused lines of credit totaling $312.8 million, which
relate primarily to home equity lines of credit; outstanding commitments to sell
loans totaling $196.7 million; and outstanding commitments to purchase
securities totaling $771.3 million. We anticipate that we will have sufficient
funds available to meet our current commitments in the normal course of our
business.
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at June 30, 2003 and
December 31, 2002.
At June 30, 2003 At December 31, 2002
---------------------------------------------------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- --------------------------------------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,856,003 73.97% $ 9,209,360 76.86%
Multi-family 1,874,350 15.66 1,599,985 13.35
Commercial real estate 758,317 6.33 744,623 6.21
Construction 78,732 0.66 56,475 0.47
- --------------------------------------------------------------------------------------------------------------
Total mortgage loans 11,567,402 96.62 11,610,443 96.89
- --------------------------------------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 359,131 3.00 323,494 2.70
Passbook 6,958 0.06 7,502 0.06
Other 38,316 0.32 41,642 0.35
- --------------------------------------------------------------------------------------------------------------
Total consumer and other loans 404,405 3.38 372,638 3.11
- --------------------------------------------------------------------------------------------------------------
Total loans 11,971,807 100.00% 11,983,081 100.00%
Net unamortized premiums and
deferred loan costs 71,843 76,280
Allowance for loan losses (83,390) (83,546)
- ---------------------------------------------------------------------------------------------------------------
Total loans, net $11,960,260 $11,975,815
- ---------------------------------------------------------------------------------------------------------------
17
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed and other securities available-for-sale and held-to-maturity at
June 30, 2003 and December 31, 2002.
At June 30, 2003 At December 31, 2002
-----------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates $ 198,370 $ 204,906 $ 241,146 $ 249,459
REMICs and CMOs:
Agency issuance 2,140,943 2,165,525 608,076 616,552
Non-agency issuance 647,154 638,848 1,581,475 1,587,622
- -------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,986,467 3,009,279 2,430,697 2,453,633
- -------------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 2,241 2,307 132,011 133,448
FNMA and FHLMC preferred stock 140,015 142,964 140,015 136,682
Corporate debt and other securities 67,676 76,296 67,854 68,818
- -------------------------------------------------------------------------------------------------------------------
Total other securities 209,932 221,567 339,880 338,948
- -------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $3,196,399 $3,230,846 $2,770,577 $2,792,581
===================================================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates $ 19,073 $ 20,346 $ 24,534 $ 26,190
REMICs and CMOs:
Agency issuance 4,689,360 4,738,626 3,595,244 3,646,023
Non-agency issuance 879,070 876,989 1,306,113 1,313,349
- -------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 5,587,503 5,635,961 4,925,891 4,985,562
- -------------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies - - 65,776 66,018
Obligations of states and
political subdivisions 38,607 38,607 39,611 39,611
Corporate debt securities 9,981 10,209 9,979 9,374
- -------------------------------------------------------------------------------------------------------------------
Total other securities 48,588 48,816 115,366 115,003
- -------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,636,091 $5,684,777 $5,041,257 $5,100,565
===================================================================================================================
18
Comparison of Financial Condition as of June 30, 2003 and December 31, 2002 and
Operating Results for the Three and Six Months Ended June 30, 2003 and 2002
Financial Condition
Total assets increased $585.1 million to $22.28 billion at June 30, 2003, from
$21.70 billion at December 31, 2002. The primary reason for the increase in
total assets was the increase in mortgage-backed securities, partially offset by
decreases in federal funds sold and repurchase agreements and other securities.
This growth was funded primarily through increases in borrowings and deposits.
Mortgage loans decreased $48.3 million to $11.63 billion at June 30, 2003, from
$11.68 billion at December 31, 2002. This decrease was primarily due to the
continued extraordinarily high level of mortgage loan repayments during the six
months ended June 30, 2003, which have outpaced our levels of mortgage loan
originations and purchases. Mortgage loan repayments increased to $3.23 billion
for the six months ended June 30, 2003, from $2.19 billion for the six months
ended June 30, 2002. Gross mortgage loans originated and purchased during the
six months ended June 30, 2003 totaled $3.20 billion, excluding originations of
loans held-for-sale totaling $319.1 million, of which $2.50 billion were
originations and $698.4 million were purchases. This compares to $1.75 billion
of originations and $746.2 million of purchases for a total of $2.50 billion,
excluding originations of loans held-for-sale totaling $212.0 million, during
the six months ended June 30, 2002.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans, which represent 74.0% of our total loan portfolio at June
30, 2003, decreased $353.4 million to $8.86 billion at June 30, 2003, from $9.21
billion at December 31, 2002. As noted above, this decrease was primarily due to
the extraordinarily 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 loan portfolio increased $274.4 million
to $1.87 billion at June 30, 2003, from $1.60 billion at December 31, 2002. Our
commercial real estate loan portfolio increased $13.7 million to $758.3 million
at June 30, 2003, from $744.6 million at December 31, 2002. Multi-family and
commercial real estate loan originations totaled $648.6 million for the six
months ended June 30, 2003 and $447.1 million for the six months ended June 30,
2002. Our multi-family and commercial real estate loans tend to be less
susceptible to prepayment risk than our one-to-four family loans due to the
inclusion of prepayment penalties. Our new multi-family and commercial real
estate loan originations are similar in type and have slightly larger average
balances than the loans currently in our portfolio. The average loan balance of
loans in our multi-family and commercial real estate portfolio continues to be
less than $1.0 million and we have not changed our underwriting standards with
respect to such loans. Our portfolio of consumer and other loans increased $31.8
million to $404.4 million at June 30, 2003, from $372.6 million at December 31,
2002. This increase is primarily in home equity lines of credit as a result of
the continued strong housing market and the low interest rate environment.
Mortgage-backed securities increased $1.22 billion to $8.60 billion at June 30,
2003, from $7.38 billion at December 31, 2002. This increase was primarily the
result of purchases of real estate mortgage investment conduits, or REMICs, and
collateralized mortgage obligations,
19
or CMOs, totaling $5.70 billion, partially offset by principal payments received
of $3.62 billion and sales of $819.5 million. This increase in mortgage-backed
securities reflects our use of excess cash flows, as well as cash flows from
increased deposits and borrowings, for the purchase of these securities. We will
continue to evaluate how much, if any, of our cash flows in excess of mortgage
and other loan fundings will be used to repay borrowings rather than for the
purchases of mortgage-backed securities.
Other securities decreased $184.1 million to $270.2 million at June 30, 2003,
from $454.3 million at December 31, 2002, primarily due to $199.7 million in
securities which were called or matured, partially offset by a decrease in the
net unrealized loss on securities available-for-sale of $12.6 million. The
continued low interest rate environment during the six months ended June 30,
2003 has resulted in a significant portion of our callable investment securities
being called, primarily in the first quarter of 2003.
Federal funds sold and repurchase agreements decreased $392.6 million to $117.7
million at June 30, 2003, from $510.3 million at December 31, 2002, primarily
due to our use of funds for the purchase of mortgage-backed securities and the
repayment of borrowings. Federal Home Loan Bank of New York, or FHLB-NY, stock
decreased $16.4 million to $231.2 million at June 30, 2003, from $247.6 million
at December 31, 2002 as a result of decreased levels of FHLB-NY borrowings.
Deposits increased $242.0 million to $11.31 billion at June 30, 2003, from
$11.07 billion at December 31, 2002. The increase in deposits was primarily due
to an increase of $332.4 million in certificates of deposit to $5.49 billion at
June 30, 2003, from $5.15 billion at December 31, 2002, partially offset by a
decrease of $313.4 million in our money market accounts to $1.39 billion at June
30, 2003, from $1.70 billion at December 31, 2002. The decrease in our money
market accounts is attributable to intense 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. Partially offsetting
this decrease in our money market accounts were increases in NOW and demand
deposit accounts of $127.6 million and savings accounts of $95.3 million.
Despite continued local competition for checking accounts, we have been
successful in growing our NOW and demand deposits, including our business
checking deposits, due in large part to our concerted sales and marketing
efforts, including our PEAK Process which was introduced in 2002.
Reverse repurchase agreements increased $450.0 million to $6.74 billion at June
30, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances decreased
$85.0 million to $1.98 billion at June 30, 2003, from $2.06 billion at December
31, 2002. As previously discussed, the increase in borrowings reflects
management's decision during the first quarter of 2003 to help protect against
the impact on interest expense of future interest rate increases by borrowing
$500.0 million with a weighted average rate of 2.58% and a weighted average
maturity of 3.2 years. During the three months ended June 30, 2003, we had $1.11
billion in primarily short-term borrowings mature of which we repaid $195.0
million of borrowings, extended $300.0 million of borrowings at a weighted
average rate of 2.29% and a weighted average maturity of 3.7 years and rolled
over the remaining borrowings that matured during the period into short-term
borrowings.
20
Stockholders' equity decreased to $1.53 billion at June 30, 2003, from $1.55
billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $118.0 million and dividends declared of
$35.7 million. These decreases were partially offset by net income of $107.3
million, an increase in accumulated other comprehensive income, net of tax, of
$8.3 million, the effect of stock options exercised and related tax benefit of
$7.5 million and the amortization of the allocated portion of shares held by the
ESOP of $4.3 million.
Results of Operations
General
Net income for the three months ended June 30, 2003 decreased $13.0 million to
$50.9 million, from $63.9 million for the three months ended June 30, 2002.
Diluted earnings per common share totaled $0.64 per share for the three months
ended June 30, 2003 and $0.73 per share for the three months ended June 30,
2002. Return on average assets decreased to 0.88% for the three months ended
June 30, 2003, from 1.16% for the three months ended June 30, 2002. Return on
average stockholders' equity decreased to 13.27% for the three months ended June
30, 2003, from 16.32% for the three months ended June 30, 2002. Return on
average tangible stockholders' equity, which represents average stockholders'
equity less average goodwill, decreased to 15.09% for the three months ended
June 30, 2003, from 18.50% for the three months ended June 30, 2002.
Net income for the six months ended June 30, 2003 decreased $17.8 million to
$107.3 million, from $125.1 million for the six months ended June 30, 2002.
Diluted earnings per common share totaled $1.33 per share for the six months
ended June 30, 2003 and $1.41 per share for the six months ended June 30, 2002.
Return on average assets decreased to 0.94% for the six months ended June 30,
2003, from 1.12% for the six months ended June 30, 2002. Return on average
stockholders' equity decreased to 13.94% for the six months ended June 30, 2003,
from 16.01% for the six months ended June 30, 2002. Return on average tangible
stockholders' equity decreased to 15.84% for the six months ended June 30, 2003,
from 18.16% for the six months ended June 30, 2002. The decreases in net income
for the three and six months ended June 30, 2003 are primarily the result of
decreases in net interest income which is discussed further below.
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 3, "Quantitative and Qualitative Disclosures About
Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the three months ended June 30, 2003, net interest income decreased $26.1
million to $96.3 million, from $122.4 million for the three months ended June
30, 2002. For the six months ended June 30, 2003, net interest income decreased
$32.0 million to $205.3 million, from $237.3 million for the six months ended
June 30, 2002. The net interest margin decreased to 1.78% for the three months
ended June 30, 2003, from 2.34% for the three
21
months ended June 30, 2002. The net interest margin decreased to 1.93% for the
six months ended June 30, 2003, from 2.25% for the six months ended June 30,
2002. The decreases in net interest income were the result of decreases in
interest income, partially offset by decreases in interest expense. The
decreases in interest income and the net interest margin for both the three and
six months ended June 30, 2003 were due, in part, to the more rapid decline in
the yields on interest-earning assets than the decline in the costs of
interest-bearing liabilities and the repurchases of our common stock over the
past year. The decrease in the yields on interest-earning assets is primarily
the result of the high level of mortgage loan and mortgage-backed securities
repayments as a result of the continued low interest rate environment,
particularly for medium- and long-term instruments for which rates continued to
decline throughout 2002 and the first half of 2003, resulting in reinvestment in
those assets at lower rates. These high levels of repayments have also resulted
in accelerated premium amortization which has further contributed to the decline
in the yields on these portfolios. Net premium amortization on our
mortgage-backed securities and mortgage loan portfolios increased $24.4 million
to $33.8 million for the three months ended June 30, 2003, from $9.4 million for
the three months ended June 30, 2002. Net premium amortization on our
mortgage-backed securities and mortgage loan portfolios increased $39.4 million
to $58.8 million for the six months ended June 30, 2003, from $19.4 million for
the six months ended June 30, 2002. The decrease in interest expense was
primarily attributable to the decrease in our cost of funds, which is due to the
downward repricing of deposits, along with the repayment and refinancing of
various higher cost borrowings.
The average balance of net interest-earning assets decreased $380.8 million to
$378.1 million for the three months ended June 30, 2003, from $758.9 million for
the three months ended June 30, 2002. The decrease in the average balance of net
interest-earning assets was the result of an increase of $1.10 billion in the
average balance of total interest-bearing liabilities to $21.28 billion for the
three months ended June 30, 2003, from $20.18 billion for the three months ended
June 30, 2002, partially offset by an increase of $718.5 million in the average
balance of total interest-earning assets to $21.65 billion for the three months
ended June 30, 2003, from $20.94 billion for the three months ended June 30,
2002. The net interest rate spread decreased to 1.72% for the three months ended
June 30, 2003, from 2.19% for the three months ended June 30, 2002. The average
yield on interest-earning assets decreased to 4.97% for the three months ended
June 30, 2003, from 6.23% for the three months ended June 30, 2002. The average
cost of interest-bearing liabilities decreased to 3.25% for the three months
ended June 30, 2003, from 4.04% for the three months ended June 30, 2002.
The average balance of net interest-earning assets decreased $342.5 million to
$399.5 million for the six months ended June 30, 2003, from $742.0 million for
the six months ended June 30, 2002. The decrease in the average balance of net
interest-earning assets was the result of an increase of $521.0 million in the
average balance of total interest-bearing liabilities to $20.88 billion for the
six months ended June 30, 2003, from $20.36 billion for the six months ended
June 30, 2002, partially offset by an increase of $178.5 million in the average
balance of total interest-earning assets to $21.28 billion for the six months
ended June 30, 2003, from $21.10 billion for the six months ended June 30, 2002.
The net interest rate spread decreased to 1.87% for the six months ended June
30, 2003, from 2.11% for the six months ended June 30, 2002. The average yield
on interest-earning assets decreased to 5.19% for the six months ended June 30,
2003, from 6.23% for the six months ended June 30, 2002. The average cost of
interest-bearing liabilities decreased to 3.32% for the six months ended June
30, 2003, from 4.12% for the six months ended June 30, 2002.
22
The primary reasons for the decreases in net interest-earning assets are the
repurchases of our common stock over the past year and an increase in the
monthly mortgage-backed securities principal payments receivable, due to the
accelerated mortgage-backed securities cash flow, and the $100.0 million premium
paid in the first quarter of 2002 to purchase additional BOLI. The changes in
the yields on interest-earning assets and the costs of interest-bearing
liabilities for both the three and six months ended June 30, 2003 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."
Analysis of Net Interest Income
The following tables set forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the three and
six months ended June 30, 2003 and 2002. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The yields and costs include amortization of fees, costs, premiums and discounts
which are considered adjustments to interest rates.
23
For the Three Months Ended June 30,
-------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,970,109 $117,866 5.26% $10,259,961 $163,449 6.37%
Multi-family, commercial
real estate and construction 2,601,732 49,449 7.60 1,967,805 38,781 7.88
Consumer and other loans (1) 406,785 4,960 4.88 282,510 4,117 5.83
----------- -------- ----------- --------
Total loans 11,978,626 172,275 5.75 12,510,276 206,347 6.60
Mortgage-backed securities (2) 8,952,753 88,213 3.94 6,508,577 97,225 5.98
Other securities (2) (3) 562,161 8,280 5.89 1,163,408 19,449 6.69
Federal funds sold and
repurchase agreements 160,646 465 1.16 753,410 3,254 1.73
----------- -------- ----------- --------
Total interest-earning assets 21,654,186 269,233 4.97 20,935,671 326,275 6.23
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,280,248 1,007,121
----------- -----------
Total assets $23,119,585 $22,127,943
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,914,416 3,627 0.50 $ 2,751,167 8,566 1.25
Money market 1,433,396 2,736 0.76 1,935,305 9,495 1.96
NOW and demand deposit 1,491,341 522 0.14 1,252,742 894 0.29
Certificates of deposit 5,409,226 50,304 3.72 5,224,909 56,588 4.33
----------- -------- ----------- --------
Total deposits 11,248,379 57,189 2.03 11,164,123 75,543 2.71
Borrowed funds 10,027,713 115,793 4.62 9,012,673 128,363 5.70
----------- -------- ----------- --------
Total interest-bearing liabilities 21,276,092 172,982 3.25 20,176,796 203,906 4.04
-------- --------
Non-interest-bearing liabilities 309,757 384,027
----------- -----------
Total liabilities 21,585,849 20,560,823
Stockholders' equity 1,533,736 1,567,120
----------- -----------
Total liabilities and stockholders'
equity $23,119,585 $22,127,943
=========== ===========
Net interest income/net interest
rate spread (4) $ 96,251 1.72% $122,369 2.19%
======== ==== ======== ====
Net interest-earning assets/net
interest margin (5) $ 378,094 1.78% $ 758,875 2.34%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.02x 1.04x
==== ====
- --------------------------------
(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.
24
For the Six Months Ended June 30,
---------------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,019,861 $244,795 5.43% $ 10,328,441 $329,958 6.39%
Multi-family, commercial
real estate and construction 2,520,663 95,665 7.59 1,889,347 75,070 7.95
Consumer and other loans (1) 398,688 9,732 4.88 268,858 7,919 5.89
------------ ------- ------------ --------
Total loans 11,939,212 350,192 5.87 12,486,646 412,947 6.61
Mortgage-backed securities (2) 8,547,489 182,261 4.26 6,567,934 197,721 6.02
Other securities (2) (3) 587,487 18,129 6.17 1,175,753 39,105 6.65
Federal funds sold and
repurchase agreements 207,267 1,217 1.17 872,582 7,392 1.69
------------ ------- ------------ --------
Total interest-earning assets 21,281,455 551,799 5.19 21,102,915 657,165 6.23
------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,253,126 1,015,143
------------ ------------
Total assets $ 22,719,732 $ 22,303,209
============ ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,875,486 7,116 0.49 $ 2,692,454 16,669 1.24
Money market 1,501,755 6,212 0.83 1,945,914 19,855 2.04
NOW and demand deposit 1,438,772 1,012 0.14 1,222,915 1,719 0.28
Certificates of deposit 5,370,429 101,090 3.76 5,187,287 115,527 4.45
------------ ------- ------------ -------
Total deposits 11,186,442 115,430 2.06 11,048,570 153,770 2.78
Borrowed funds 9,695,502 231,110 4.77 9,312,348 266,099 5.71
------------ ------- ------------ --------
Total interest-bearing liabilities 20,881,944 346,540 3.32 20,360,918 419,869 4.12
------- --------
Non-interest-bearing liabilities 297,985 379,068
------------ ------------
Total liabilities 21,179,929 20,739,986
Stockholders' equity 1,539,803 1,563,223
------------ ------------
Total liabilities and stockholders'
equity $ 22,719,732 $ 22,303,209
============ ============
Net interest income/net interest
rate spread $205,259 1.87% $ 237,296 2.11%
======== ==== ========= ====
Net interest-earning assets/net
interest margin $ 399,511 1.93% $ 741,997 2.25%
============ ==== ============ ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.02x 1.04x
==== ====
- --------------------------------
(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.
25
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
Compared to Compared to
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
------------------------------------------ ----------------------------------------
Increase (Decrease) Increase (Decrease)
------------------------------------------ ----------------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
------------------------------------------ ----------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $ (19,104) $ (26,479) $ (45,583) $ (38,962) $ (46,201) $(85,163)
Multi-family, commercial
real estate and construction 12,089 (1,421) 10,668 24,127 (3,532) 20,595
Consumer and other loans 1,594 (751) 843 3,342 (1,529) 1,813
Mortgage-backed securities 30,065 (39,077) (9,012) 50,830 (66,290) (15,460)
Other securities (9,070) (2,099) (11,169) (18,331) (2,645) (20,976)
Federal funds sold and repurchase
agreements (1,966) (823) (2,789) (4,399) (1,776) (6,175)
- -----------------------------------------------------------------------------------------------------------------------------
Total 13,608 (70,650) (57,042) 16,607 (121,973) (105,366)
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 484 (5,423) (4,939) 1,075 (10,628) (9,553)
Money market (2,011) (4,748) (6,759) (3,791) (9,852) (13,643)
NOW and demand deposit 153 (525) (372) 262 (969) (707)
Certificates of deposit 1,933 (8,217) (6,284) 3,961 (18,398) (14,437)
Borrowed funds 13,457 (26,027) (12,570) 10,507 (45,496) (34,989)
- -----------------------------------------------------------------------------------------------------------------------------
Total 14,016 (44,940) (30,924) 12,014 (85,343) (73,329)
- -----------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ (408) $ (25,710) $ (26,118) $ 4,593 $ (36,630) $(32,037)
=============================================================================================================================
Interest Income
Interest income for the three months ended June 30, 2003 decreased $57.1 million
to $269.2 million, from $326.3 million for the three months ended June 30, 2002.
This decrease was primarily the result of a decrease in the average yield on
interest-earning assets to 4.97% for the three months ended June 30, 2003, from
6.23% for the three months ended June 30, 2002, partially offset by a $718.5
million increase in the average balance of interest-earning assets to $21.65
billion for the three months ended June 30, 2003, from $20.94 billion for the
three months ended June 30, 2002. The decrease in the average yield on
interest-earning assets was due to decreases in the average yields on all asset
categories, primarily our mortgage-backed securities and one-to-four family
mortgage loans. As previously discussed, the declines in medium- and long-term
U.S. Treasury rates as well as the reduction in short-term interest rates during
2002 and the first half of 2003 have created a lower interest rate environment
during the three months ended June 30, 2003 than that which existed during the
three months ended June 30, 2002, resulting in continued high levels of
repayments on our mortgage-backed securities and one-to-four family mortgage
loan portfolios and accelerated premium amortization. The increase in the
average balance of interest-earning assets was primarily due to increases in the
26
average balances of mortgage-backed securities and multi-family, commercial real
estate and construction loans, partially offset by decreases in the average
balances of one-to-four family mortgage loans, other securities and federal
funds sold and repurchase agreements.
Interest income on one-to-four family mortgage loans decreased $45.5 million to
$117.9 million for the three months ended June 30, 2003, from $163.4 million for
the three months ended June 30, 2002, which was the result of a decrease in the
average yield to 5.26% for the three months ended June 30, 2003, from 6.37% for
the three months ended June 30, 2002, coupled with a decrease of $1.29 billion
in the average balance of such loans. The decrease in the average yield on
one-to-four family mortgage loans reflects the impact of the lower interest rate
environment during the three months ended June 30, 2003 as compared to the three
months ended June 30, 2002 as higher rate loans were repaid and replaced with
lower yielding new originations and purchases and adjustable rate mortgage, or
ARM, loans repriced. Additionally, the yield has been negatively impacted by
accelerated loan premium amortization, discussed previously, as a result of the
increased refinance activity. The decrease in the average balance of one-to-four
family mortgage loans reflects the extraordinarily high level of repayment
activity, due to refinancings, particularly in the second half of 2002 and
continuing in 2003, partially offset by originations and purchases of
one-to-four family mortgage loans.
Interest income on multi-family, commercial real estate and construction loans
increased $10.6 million to $49.4 million for the three months ended June 30,
2003, from $38.8 million for the three months ended June 30, 2002, which was
primarily the result of an increase of $633.9 million in the average balance of
such loans, partially offset by a decrease in the average yield to 7.60% for the
three months ended June 30, 2003, from 7.88% for the three months ended June 30,
2002. The increase in the average balance of multi-family, commercial real
estate and construction loans reflects our increased emphasis on originations of
such loans, coupled with the fact that we have not experienced significant
repayment activity within this portfolio in part due to the prepayment penalties
associated with these loans. The decrease in the average yield on multi-family,
commercial real estate and construction loans reflects the growth in this
portfolio resulting from lower yielding new originations due to the impact of
the lower interest rate environment during the three months ended June 30, 2003
as compared to the three months ended June 30, 2002. The yield on multi-family,
commercial real estate and construction loans has not declined to the same
extent as the yield on one-to-four family mortgage loans primarily as a result
of the lower level of repayment activity within this portfolio.
Interest income on consumer and other loans increased $843,000 for the three
months ended June 30, 2003 compared to the three months ended June 30, 2002
resulting from an increase of $124.3 million in the average balance of this
portfolio, partially offset by a decrease in the average yield to 4.88% for the
three months ended June 30, 2003, from 5.83% for the three months ended June 30,
2002. The changes in interest income on consumer and other loans are primarily
attributable to home equity lines of credit which represent 88.8% of this
portfolio at June 30, 2003. The increase in the average balance of home equity
lines of credit is a result of the strong housing market combined with low
interest rates over the past two years. Our home equity lines of credit
generally reset monthly and are indexed to the prime rate which decreased 50
basis points during the year ended December 31, 2002 and 25 basis points in June
2003.
Interest income on mortgage-backed securities decreased $9.0 million to $88.2
million for the three months ended June 30, 2003, from $97.2 million for the
three months ended June 30, 2002. This decrease was the result of a decrease in
the average yield to 3.94% for the three months ended June 30, 2003, from 5.98%
for the three months ended June 30, 2002, partially offset by an increase of
$2.44 billion 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
27
environment as higher yielding securities were repaid and replaced with lower
yielding securities, coupled with accelerated premium amortization. The increase
in the average balance of mortgage-backed securities was the result of increased
levels of purchases of mortgage-backed securities during the second half of 2002
and the first half of 2003 to effectively deploy our cash flows in excess of
mortgage and other loan fundings, partially offset by increased levels of
principal repayments due to the lower interest rate environment.
Interest income on other securities decreased $11.1 million to $8.3 million for
the three months ended June 30, 2003, from $19.4 million for the three months
ended June 30, 2002. This decrease resulted from a decrease of $601.2 million in
the average balance of this portfolio, coupled with a decrease in the average
yield to 5.89% for the three months ended June 30, 2003, from 6.69% for the
three months ended June 30, 2002, primarily due to higher yielding securities
being called throughout 2002 and in the first half of 2003 as a result of the
continued low interest rate environment.
Interest income on federal funds sold and repurchase agreements decreased $2.8
million as a result of a decrease of $592.8 million in the average balance of
the portfolio, coupled with a decrease in the average yield to 1.16% for the
three months ended June 30, 2003, from 1.73% for the three months ended June 30,
2002.
Interest income for the six months ended June 30, 2003 decreased $105.4 million
to $551.8 million, from $657.2 million for the six months ended June 30, 2002.
This decrease was primarily the result of a decrease in the average yield on
interest-earning assets to 5.19% for the six months ended June 30, 2003, from
6.23% for the six months ended June 30, 2002, partially offset by a $178.5
million increase in the average balance of interest-earning assets to $21.28
billion for the six months ended June 30, 2003, from $21.10 billion for the six
months ended June 30, 2002. Consistent with the changes noted for the three
months ended June 30, 2003, the decrease in the average yield on
interest-earning assets was due to decreases in the average yields on all asset
categories, primarily our mortgage-backed securities and one-to-four family
mortgage loans, and the increase in the average balance of interest-earning
assets was primarily due to increases in the average balances of mortgage-backed
securities and multi-family, commercial real estate and construction loans,
partially offset by decreases in the average balances of one-to-four family
mortgage loans, other securities and federal funds sold and repurchase
agreements.
Interest income on one-to-four family mortgage loans decreased $85.2 million to
$244.8 million for the six months ended June 30, 2003, from $330.0 million for
the six months ended June 30, 2002, which was the result of a decrease in the
average yield to 5.43% for the six months ended June 30, 2003, from 6.39% for
the six months ended June 30, 2002, coupled with a decrease of $1.31 billion in
the average balance of such loans.
Interest income on multi-family, commercial real estate and construction loans
increased $20.6 million to $95.7 million for the six months ended June 30, 2003,
from $75.1 million for the six months ended June 30, 2002, which was primarily
the result of an increase of $631.3 million in the average balance of such
loans, partially offset by a decrease in the average yield to 7.59% for the six
months ended June 30, 2003, from 7.95% for the six months ended June 30, 2002.
Interest income on consumer and other loans increased $1.8 million for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002
resulting from an increase of $129.8 million in the average balance of this
portfolio, partially offset by a decrease in the average yield to 4.88% for the
six months ended June 30, 2003, from 5.89% for the six months ended June 30,
2002.
28
Interest income on mortgage-backed securities decreased $15.4 million to
$182.3 million for the six months ended June 30, 2003, from $197.7 million for
the six months ended June 30, 2002. This decrease was the result of a decrease
in the average yield to 4.26% for the six months ended June 30, 2003, from 6.02%
for the six months ended June 30, 2002, partially offset by an increase of $1.98
billion in the average balance of the portfolio.
Interest income on other securities decreased $21.0 million to $18.1 million for
the six months ended June 30, 2003, from $39.1 million for the six months ended
June 30, 2002. This decrease resulted from a decrease of $588.3 million in the
average balance of this portfolio, coupled with a decrease in the average yield
to 6.17% for the six months ended June 30, 2003, from 6.65% for the six months
ended June 30, 2002, primarily due to higher yielding securities being called
throughout 2002 and in the first half of 2003 as a result of the continued low
interest rate environment.
Interest income on federal funds sold and repurchase agreements decreased $6.2
million as a result of a decrease of $665.3 million in the average balance of
the portfolio, coupled with a decrease in the average yield to 1.17% for the six
months ended June 30, 2003, from 1.69% for the six months ended June 30, 2002.
The principal reasons for the changes in the average balances and yields of the
various assets noted above for the six months ended June 30, 2003 are consistent
with the principal reasons for the changes for the three months ended June 30,
2003, previously discussed.
Interest Expense
Interest expense for the three months ended June 30, 2003 decreased $30.9
million to $173.0 million, from $203.9 million for the three months ended June
30, 2002. This decrease was primarily the result of a decrease in the average
cost of interest-bearing liabilities to 3.25% for the three months ended June
30, 2003, from 4.04% for the three months ended June 30, 2002, partially offset
by an increase of $1.10 billion in the average balance of interest-bearing
liabilities to $21.28 billion for the three months ended June 30, 2003, from
$20.18 billion for the three months ended June 30, 2002. The decrease in the
overall average cost of our interest-bearing liabilities reflects the impact of
the continued lower interest rate environment on the cost of our deposits and
borrowings. The increase in the average balance of interest-bearing liabilities
was attributable to an increase in borrowings, primarily due to the issuance of
$250.0 million senior unsecured notes during the quarter ended December 31, 2002
and the additional $500.0 million of medium-term borrowings during the first
quarter of 2003, discussed previously, as well as increases in deposits.
Interest expense on deposits decreased $18.3 million, to $57.2 million for the
three months ended June 30, 2003, from $75.5 million for the three months ended
June 30, 2002, reflecting a decrease in the average cost of deposits to 2.03%
for the three months ended June 30, 2003, from 2.71% for the three months ended
June 30, 2002, partially offset by an increase of $84.3 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
money market accounts, savings accounts and certificates of deposit, as a result
of the lower interest rate environment which has continued into 2003. The
increase in the average balance of total deposits was the result of increases in
the average balances of NOW and demand deposit accounts, certificates of deposit
and savings accounts, partially offset by a decrease in the average balance of
money market accounts.
29
Interest expense on money market accounts decreased $6.8 million reflecting a
decrease in the average cost to 0.76% for the three months ended June 30, 2003,
from 1.96% for the three months ended June 30, 2002, coupled with a decrease of
$501.9 million in the average balance of such accounts. Interest paid on money
market accounts is on a tiered basis with 83.69% of the balance at June 30, 2003
in the highest tier (accounts with balances of $50,000 and higher). The decrease
in the average balance of money market accounts is attributable to intense
competition for these accounts, as previously discussed.
Interest expense on certificates of deposit decreased $6.3 million resulting
from a decrease in the average cost to 3.72% for the three months ended June 30,
2003, from 4.33% for the three months ended June 30, 2002, partially offset by
an increase of $184.3 million in the average balance.
Interest expense on savings accounts decreased $4.9 million which was
attributable to a decrease in the average cost to 0.50% for the three months
ended June 30, 2003, from 1.25% for the three months ended June 30, 2002,
partially offset by an increase of $163.2 million in the average balance.
Interest expense on NOW and demand deposit accounts decreased $372,000 as a
result of a decrease in the average cost to 0.14% for the three months ended
June 30, 2003, from 0.29% for the three months ended June 30, 2002, partially
offset by an increase of $238.6 million in the average balance of these
accounts. The increases in the average balances of savings and NOW and demand
deposit accounts are consistent with our emphasis on deposit generation.
Interest expense on borrowed funds for the three months ended June 30, 2003
decreased $12.6 million to $115.8 million, from $128.4 million for the three
months ended June 30, 2002, resulting from a decrease in the average cost of
borrowings to 4.62% for the three months ended June 30, 2003, from 5.70% for the
three months ended June 30, 2002, partially offset by an increase of $1.02
billion in the average balance. The decrease in the average cost of borrowings
for the three months ended June 30, 2003 as compared to the three months ended
June 30, 2002 is the result of the refinancing of higher cost borrowings as they
matured. The increase in the average balance of borrowed funds is a result of
the previously discussed issuance of $250.0 million senior unsecured notes
during the quarter ended December 31, 2002 and the additional $500.0 million of
medium-term borrowings during the first quarter of 2003.
Interest expense for the six months ended June 30, 2003 decreased $73.4 million
to $346.5 million, from $419.9 million for the six months ended June 30, 2002.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 3.32% for the six months ended June 30, 2003,
from 4.12% for the six months ended June 30, 2002, partially offset by an
increase of $521.0 million in the average balance of interest-bearing
liabilities to $20.88 billion for the six months ended June 30, 2003, from
$20.36 billion for the six months ended June 30, 2002. The decrease in the
overall average cost of our interest-bearing liabilities reflects the impact of
the continued lower interest rate environment on the cost of our deposits and
borrowings. The increase in the average balance of interest-bearing liabilities
was attributable to increases in both borrowings and deposits.
Interest expense on deposits decreased $38.4 million, to $115.4 million for the
six months ended June 30, 2003, from $153.8 million for the six months ended
June 30, 2002, reflecting a decrease in the average cost of deposits to 2.06%
for the six months ended June 30, 2003, from 2.78% for the six months ended June
30, 2002, partially offset by an increase of $137.9 million in the average
balance of total deposits. The decrease in the average cost of total deposits
was driven by decreases in rates in all deposit categories, primarily on our
money market accounts, savings accounts and certificates of deposit, as a result
of the lower interest rate environment which has
30
continued into 2003. The increase in the average balance of total deposits was
the result of increases in the average balances of NOW and demand deposit
accounts, certificates of deposit and savings accounts, partially offset by a
decrease in the average balance of money market accounts. The principal reasons
for the changes in the average costs and average balances of deposits for the
six months ended June 30, 2003 are consistent with the principal reasons for the
changes noted for the three months ended June 30, 2003.
Interest expense on certificates of deposit decreased $14.4 million resulting
from a decrease in the average cost to 3.76% for the six months ended June 30,
2003, from 4.45% for the six months ended June 30, 2002, partially offset by an
increase of $183.1 million in the average balance. Interest expense on money
market accounts decreased $13.6 million reflecting a decrease in the average
cost to 0.83% for the six months ended June 30, 2003, from 2.04% for the six
months ended June 30, 2002, coupled with a decrease of $444.2 million in the
average balance of such accounts. Interest expense on savings accounts decreased
$9.6 million which was attributable to a decrease in the average cost to 0.49%
for the six months ended June 30, 2003, from 1.24% for the six months ended June
30, 2002, partially offset by an increase of $183.0 million in the average
balance. Interest expense on NOW and demand deposit accounts decreased $707,000
as a result of a decrease in the average cost to 0.14% for the six months ended
June 30, 2003, from 0.28% for the six months ended June 30, 2002, partially
offset by an increase of $215.9 million in the average balance of these
accounts.
Interest expense on borrowed funds for the six months ended June 30, 2003
decreased $35.0 million to $231.1 million, from $266.1 million for the six
months ended June 30, 2002, resulting from a decrease in the average cost of
borrowings to 4.77% for the six months ended June 30, 2003, from 5.71% for the
six months ended June 30, 2002, partially offset by an increase of $383.2
million in the average balance. The decrease in the average cost of borrowings
is the result of the refinancing of higher cost borrowings as they matured. The
increase in the average balance of borrowed funds is the result of the
previously discussed additional borrowings.
Provision for Loan Losses
During the six months ended June 30, 2003, no provision for loan losses was
recorded. The provision for loan losses totaled $1.0 million for the three
months ended June 30, 2002 and $2.0 million for the six months ended June 30,
2002. The decrease in the provision for loan losses is due to an analysis
performed, during the third quarter of 2002, of the actual charge-off history of
our loan portfolio compared to our previously determined allowance coverage
percentages, which are utilized to determine our general valuation allowances.
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. We
believe our current allowance coverage percentages are adequate to reflect the
risks inherent in our loan portfolios.
The allowance for loan losses totaled $83.4 million at June 30, 2003 and $83.5
million at December 31, 2002. Net loan charge-offs totaled $64,000 for the three
months ended June 30, 2003 compared to $344,000 for the three months ended June
30, 2002. Net loan charge-offs totaled $156,000 for the six months ended June
30, 2003 compared to $686,000 for the six months ended June 30, 2002.
Non-performing loans increased $1.5 million to $36.0 million at June 30, 2003,
from $34.5 million at December 31, 2002. The allowance for loan losses as a
percentage of non-performing loans decreased to 231.58% at June 30, 2003, from
242.04% at December 31, 2002 primarily due to the increase in non-performing
loans from December 31, 2002 to June 30, 2003. The allowance for loan losses as
a percentage of total loans was 0.69% at
31
June 30, 2003 and 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 three months ended June 30, 2003 increased $7.2
million, to $31.5 million, from $24.3 million for the three months ended June
30, 2002 and for the six months ended June 30, 2003 increased $6.1 million, to
$57.4 million, from $51.3 million for the six months ended June 30, 2002. The
increases in non-interest income were primarily due to the net gain on sales of
securities, partially offset by a decrease in mortgage banking income, net.
Net gain on sales of securities totaled $8.0 million for the three months ended
June 30, 2003 and $10.2 million for the six months ended June 30, 2003. There
were no sales of securities during the six months ended June 30, 2002. The net
gains recognized in 2003 offset the increases in the valuation allowance for MSR
and a portion of the negative effect of the reduced net interest margin.
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 $976,000 to a net loss of $376,000 for the three
months ended June 30, 2003, from net income of $600,000 for the three months
ended June 30, 2002 and decreased $4.0 million to net income of $60,000 for the
six months ended June 30, 2003, from net income of $4.0 million for the six
months ended June 30, 2002. These decreases are primarily due to an increase in
amortization of MSR and a decrease in loan servicing fees, both of which are a
result of the reduction in the servicing portfolio, partially offset by an
increase in net gain on sales of loans. An increase in the provision for
valuation allowance adjustments also contributed to the decrease for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002.
Amortization of MSR increased $1.9 million to $3.8 million for the three months
ended June 30, 2003, from $1.9 million for the three months ended June 30, 2002
and increased $3.6 million to $7.6 million for the six months ended June 30,
2003, from $4.0 million for the six months ended June 30, 2002. The increases in
MSR amortization are attributable to the continued extraordinarily high level of
mortgage loan repayments. Loan servicing fees, which include all contractual and
ancillary servicing revenue we receive, decreased $1.0 million to $2.1 million
for the three months ended June 30, 2003, from $3.1 million for the three months
ended June 30, 2002 and decreased $1.9 million to $4.4 million for the six
months ended June 30, 2003, from $6.3 million for the six months ended June 30,
2002, primarily as a result of a decrease in the balance of loans serviced for
others to $2.22 billion at June 30, 2003, from $3.10 billion at June 30, 2002.
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 $1.8 million to $3.1 million for the three
months ended June 30, 2003, from $1.3 million for the three months ended June
30, 2002 and increased $3.2 million to $6.0 million for the six months ended
June 30, 2003, from $2.8 million for the six months ended June 30, 2002. The
increases in net gain on sales of loans were primarily due to more favorable
pricing opportunities during the three and six months ended June 30, 2003 as
compared to the three and six months ended June 30, 2002 and increases in the
volume of fixed rate loans originated and sold into the secondary market during
these periods. 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. The provision
for the valuation
32
allowance of MSR totaled $1.8 million for the three months ended June 30, 2003
and $1.9 million for the three months ended June 30, 2002. For the six months
ended June 30, 2003, the provision increased $1.6 million to $2.7 million, from
$1.1 million for the six months ended June 30, 2002. This increase reflects the
lower interest rate environment and projected greater loan prepayment speeds
during 2003 as compared to the first half of 2002.
Other non-interest income decreased $1.6 million to $2.5 million for the six
months ended June 30, 2003, from $4.1 million for the six months ended June 30,
2002, primarily due to income in the first quarter of 2002 related to the sale
of Prudential Financial, Inc. stock, which was received as a result of the
conversion of The Prudential Insurance Company of America from a mutual company
to a stock company, and income from an investment in a limited partnership.
Income from BOLI decreased $1.0 million to $5.0 million for the three months
ended June 30, 2003, from $6.0 million for the three months ended June 30, 2002.
This decrease is primarily attributable to a reduction in the yield on the BOLI
investment as a result of the lower interest rate environment. Customer service
fees increased $412,000 to $15.8 million for the three months ended June 30,
2003, from $15.3 million for the three months ended June 30, 2002 and increased
$1.3 million to $30.6 million for the six months ended June 30, 2003, from $29.3
million for the six months ended June 30, 2002.
Non-Interest Expense
Non-interest expense increased $1.5 million to $51.8 million for the three
months ended June 30, 2003, from $50.3 million for the three months ended June
30, 2002 and increased $5.4 million to $103.8 million for the six months ended
June 30, 2003, from $98.4 million for the six months ended June 30, 2002. The
increases in non-interest expense were primarily due to increases in
compensation and benefits expense and occupancy, equipment and systems expense,
partially offset by a decrease in other non-interest expense.
Compensation and benefits expense increased $1.3 million to $27.6 million for
the three months ended June 30, 2003, from $26.3 million for the three months
ended June 30, 2002 and increased $4.0 million to $56.4 million for the six
months ended June 30, 2003, from $52.4 million for the six months ended June 30,
2002. The increases were primarily attributable to an increase in pension and
other postretirement benefits expense of $1.5 million for the three months ended
June 30, 2003 and $3.0 million for the six months ended June 30, 2003 over the
comparable 2002 periods. The increases in pension expense are primarily related
to the decrease in the value of our pension assets which is a result of the
decline in the equities markets during 2002. Occupancy, equipment and systems
expense increased $2.1 million to $15.2 million for the three months ended June
30, 2003, from $13.1 million for the three months ended June 30, 2002 and
increased $3.6 million to $29.8 million for the six months ended June 30, 2003,
from $26.2 million for the six months ended June 30, 2002, due to increases in
building and furniture, fixtures and equipment expense, data processing and
depreciation, as a result of facilities and systems enhancements over the past
year, and increases in rent and utilities expense.
Our percentage of general and administrative expense to average assets was 0.90%
for the three months ended June 30, 2003 and 0.91% for the six months ended June
30, 2003, compared to 0.91% for the three months ended June 30, 2002 and 0.88%
for the six months ended June 30, 2002. The efficiency ratio, which represents
general and administrative expense divided by the sum of net interest income
plus non-interest income, was 40.57% for the three months ended June 30, 2003
and 39.52% for the six months ended June 30, 2003, compared to 34.27% for the
three months ended June 30, 2002 and 34.10% for the six months ended June 30,
2002. The increases in the efficiency ratios are primarily attributable to the
decreases in net interest income
33
for the three and six months ended June 30, 2003 compared to the three and six
months ended June 30, 2002, discussed previously.
Income Tax Expense
For the three months ended June 30, 2003, income tax expense totaled $25.1
million compared to $31.5 million for the three months ended June 30, 2002,
representing an effective tax rate of 33.0% for each of the three month periods.
For the six months ended June 30, 2003, income tax expense totaled $51.6
million, representing an effective tax rate of 32.5%, compared to $63.0 million,
representing an effective tax rate of 33.5%, for the six months ended June 30,
2002. The reduction in the effective tax rate for the six months ended June 30,
2003 is primarily due to the additional BOLI purchase in the first quarter of
2002 and additional income from subsidiary activities.
Asset Quality
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Through a variety of strategies, including, but not
limited to, aggressive collection efforts and marketing of foreclosed
properties, we have been proactive in addressing problem and non-performing
assets which, in turn, has helped to build the strength of our financial
condition. Such strategies, as well as our concentration on one-to-four family
mortgage lending, the maintenance of sound credit standards for new loan
originations, and a strong real estate market, have resulted in our maintaining
a very low level of non-performing assets in relation to both the size of our
loan portfolio and relative to our peers.
Non-Performing Assets
The following table sets forth information regarding non-performing assets at
June 30, 2003 and December 31, 2002. In addition to the non-performing loans, we
had $2.3 million of potential problem loans at June 30, 2003 compared to $1.5
million at December 31, 2002. Such loans are 60-89 days delinquent as shown on
page 35.
At June 30, At December 31,
(Dollars in Thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $34,447 $31,997
Non-accrual delinquent consumer and other loans 1,067 1,485
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 495 1,035
- -------------------------------------------------------------------------------------------------------------
Total non-performing loans 36,009 34,517
Real estate owned, net (3) 579 1,091
- -------------------------------------------------------------------------------------------------------------
Total non-performing assets $36,588 $35,608
=============================================================================================================
Non-performing loans to total loans 0.30% 0.29%
Non-performing loans to total assets 0.16 0.16
Non-performing assets to total assets 0.16 0.16
Allowance for loan losses to non-performing loans 231.58 242.04
Allowance for loan losses to total loans 0.69 0.69
(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.
34
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of June 30, 2003, $12.9 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$1.3 million for the six months ended June 30, 2003 and $2.3 million for the
year ended December 31, 2002. This compares to actual payments recorded as
interest income, with respect to such loans, of $668,000 for the six months
ended June 30, 2003, and $1.6 million for the year ended December 31, 2002.
Excluded from non-performing assets are restructured loans that have complied
with the terms of their restructure agreement for a satisfactory period and
have, therefore, been returned to performing status. Restructured loans that are
in compliance with their restructured terms totaled $4.5 million at June 30,
2003 and $5.0 million at December 31, 2002.
Delinquent Loans
The following table shows a comparison of delinquent loans at June 30, 2003 and
December 31, 2002.
At June 30, 2003 At December 31, 2002
--------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------------------------------------------------------------------------
Number Number Number Number
of of of of
(Dollars in Thousands) Loans Amount Loans Amount Loans Amount Loans Amount
- -------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family 13 $1,177 166 $29,565 12 $417 185 $30,130
Multi-family 1 63 14 4,617 1 192 6 2,114
Commercial real estate 1 595 1 760 2 324 1 788
Consumer and other loans 67 432 79 1,067 85 571 131 1,485
- -------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 82 $2,267 260 $36,009 100 $1,504 323 $34,517
=========================================================================================================================
Delinquent loans to total loans 0.02% 0.30% 0.01% 0.29%
Allowance for Loan Losses
The following table sets forth the change in our allowance for loan losses for
the six months ended June 30, 2003.
(In Thousands)
Balance at December 31, 2002 $83,546
Provision charged to operations -
Charge-offs:
One-to-four family (50)
Consumer and other (557)
------------------------------------------------------
Total charge-offs (607)
------------------------------------------------------
Recoveries:
One-to-four family 24
Commercial real estate 20
Consumer and other 407
------------------------------------------------------
Total recoveries 451
------------------------------------------------------
Net charge-offs (156)
------------------------------------------------------
Balance at June 30, 2003 $83,390
======================================================
35
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. Net interest income is the primary component of our net
income. Net interest income is the difference between the interest earned on our
loans, securities and other interest-earning assets and the interest expense
incurred on our deposits and borrowings. The yields, costs, and volumes of
loans, securities, deposits and borrowings are directly affected by the levels
of and changes in market interest rates. Additionally, changes in interest rates
also affect the related cash flows of our assets and liabilities as the option
to prepay assets or withdraw liabilities remains with our customers, in most
cases without penalty. The objective of our IRR management policy is to maintain
an appropriate mix and level of assets, liabilities and off-balance sheet items
to enable us to meet our growth and/or earnings objectives, while maintaining
specified minimum capital levels as required by the Office of Thrift
Supervision, or OTS, in the case of Astoria Federal, and as established by our
Board of Directors. We use a variety of analyses to monitor, control and adjust
our asset and liability positions, primarily interest rate sensitivity gap
analysis, or gap analysis, and Net Interest Income Sensitivity, or NII
Sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in
conformity 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 37, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at June 30, 2003 that we anticipate will reprice or mature in each
of the future time periods shown using certain assumptions based on our
historical experience and other market-based data available to us. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. Prepayment rates will vary
due to a number of factors, including the regional economy in the area where the
underlying collateral is located, seasonal factors, demographic variables and
the assumability of the underlying mortgages. However, the major factors
affecting mortgage prepayment rates are prevailing interest rates and related
mortgage refinancing opportunities.
The Gap Table does not indicate the impact of general interest rate movements on
our net interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates are
current trends and historical repricing experience with respect to similar
products. As a result, different assumptions may be used at different points in
time.
The Gap Table includes $2.29 billion of callable borrowings classified according
to their maturity dates, primarily in the more than three years to five 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 $202.5 million
36
classified according to their call dates, of which $101.6 million are callable
within one year and at various times thereafter. The classifications of callable
borrowings and securities are consistent with our experience with these
instruments in the current low interest rate environment. As indicated in the
Gap Table, our one-year cumulative gap at June 30, 2003 was 4.65%. This compares
to a one-year cumulative gap of 18.15% at December 31, 2002. The decrease in our
one-year cumulative gap is primarily attributable to $3.31 billion in borrowings
which mature in the first half of 2004 which were classified in the more than
one year to three years category at December 31, 2002 and are classified in the
one year or less category at June 30, 2003.
At June 30, 2003
-------------------------------------------------------------------------------
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) $ 4,280,861 $2,964,817 $3,021,575 $ 1,337,243 $11,604,496
Consumer and other loans (1) 379,440 24,957 - - 404,397
Federal funds sold and
repurchase agreements 117,722 - - - 117,722
Mortgage-backed and other
securities available-for-sale and
FHLB stock 2,106,775 504,230 435,467 356,995 3,403,467
Mortgage-backed and other securities
held-to-maturity 3,271,155 1,218,754 604,002 501,860 5,595,771
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,155,953 4,712,758 4,061,044 2,196,098 21,125,853
Net unamortized purchase premiums
and deferred costs (2) 88,540 37,320 29,802 15,080 170,742
- ----------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 10,244,493 4,750,078 4,090,846 2,211,178 21,296,595
- ----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 161,153 322,305 322,305 2,121,840 2,927,603
Money market 1,220,282 17,356 17,356 130,171 1,385,165
NOW and demand deposit 40,473 80,946 80,946 1,308,584 1,510,949
Certificates of deposit 2,711,461 1,699,084 986,869 88,035 5,485,449
Borrowed funds 5,074,502 997,288 1,518,537 1,600,712 9,191,039
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,207,871 3,116,979 2,926,013 5,249,342 20,500,205
- ----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 1,036,622 1,633,099 1,164,833 (3,038,164) $ 796,390
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 1,036,622 $2,669,721 $3,834,554 $ 796,390
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity
gap as a percentage of total assets 4.65% 11.98% 17.21% 3.57%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 111.26% 121.66% 125.14% 103.88%
(1) Mortgage and consumer and other loans include loans held-for-sale and
exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
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
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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 July 1, 2003 would increase by approximately 7.36% from the base
projection. At December 31, 2002, in the up 200 basis point scenario, our
projected net interest income for the twelve month period beginning January 1,
2003 would have increased by approximately 1.10% 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 July 1, 2003 would decrease by
approximately 9.68% from the base projection. At December 31, 2002, in the down
100 basis point scenario, our projected net interest income for the twelve month
period beginning January 1, 2003 would have decreased by approximately 1.09%
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.
These very high levels of prepayments have continued during the first half of
2003. 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 decrease at a slower rate, resulting in an
adverse impact on our results of operations.
Various shortcomings are inherent in both the Gap Table and NII Sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII Sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from this analysis. These include, but are not limited to, BOLI, MSR, defined
benefit pension costs and the mark to market adjustments on certain derivative
instruments.
ITEM 4. Controls and Procedures
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of June 30, 2003. Based upon their evaluation, they each
38
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 changes in our internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of our business, we are routinely made defendant in or a
party to a number of pending or threatened legal actions or proceedings which,
in some cases, seek substantial monetary damages from or other forms of relief
against us. In our opinion, after consultation with legal counsel, we believe it
unlikely that such actions or proceedings will have a material adverse effect on
our financial condition, operating results or liquidity.
We are a party to two actions pending against the United States, involving
assisted acquisitions made in the early 1980's and supervisory goodwill
accounting utilized in connection therewith, which could result in a gain. The
ultimate outcomes of such actions are uncertain and there can be no assurance
that we will benefit financially from such litigation.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of shareholders was held May 21, 2003, referred to as the
Annual Meeting. At the Annual Meeting, our shareholders re-elected Gerard C.
Keegan, Andrew M. Burger, Denis J. Connors, Thomas J. Donahue and Donald D. Wenk
as directors, each to serve for a three year term and, in any case, until the
election and qualification of their respective successors. Mr. Wenk will reach
mandatory retirement age of seventy-five in June 2005. Accordingly, we do not
expect that Mr. Wenk will finish the term for which he has been re-elected. The
shareholders also approved the 2003 Stock Option Plan for Officers and Employees
of Astoria Financial Corporation and ratified our appointment of KPMG LLP as our
independent auditors for our 2003 fiscal year.
The number of votes cast to each matter acted upon at the Annual Meeting was as
follows:
(a) Election of Directors:
For Withheld
--- --------
Gerard C. Keegan 75,073,438 1,343,531
Andrew M. Burger 74,292,739 2,124,230
Denis J. Connors 74,324,380 2,092,589
Thomas J. Donahue 74,325,159 2,091,810
Donald D. Wenk 75,055,697 1,361,272
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There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
(b) Approval of the 2003 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation:
For: 66,768,861
Against: 9,214,129
Abstained: 433,974
There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
(c) Ratification of the appointment of KPMG LLP as independent auditors of
Astoria Financial Corporation for the 2003 fiscal year:
For: 74,984,175
Against: 1,256,972
Abstained: 175,820
There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
31.1 Certifications of Chief Executive Officer.
31.2 Certifications of Chief Financial Officer.
32.1 Written Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350.*
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.
(b) Reports on Form 8-K
1. Report on Form 8-K dated May 21, 2003, which includes under Item 9 of
Form 8-K (including Item 12 disclosures) a slide presentation delivered
to shareholders during the
40
Annual Meeting of Shareholders held on May 21, 2003, which contains a
review of financial results and trends through the period ended March
31, 2003 and the outlook for the remainder of 2003 and a press release
dated May 21, 2003 announcing the results of shareholder voting at the
Annual Meeting of Shareholders. This report has been furnished but not
filed pursuant to Regulation FD and Regulation G.
2. Report on Form 8-K dated May 6, 2003, which includes under Item 9 of
Form 8-K (including Item 12 disclosures) the text of a written
presentation of financial results and trends through the period ended
March 31, 2003 made available to interested investors and analysts
during the quarter ending June 30, 2003. This report has been furnished
but not filed pursuant to Regulation FD and Regulation G.
3. Report on Form 8-K dated April 17, 2003, which includes under Item 9 of
Form 8-K (including Item 12 disclosures) a press release dated April 17,
2003 which includes highlights of our financial results for the quarter
ended March 31, 2003. This report has been furnished but not filed
pursuant to Regulation FD and Regulation G.
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, 2003 By: /s/ Monte N. Redman
------------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
41
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.
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.
42