UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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, October 31, 2003
- ----------------------- ----------------------------------------------
.01 Par Value 79,396,637
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at September 30, 2003
and December 31, 2002 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2003 and September 30, 2002 3
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 2003 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and September 30, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 40
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
At At
September 30, December 31,
(In Thousands, Except Share Data) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 212,997 $ 167,605
Federal funds sold and repurchase agreements 71,354 510,252
Available-for-sale securities:
Encumbered 2,974,704 2,096,619
Unencumbered 477,853 695,962
- -----------------------------------------------------------------------------------------------------------------
3,452,557 2,792,581
Held-to-maturity securities, fair value of $4,967,478 and $5,100,565, respectively:
Encumbered 3,804,360 4,059,947
Unencumbered 1,104,226 981,310
- -----------------------------------------------------------------------------------------------------------------
4,908,586 5,041,257
Federal Home Loan Bank of New York stock, at cost 230,450 247,550
Loans held-for-sale, net 56,434 62,669
Loans receivable:
Mortgage loans, net 11,894,172 11,680,160
Consumer and other loans, net 417,243 379,201
- -----------------------------------------------------------------------------------------------------------------
12,311,415 12,059,361
Allowance for loan losses (83,205) (83,546)
- -----------------------------------------------------------------------------------------------------------------
Loans receivable, net 12,228,210 11,975,815
Mortgage servicing rights, net 15,941 20,411
Accrued interest receivable 80,855 88,908
Premises and equipment, net 158,593 157,297
Goodwill 185,151 185,151
Bank owned life insurance 365,508 358,898
Other assets 102,452 89,435
- -----------------------------------------------------------------------------------------------------------------
Total assets $22,069,088 $21,697,829
=================================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,940,597 $ 2,832,291
Money market 1,306,370 1,698,552
NOW and demand deposit 1,479,685 1,383,315
Certificates of deposit 5,486,235 5,153,038
- -----------------------------------------------------------------------------------------------------------------
Total deposits 11,212,887 11,067,196
Reverse repurchase agreements 6,635,000 6,285,000
Federal Home Loan Bank of New York advances 1,964,000 2,064,000
Other borrowings, net 474,877 472,180
Mortgage escrow funds 138,576 104,353
Accrued expenses and other liabilities 168,531 151,102
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 20,593,871 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 79,651,565 and 84,805,817 shares outstanding,
respectively) 1,110 1,110
Additional paid-in capital 849,201 840,186
Retained earnings 1,450,778 1,368,062
Treasury stock (31,345,027 and 26,190,775 shares, at cost, respectively) (776,832) (639,579)
Accumulated other comprehensive (loss) income (24,610) 9,800
Unallocated common stock held by ESOP (4,809,080 and 5,018,500 shares,
respectively) (26,430) (27,581)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,475,217 1,553,998
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,069,088 $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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------
(In Thousands, Except Share Data) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 110,340 $ 154,192 $ 355,135 $ 484,150
Multifamily, commercial real estate and
construction 53,419 42,644 149,084 117,714
Consumer and other loans 4,736 4,792 14,468 12,711
Mortgage-backed securities 71,276 91,552 253,537 289,273
Other securities 7,265 16,629 25,394 55,734
Federal funds sold and repurchase agreements 219 3,571 1,436 10,963
- --------------------------------------------------------------------------------------------------------------------
Total interest income 247,255 313,380 799,054 970,545
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 55,176 71,702 170,606 225,472
Borrowed funds 112,447 125,554 343,557 391,653
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 167,623 197,256 514,163 617,125
- --------------------------------------------------------------------------------------------------------------------
Net interest income 79,632 116,124 284,891 353,420
Provision for loan losses -- 301 -- 2,307
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 79,632 115,823 284,891 351,113
- --------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 15,086 15,640 45,678 44,918
Other loan fees 2,001 2,242 5,868 5,922
Net gain of sales of securities 4,500 8,489 14,665 8,489
Mortgage banking income, net 5,954 (7,571) 6,014 (3,543)
Income from bank owned life insurance 4,929 5,683 15,177 15,927
Other 1,410 729 3,916 4,787
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 33,880 25,212 91,318 76,500
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 27,211 26,645 83,579 79,002
Occupancy, equipment and systems 15,094 13,373 44,868 39,600
Federal deposit insurance premiums 480 492 1,440 1,496
Advertising 1,501 997 4,743 3,555
Other 7,122 7,075 20,584 23,333
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 51,408 48,582 155,214 146,986
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense 62,104 92,453 220,995 280,627
Income tax expense 20,503 30,237 72,108 93,262
- --------------------------------------------------------------------------------------------------------------------
Net income 41,601 62,216 148,887 187,365
Preferred dividends declared (1,500) (1,500) (4,500) (4,500)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 40,101 $ 60,716 $ 144,387 $ 182,865
====================================================================================================================
Basic earnings per common share $ 0.53 $ 0.73 $ 1.87 $ 2.17
====================================================================================================================
Diluted earnings per common share $ 0.53 $ 0.72 $ 1.85 $ 2.13
====================================================================================================================
Dividends per common share $ 0.22 $ 0.20 $ 0.64 $ 0.57
====================================================================================================================
Basic weighted average common shares 75,376,835 83,329,044 77,079,828 84,333,207
Diluted weighted average common and common equivalent shares 76,352,144 84,795,336 77,854,686 85,920,019
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003
Additional
Preferred Common Paid-in
(In Thousands, Except Share Data) Total Stock Stock Capital
- ----------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,553,998 $2,000 $1,110 $840,186
Comprehensive income:
Net income 148,887 -- -- --
Other comprehensive (loss) income,
net of tax:
Net unrealized loss on securities (35,328) -- -- --
Amortization of net unrealized loss
on cash flow hedging instruments 143 -- -- --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 775 -- -- --
----------
Comprehensive income 114,477
----------
Common stock repurchased
(5,974,400 shares) (157,367) -- -- --
Dividends on common and preferred stock
and amortization of purchase premium (53,802) -- -- (978)
Exercise of stock options and related tax
benefit (820,148 shares issued) 12,245 -- -- 5,478
Amortization relating to allocation of
ESOP stock 5,666 -- -- 4,515
- ----------------------------------------------------------------------------------------
Balance at September 30, 2003 $1,475,217 $2,000 $1,110 $849,201
========================================================================================
Unallocated
Accumulated Common
Other Stock
Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Earnings Stock Income (Loss) by ESOP
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $1,368,062 $(639,579) $ 9,800 $(27,581)
Comprehensive income:
Net income 148,887 -- -- --
Other comprehensive (loss) income,
net of tax:
Net unrealized loss on securities -- -- (35,328) --
Amortization of net unrealized loss
on cash flow hedging instruments -- -- 143 --
Amortization of unrealized loss
on securities transferred to
held-to-maturity -- -- 775 --
Comprehensive income
Common stock repurchased
(5,974,400 shares) -- (157,367) -- --
Dividends on common and preferred
stock and amortization of purchase
premium (52,824) -- -- --
Exercise of stock options and related tax
benefit (820,148 shares issued) (13,347) 20,114 -- --
Amortization relating to allocation of
ESOP stock -- -- -- 1,151
- ----------------------------------------------------------------------------------------------
Balance at September 30, 2003 $1,450,778 $(776,832) $(24,610) $(26,430)
==============================================================================================
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
-------------------------
(In Thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 148,887 $ 187,365
Adjustments to reconcile net income to net cash provided
by operating activities:
Net premium amortization on mortgage loans and mortgage-backed securities 93,594 32,835
Other net amortization (accretion) 89 (35,095)
Net provision for loan and real estate losses 4 2,311
Depreciation and amortization 9,237 8,003
Net gain on sales of loans and securities (24,945) (12,391)
Proceeds from sales of loans held-for-sale, net of originations 16,514 14,944
Amortization relating to allocation of ESOP stock 5,666 7,310
Decrease in accrued interest receivable 8,053 1,076
Mortgage servicing rights amortization and valuation allowance, net of
capitalized amounts 4,470 12,896
Income from bank owned life insurance, net of insurance proceeds received (6,610) (14,918)
Decrease (increase) in other assets 17,736 (15,862)
Increase (decrease) in accrued expenses and other liabilities 19,909 (57,062)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 292,604 131,412
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (4,376,136) (2,796,246)
Loan purchases through third parties (1,144,437) (1,113,285)
Principal payments on loans receivable 5,229,628 3,623,342
Principal payments on mortgage-backed securities held-to-maturity 4,151,290 2,260,068
Principal payments on mortgage-backed securities available-for-sale 1,939,498 1,490,987
Purchases of mortgage-backed securities held-to-maturity (4,119,277) (2,578,324)
Purchases of mortgage-backed securities available-for-sale (3,680,394) (1,263,783)
Purchases of other securities available-for-sale (600) (502)
Proceeds from calls and maturities of other securities held-to-maturity 68,264 316,649
Proceeds from calls and maturities of other securities available-for-sale 132,736 77,923
Proceeds from sales of mortgage-backed securities available-for-sale 829,680 384,250
Proceeds from sales of other securities available-for-sale 50,057 --
Net redemptions of FHLB of New York stock 17,100 24,977
Proceeds from sales of real estate owned, net 1,502 3,431
Purchases of premises and equipment, net of proceeds from sales (10,533) (13,850)
Purchase of bank owned life insurance -- (100,000)
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (911,622) 315,637
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 145,691 276,885
Net increase in borrowings with original terms of three months or less 350,000 --
Proceeds from borrowings with original terms greater than three months 800,000 250,450
Repayments of borrowings with original terms greater than three months (900,000) (1,300,000)
Net increase in mortgage escrow funds 34,223 33,377
Common stock repurchased (157,367) (129,795)
Cash dividends paid to stockholders (53,802) (53,607)
Cash received for options exercised 6,767 10,267
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 225,512 (912,423)
- -----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (393,506) (465,374)
Cash and cash equivalents at beginning of period 677,857 1,453,858
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 284,351 $ 988,484
===========================================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 513,472 $ 628,918
===========================================================================================================
Income taxes $ 71,942 $ 83,302
===========================================================================================================
Additions to real estate owned $ 986 $ 1,518
===========================================================================================================
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 September 30, 2003 and
December 31, 2002, our results of operations for the three and nine months ended
September 30, 2003 and 2002, changes in our stockholders' equity for the nine
months ended September 30, 2003 and our cash flows for the nine months ended
September 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 September 30, 2003 and December 31, 2002, and amounts of
revenues and expenses in the consolidated statements of income for the three and
nine months ended September 30, 2003 and 2002. The results of operations for the
three and nine months ended September 30, 2003 are not necessarily indicative of
the results of operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission, or SEC.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 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 September 30,
----------------------------------------
2003 2002
----------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS EPS EPS
- --------------------------------------------------------------------------------------
Net income $41,601 $41,601 $62,216 $62,216
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
- ------------------------------------------------------------------------------------
Net income available to common shareholders $40,101 $40,101 $60,716 $60,716
====================================================================================
Total weighted average basic common shares
outstanding 75,377 75,377 83,329 83,329
Effect of dilutive securities:
Options -- 975 -- 1,466
- ------------------------------------------------------------------------------------
Total weighted average diluted common
shares outstanding 75,377 76,352 83,329 84,795
====================================================================================
Net earnings per common share $ 0.53 $ 0.53 $ 0.73 $ 0.72
====================================================================================
For the Nine Months Ended September 30,
-----------------------------------------
2003 2002
-----------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS
- ---------------------------------------------------------------------------------------
Net income $148,887 $148,887 $187,365 $187,365
Preferred dividends declared (4,500) (4,500) (4,500) (4,500)
- ---------------------------------------------------------------------------------------
Net income available to common shareholders $144,387 $144,387 $182,865 $182,865
=======================================================================================
Total weighted average basic common shares
outstanding 77,080 77,080 84,333 84,333
Effect of dilutive securities:
Options -- 775 -- 1,587
- ---------------------------------------------------------------------------------------
Total weighted average diluted common
shares outstanding 77,080 77,855 84,333 85,920
=======================================================================================
Net earnings per common share $ 1.87 $ 1.85 $ 2.17 $ 2.13
=======================================================================================
(1) Options to purchase 532,384 shares of common stock at prices between $27.29
per share and $29.88 per share were outstanding as of September 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 nine months ended September 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 $30.4 million at
September 30, 2003 and $35.1 million at December 31, 2002. The valuation
allowance totaled $14.5 million at September 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 $3.0 million for the three
months ended September 30, 2003 and $2.7 million for the three months ended
September 30, 2002. MSR amortization totaled $10.6 million for the nine months
ended September 30, 2003 and $6.7 million for the nine months ended September
30, 2002. As of September 30, 2003, estimated future MSR amortization through
2008, based on the prepayment assumptions utilized in the September 30, 2003 MSR
valuation, is as follows: $2.0 million for the remainder of 2003,
7
$7.4 million for 2004, $5.5 million for 2005, $4.0 million for 2006, $2.9
million for 2007 and $2.1 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 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 For the Nine Months Ended
September 30, September 30,
------------------------------------------------------
(In Thousands, Except Per Share Data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------
Net income:
As reported $41,601 $62,216 $148,887 $187,365
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,231 1,043 3,844 3,274
------- ------- -------- --------
Pro forma $40,370 $61,173 $145,043 $184,091
======= ======= ======== ========
Basic earnings per common share:
As reported $ 0.53 $ 0.73 $ 1.87 $ 2.17
======= ======= ======== ========
Pro forma $ 0.52 $ 0.72 $ 1.82 $ 2.13
======= ======= ======== ========
Diluted earnings per common share:
As reported $ 0.53 $ 0.72 $ 1.85 $ 2.13
======= ======= ======== ========
Pro forma $ 0.51 $ 0.70 $ 1.81 $ 2.09
======= ======= ======== ========
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
8
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. In
October 2003, the FASB issued a Staff Position which delayed the effective date
of FIN 46 for a public entity until the end of the first interim or annual
period ending after December 15, 2003, provided that the variable interest
entity was created before February 1, 2003 and the public entity has not issued
financial statements reporting that variable interest entity in accordance with
FIN 46, other than certain disclosures required by paragraph 26 of FIN 46. In
its current form, FIN 46 may require us to deconsolidate our investment in
Astoria Capital Trust I in future financial statements. The potential
deconsolidation of subsidiary trusts, like Astoria Capital Trust I, appears to
be an unintended consequence of FIN 46. It is currently unknown if, or when, the
FASB will address this issue. The adoption of the currently effective provisions
of FIN 46 did not have a material impact on our financial condition or results
of operations. The adoption of the remaining provisions of FIN 46, including the
possible deconsolidation of Astoria Capital Trust I, is not expected to 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
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.
9
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.
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,
10
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 Reports on Form 10-Q for the
quarters ended March 31, 2003 and June 30, 2003 and this report, contains a
summary of our significant accounting policies. Various elements of our
accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. 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.
11
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.
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.
12
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 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.
13
For purposes of our goodwill impairment testing, we identified a single
reporting unit. On September 30, 2003 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. 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 securities portfolio is carried at estimated fair value,
with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive income (or loss) 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 95.3% of our total securities portfolio at September 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 nine months ended
September 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 $11.52 billion for the nine months ended September 30, 2003
and $7.77 billion for the nine months ended September 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 of the past two years. Medium- and long-term U.S. Treasury
rates (maturities of two to ten years), as well as the federal fund rate,
continued to decline during 2002 and the first half of 2003. Conversely, during
the quarter ended September 30, 2003, medium- and long-term U.S. Treasury rates
increased on average approximately 32 basis points. This increase has resulted
in a reduction in the one-to-four family mortgage refinance applications that we
received in August and September, which is consistent with the national trend,
and should reduce the repayments on our mortgage loans and mortgage-backed
securities in the 2003 fourth quarter.
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 $292.6 million during the nine months ended September 30, 2003 and
$131.4 million during the nine months ended September 30, 2002. During the nine
months ended September 30, 2003, net borrowings increased $252.7 million and net
deposits increased $145.7 million. During the nine months ended September 30,
2003, we extended $800.0 million of borrowings with a weighted average rate of
2.47% and a weighted average maturity of 3.4 years to help protect against the
impact on interest expense of future interest rate increases. All other
borrowings that matured in 2003 were rolled over into short-
14
term borrowings. During the three months ended September 30, 2003, we entered
into forward borrowing commitments, with a weighted average rate of 2.63% and a
weighted average term of 2.7 years, to replace $900.0 million of borrowings,
with a weighted average rate of 5.29%, scheduled to mature in the fourth quarter
of 2003. During the nine months ended September 30, 2002, net borrowings
decreased $1.05 billion, while net deposits increased $276.9 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 nine months ended September 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. 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 nine months ended September 30, 2003,
despite strong loan originations, our purchases of mortgage-backed securities
exceeded our originations and purchases of mortgage loans. During the nine
months ended September 30, 2003, our gross originations and purchases of
mortgage loans totaled $5.81 billion, including originations of loans
held-for-sale totaling $540.8 million, compared to $3.98 billion, including
originations of loans held-for-sale totaling $300.4 million, during the nine
months ended September 30, 2002. The strong levels of loan originations and
purchases for both the nine months ended September 30, 2003 and 2002 are
attributable to the continued low interest rate environment which has resulted
in continued high levels of mortgage refinance activity. Our originations and
purchases of mortgage loans are on target to exceed $7.00 billion for 2003, even
with the previously discussed reduction in the one-to-four family mortgage
refinance applications received in August and September. Purchases of
mortgage-backed securities totaled $7.80 billion during the nine months ended
September 30, 2003 and $3.84 billion during the nine months ended September 30,
2002. The increase in mortgage-backed securities purchases during the nine
months ended September 30, 2003 reflects the continued utilization of cash flows
in excess of mortgage and other loan fundings arising from the significant
refinance activity we have experienced. We will continue to evaluate the
alternative of using cash flows in excess of mortgage and other loan fundings to
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 $284.4 million at September 30, 2003, compared to $677.9 million
at December 31, 2002. This decrease reflects the net effect of our operating,
investing and financing activities, in particular, our use of funds for the
purchase of mortgage-backed securities. Borrowings maturing over the next twelve
months total $4.96 billion with a weighted average rate of 4.53%. As previously
discussed, during the third quarter of 2003 we entered into forward borrowing
commitments to replace $900.0 million of borrowings scheduled to mature in the
fourth quarter of 2003. We have the flexibility to either repay or rollover the
remaining 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 $2.66 billion in certificates of deposit with a weighted
average rate of 2.55% 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.
15
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:
Fourth quarter 2003 * $1,650 3.41% $ 778 2.45%
First quarter 2004 2,810 4.97 943 2.45
Second quarter 2004 500 5.80 581 2.73
Third quarter 2004 -- -- 356 2.77
------ ------
Total $4,960 4.53 $2,658 2.55
====== ======
* Includes $900.0 million of borrowings, with a weighted average rate of
5.29%, scheduled to mature in the fourth quarter of 2003, which were
effectively extended through forward borrowing commitments entered into in
the third quarter of 2003 with a weighted average rate of 2.63% and a
weighted average term of 2.7 years.
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 $1.48 billion at September 30, 2003, from
$1.55 billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $157.4 million, dividends declared of
$53.8 million and a decrease in accumulated other comprehensive income, net of
tax, of $34.4 million, which was primarily due to the decrease in the net
unrealized gain on our mortgage-backed securities available-for-sale. These
decreases were partially offset by net income of $148.9 million, the effect of
stock options exercised and related tax benefit of $12.2 million and the
amortization of the allocated portion of shares held by the employee stock
ownership plan, or ESOP, of $5.7 million.
On September 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 August 15,
2003 totaling $16.6 million. On October 15, 2003, we declared a quarterly cash
dividend of $0.22 per share on shares of our common stock payable on December 1,
2003 to stockholders of record as of the close of business on November 17, 2003.
On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of 12%
Noncumulative Perpetual Preferred Stock, Series B at a redemption price of
$27.25 per share, plus $1.00 per share in accrued and unpaid dividends, for an
aggregate redemption price of $28.25 per share. Accrued and unpaid dividends
covered the period from June 1, 2003 through September 30, 2003.
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 nine
months ended September 30, 2003, we repurchased 5,974,400 shares of our common
stock at an aggregate cost of $157.4 million. In total, as of September 30,
2003, 6,292,400 shares of our common stock, at an aggregate cost of $165.8
million, have been repurchased under the ninth stock repurchase plan.
At September 30, 2003, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.52%, leverage
capital ratio of 7.52% and total risk-based capital ratio of 15.66%. 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 September 30,
2003, we had outstanding commitments to originate and purchase loans totaling
$809.0 million; outstanding unused lines of credit totaling $325.4 million,
which relate primarily to home equity lines of credit; outstanding commitments
to sell loans totaling $80.6 million; outstanding commitments to purchase
securities totaling $697.7 million; and outstanding forward borrowing
commitments totaling $900.0 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 September 30, 2003 and
December 31, 2002.
At September 30, 2003 At December 31, 2002
-----------------------------------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- -----------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,822,235 72.08% $ 9,209,360 76.86%
Multi-family 2,093,896 17.11 1,599,985 13.35
Commercial real estate 822,240 6.72 744,623 6.21
Construction 90,805 0.74 56,475 0.47
- ----------------------------------------------------------------------------------
Total mortgage loans 11,829,176 96.65 11,610,443 96.89
- ----------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 368,764 3.02 323,494 2.70
Passbook 7,245 0.06 7,502 0.06
Other 33,561 0.27 41,642 0.35
- ----------------------------------------------------------------------------------
Total consumer and other loans 409,570 3.35 372,638 3.11
- ----------------------------------------------------------------------------------
Total loans 12,238,746 100.00% 11,983,081 100.00%
Net unamortized premiums and
deferred loan costs 72,669 76,280
Allowance for loan losses (83,205) (83,546)
- ----------------------------------------------------------------------------------
Total loans, net $12,228,210 $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
September 30, 2003 and December 31, 2002.
At September 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 (1) $ 175,907 $ 181,938 $ 241,146 $ 249,459
REMICs and CMOs:
Agency issuance (1) 2,801,005 2,768,981 608,076 616,552
Non-agency issuance 350,952 342,401 1,581,475 1,587,622
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 3,327,864 3,293,320 2,430,697 2,453,633
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 2,240 2,283 132,011 133,448
FNMA and FHLMC preferred stock 140,015 133,697 140,015 136,682
Corporate debt and other securities 22,052 23,257 67,854 68,818
- ----------------------------------------------------------------------------------------------
Total other securities 164,307 159,237 339,880 338,948
- ----------------------------------------------------------------------------------------------
Total securities available-for-sale $3,492,171 $3,452,557 $2,770,577 $2,792,581
==============================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 16,134 $ 17,168 $ 24,534 $ 26,190
REMICs and CMOs:
Agency issuance (1) 4,276,110 4,335,778 3,595,244 3,646,023
Non-agency issuance 568,972 566,637 1,306,113 1,313,349
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,861,216 4,919,583 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 37,387 37,387 39,611 39,611
Corporate debt securities 9,983 10,508 9,979 9,374
- ----------------------------------------------------------------------------------------------
Total other securities 47,370 47,895 115,366 115,003
- ----------------------------------------------------------------------------------------------
Total securities held-to-maturity $4,908,586 $4,967,478 $5,041,257 $5,100,565
==============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
18
Comparison of Financial Condition as of September 30, 2003 and December 31, 2002
and Operating Results for the Three and Nine Months Ended September 30, 2003 and
2002
Financial Condition
Total assets increased $371.3 million to $22.07 billion at September 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 and multi-family and
commercial real estate loans, partially offset by decreases in one-to-four
family mortgage loans, federal funds sold and repurchase agreements and other
securities. This growth was funded primarily through increases in borrowings and
deposits.
Mortgage loans increased $214.0 million to $11.89 billion at September 30, 2003,
from $11.68 billion at December 31, 2002. This increase was primarily due to an
increase in our multi-family and commercial real estate loan portfolios,
partially offset by a decrease in our one-to-four family mortgage loan
portfolio. Gross mortgage loans originated and purchased during the nine months
ended September 30, 2003 totaled $5.27 billion, excluding originations of loans
held-for-sale totaling $540.8 million, of which $4.14 billion were originations
and $1.13 billion were purchases. This compares to $2.58 billion of originations
and $1.10 billion of purchases for a total of $3.68 billion, excluding
originations of loans held-for-sale totaling $300.4 million, during the nine
months ended September 30, 2002. Mortgage loan repayments increased to $5.06
billion for the nine months ended September 30, 2003, from $3.53 billion for the
nine months ended September 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 represented 72.1% of our total loan portfolio at
September 30, 2003, decreased $387.1 million to $8.82 billion at September 30,
2003, from $9.21 billion at December 31, 2002. This decrease was primarily due
to the continued high level of one-to-four family loan repayments during the
nine months ended September 30, 2003 which have outpaced our levels of
one-to-four family loan originations and purchases. During the quarter ended
September 30, 2003, medium- and long-term U.S. Treasury rates increased on
average approximately 32 basis points. This increase has resulted in a reduction
in the one-to-four family mortgage refinance applications that we received in
August and September, which should reduce the repayments on our mortgage loans
in the 2003 fourth quarter.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate loan
originations. Our multi-family mortgage loan portfolio increased $493.9 million
to $2.09 billion at September 30, 2003, from $1.60 billion at December 31, 2002.
Our commercial real estate loan portfolio increased $77.6 million to $822.2
million at September 30, 2003, from $744.6 million at December 31, 2002.
Multi-family and commercial real estate loan originations totaled $1.21 billion
for the nine months ended September 30, 2003 and $761.0 million for the nine
months ended September 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 to 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. Our portfolio of consumer and other loans increased $37.0 million to
$409.6 million at September 30, 2003, from $372.6 million at December 31, 2002.
This increase is primarily in home
19
equity lines of credit as a result of the continued strong housing market and
the low interest rate environment.
Mortgage-backed securities increased $775.0 million to $8.15 billion at
September 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, or CMOs, totaling $7.80
billion, partially offset by principal payments received of $6.09 billion, sales
of $819.5 million, net premium amortization of $58.2 million and a decrease of
$57.5 million in the net unrealized gain on our available-for-sale portfolio.
This increase in mortgage-backed securities reflects our use of excess cash
flows, as well as cash flows from increased deposits and borrowings, for the
purchase of these securities. Although our mortgage-backed securities portfolio
increased from December 31, 2002, during the three months ended September 30,
2003, mortgage-backed securities decreased $442.2 million from $8.60 billion at
June 30, 2003 as a result of principal payments received in excess of purchases
during the quarter. 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. The
decrease in the net unrealized gain on our mortgage-backed securities
available-for-sale portfolio is primarily due to the substantial turnover of
securities in our portfolio resulting in a decrease in the average coupon rate
of the portfolio and an $839.7 million increase in mortgage-backed securities
available-for-sale from December 31, 2002.
Other securities decreased $247.7 million to $206.6 million at September 30,
2003, from $454.3 million at December 31, 2002, primarily due to $201.0 million
in securities which were called or matured and sales of $45.6 million. The
continued low interest rate environment during 2003 resulted in a significant
portion of our remaining callable investment securities being called,
primarily in the first quarter of 2003.
Federal funds sold and repurchase agreements decreased $438.9 million to $71.4
million at September 30, 2003, from $510.3 million at December 31, 2002,
primarily due to our use of funds for the purchase of mortgage-backed
securities.
Deposits increased $145.7 million to $11.21 billion at September 30, 2003, from
$11.07 billion at December 31, 2002. The increase in deposits was primarily due
to an increase of $333.2 million in certificates of deposit to $5.49 billion at
September 30, 2003, an increase in savings accounts of $108.3 million to $2.94
billion at September 30, 2003 and an increase in NOW and demand deposit accounts
of $96.4 million to $1.48 billion at September 30, 2003. These increases were
partially offset by a decrease of $392.2 million in our money market accounts to
$1.31 billion at September 30, 2003, from $1.70 billion at December 31, 2002.
The increase in our certificates of deposit was primarily the result of our
efforts to extend the maturities of our certificates of deposit through
promotional rates and targeted marketing and sales efforts in the prevailing low
interest rate environment. 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. 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.
20
Reverse repurchase agreements increased $350.0 million to $6.64 billion at
September 30, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances
decreased $100.0 million to $1.96 billion at September 30, 2003, from $2.06
billion at December 31, 2002. As previously discussed, during the nine months
ended September 30, 2003, we extended $800.0 million of borrowings with a
weighted average rate of 2.47% and a weighted average maturity of 3.4 years to
help protect against the impact on interest expense of future interest rate
increases. All other borrowings that matured in 2003 were rolled over into
short-term borrowings. During the three months ended September 30, 2003, we
entered into forward borrowing commitments, with a weighted average rate of
2.63% and a weighted average term of 2.7 years, to replace $900.0 million of
borrowings, with a weighted average rate of 5.29%, scheduled to mature in the
fourth quarter of 2003.
Stockholders' equity decreased to $1.48 billion at September 30, 2003, from
$1.55 billion at December 31, 2002. The decrease in stockholders' equity was the
result of common stock repurchased of $157.4 million, dividends declared of
$53.8 million and a decrease in accumulated other comprehensive income, net of
tax, of $34.4 million, which was primarily due to the decrease in the net
unrealized gain on our mortgage-backed securities available-for-sale. These
decreases were partially offset by net income of $148.9 million, the effect of
stock options exercised and related tax benefit of $12.2 million and the
amortization of the allocated portion of shares held by the ESOP of $5.7
million.
Results of Operations
General
Net income for the three months ended September 30, 2003 decreased $20.6 million
to $41.6 million, from $62.2 million for the three months ended September 30,
2002. Diluted earnings per common share totaled $0.53 per share for the three
months ended September 30, 2003 and $0.72 per share for the three months ended
September 30, 2002. Return on average assets decreased to 0.74% for the three
months ended September 30, 2003, from 1.14% for the three months ended September
30, 2002. Return on average stockholders' equity decreased to 11.35% for the
three months ended September 30, 2003, from 15.72% for the three months ended
September 30, 2002. Return on average tangible stockholders' equity, which
represents average stockholders' equity less average goodwill, decreased to
12.99% for the three months ended September 30, 2003, from 17.81% for the three
months ended September 30, 2002.
Net income for the nine months ended September 30, 2003 decreased $38.5 million
to $148.9 million, from $187.4 million for the nine months ended September 30,
2002. Diluted earnings per common share totaled $1.85 per share for the nine
months ended September 30, 2003 and $2.13 per share for the nine months ended
September 30, 2002. Return on average assets decreased to 0.88% for the nine
months ended September 30, 2003, from 1.13% for the nine months ended September
30, 2002. Return on average stockholders' equity decreased to 13.13% for the
nine months ended September 30, 2003, from 15.92% for the nine months ended
September 30, 2002. Return on average tangible stockholders' equity decreased to
14.96% for the nine months ended September 30, 2003, from 18.05% for the nine
months ended September 30, 2002. The decreases in net income and the related
return ratios for the three and nine months ended September 30, 2003 are
primarily the result of decreases in net interest income which are discussed
further below.
21
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 September 30, 2003, net interest income decreased
$36.5 million to $79.6 million, from $116.1 million for the three months ended
September 30, 2002. For the nine months ended September 30, 2003, net interest
income decreased $68.5 million to $284.9 million, from $353.4 million for the
nine months ended September 30, 2002. The net interest margin decreased to 1.52%
for the three months ended September 30, 2003, from 2.25% for the three months
ended September 30, 2002. The net interest margin decreased to 1.79% for the
nine months ended September 30, 2003, from 2.25% for the nine months ended
September 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 nine months ended September 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, as previously discussed,
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 $21.3 million to $34.7 million for the three months ended
September 30, 2003, from $13.4 million for the three months ended September 30,
2002. Net premium amortization on our mortgage-backed securities and mortgage
loan portfolios increased $60.8 million to $93.6 million for the nine months
ended September 30, 2003, from $32.8 million for the nine months ended September
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 $359.1 million to
$294.4 million for the three months ended September 30, 2003, from $653.5
million for the three months ended September 30, 2002. The decrease in the
average balance of net interest-earning assets was the result of an increase of
$687.2 million in the average balance of total interest-bearing liabilities to
$20.67 billion for the three months ended September 30, 2003, from $19.98
billion for the three months ended September 30, 2002, partially offset by an
increase of $328.0 million in the average balance of total interest-earning
assets to $20.96 billion for the three months ended September 30, 2003, from
$20.63 billion for the three months ended September 30, 2002. The net interest
rate spread decreased to 1.48% for the three months ended September 30, 2003,
from 2.12% for the three months ended September 30, 2002. The average yield on
interest-earning assets decreased to 4.72% for the three months ended September
30, 2003, from 6.07% for the three months ended September 30, 2002. The
22
average cost of interest-bearing liabilities decreased to 3.24% for the three
months ended September 30, 2003, from 3.95% for the three months ended September
30, 2002.
The average balance of net interest-earning assets decreased $347.5 million to
$364.7 million for the nine months ended September 30, 2003, from $712.2 million
for the nine months ended September 30, 2002. The decrease in the average
balance of net interest-earning assets was the result of an increase of $577.0
million in the average balance of total interest-bearing liabilities to $20.81
billion for the nine months ended September 30, 2003, from $20.23 billion for
the nine months ended September 30, 2002, partially offset by an increase of
$229.6 million in the average balance of total interest-earning assets to $21.17
billion for the nine months ended September 30, 2003, from $20.94 billion for
the nine months ended September 30, 2002. The net interest rate spread decreased
to 1.74% for the nine months ended September 30, 2003, from 2.11% for the nine
months ended September 30, 2002. The average yield on interest-earning assets
decreased to 5.03% for the nine months ended September 30, 2003, from 6.18% for
the nine months ended September 30, 2002. The average cost of interest-bearing
liabilities decreased to 3.29% for the nine months ended September 30, 2003,
from 4.07% for the nine months ended September 30, 2002.
The primary reasons for the decreases in net interest-earning assets are the
repurchases of our common stock over the past year, an increase in the monthly
mortgage-backed securities principal payments receivable due to the accelerated
mortgage-backed securities cash flow, and the $100.0 million premium paid in the
first quarter of 2002 to purchase additional BOLI. The changes in the yields on
interest-earning assets and the costs of interest-bearing liabilities for both
the three and nine months ended September 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
nine months ended September 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 September 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 $ 8,944,114 $110,340 4.93% $10,012,425 $154,192 6.16%
Multi-family, commercial
real estate and construction 2,857,110 53,419 7.48 2,166,118 42,644 7.87
Consumer and other loans (1) 413,519 4,736 4.58 323,195 4,792 5.93
----------- -------- ----------- --------
Total loans 12,214,743 168,495 5.52 12,501,738 201,628 6.45
Mortgage-backed securities (2) 8,179,267 71,276 3.49 6,376,544 91,552 5.74
Other securities (2) (3) 477,432 7,265 6.09 927,940 16,629 7.17
Federal funds sold and
repurchase agreements 90,642 219 0.97 827,857 3,571 1.73
----------- -------- ----------- --------
Total interest-earning assets 20,962,084 247,255 4.72 20,634,079 313,380 6.07
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,293,372 1,101,604
----------- -----------
Total assets $22,440,607 $21,920,834
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,940,389 3,127 0.43 $ 2,810,974 7,938 1.13
Money market 1,348,441 1,986 0.59 1,870,756 7,777 1.66
NOW and demand deposit 1,529,299 292 0.08 1,273,066 931 0.29
Certificates of deposit 5,425,815 49,771 3.67 5,253,760 55,056 4.19
----------- -------- ----------- --------
Total deposits 11,243,944 55,176 1.96 11,208,556 71,702 2.56
Borrowed funds 9,423,789 112,447 4.77 8,771,982 125,554 5.73
----------- -------- ----------- --------
Total interest-bearing liabilities 20,667,733 167,623 3.24 19,980,538 197,256 3.95
-------- --------
Non-interest-bearing liabilities 306,258 357,532
----------- -----------
Total liabilities 20,973,991 20,338,070
Stockholders' equity 1,466,616 1,582,764
----------- -----------
Total liabilities and stockholders'
equity $22,440,607 $21,920,834
=========== ===========
Net interest income/net interest
rate spread (4) $ 79,632 1.48% $116,124 2.12%
======== ==== ======== ====
Net interest-earning assets/net
interest margin (5) $ 294,351 1.52% $ 653,541 2.25%
=========== ==== =========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.01x 1.03x
=========== ===========
- ----------
(1) Mortgage and consumer and other loans include loans held-for-sale and
non-performing loans and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized cost.
(3) Other securities include 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 Nine Months Ended September 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 $ 8,994,985 $355,135 5.26% $10,221,945 $484,150 6.32%
Multi-family, commercial
real estate and construction 2,634,045 149,084 7.55 1,982,618 117,714 7.92
Consumer and other loans (1) 403,689 14,468 4.78 287,169 12,711 5.90
----------- -------- ----------- --------
Total loans 12,032,719 518,687 5.75 12,491,732 614,575 6.56
Mortgage-backed securities (2) 8,423,400 253,537 4.01 6,503,436 289,273 5.93
Other securities (2) (3) 550,399 25,394 6.15 1,092,241 55,734 6.80
Federal funds sold and
repurchase agreements 167,965 1,436 1.14 857,510 10,963 1.70
----------- -------- ----------- --------
Total interest-earning assets 21,174,483 799,054 5.03 20,944,919 970,545 6.18
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 1,262,642 1,043,406
----------- -----------
Total assets $22,622,276 $22,173,476
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,897,358 10,243 0.47 $ 2,732,395 24,607 1.20
Money market 1,450,089 8,198 0.75 1,920,586 27,632 1.92
NOW and demand deposit 1,469,279 1,304 0.12 1,239,817 2,650 0.28
Certificates of deposit 5,389,094 150,861 3.73 5,209,688 170,583 4.37
----------- -------- ----------- --------
Total deposits 11,205,820 170,606 2.03 11,102,486 225,472 2.71
Borrowed funds 9,603,936 343,557 4.77 9,130,247 391,653 5.72
----------- -------- ----------- --------
Total interest-bearing liabilities 20,809,756 514,163 3.29 20,232,733 617,125 4.07
-------- --------
Non-interest-bearing liabilities 300,773 371,810
----------- -----------
Total liabilities 21,110,529 20,604,543
Stockholders' equity 1,511,747 1,568,933
----------- -----------
Total liabilities and stockholders'
equity $22,622,276 $22,173,476
=========== ===========
Net interest income/net interest
rate spread $284,891 1.74% $353,420 2.11%
======== ==== ======== ====
Net interest-earning assets/net
interest margin $ 364,727 1.79% $ 712,186 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 September 30, 2003 Nine Months Ended September 30, 2003
Compared to Compared to
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
---------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
---------------------------------------------------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $(15,272) $(28,580) $(43,852) $(53,817) $ (75,198) $(129,015)
Multi-family, commercial
real estate and construction 12,982 (2,207) 10,775 37,099 (5,729) 31,370
Consumer and other loans 1,171 (1,227) (56) 4,484 (2,727) 1,757
Mortgage-backed securities 21,563 (41,839) (20,276) 72,285 (108,021) (35,736)
Other securities (7,147) (2,217) (9,364) (25,438) (4,902) (30,340)
Federal funds sold and repurchase
agreements (2,245) (1,107) (3,352) (6,758) (2,769) (9,527)
- ----------------------------------------------------------------------------------------------------------------------
Total 11,052 (77,177) (66,125) 27,855 (199,346) (171,491)
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 348 (5,159) (4,811) 1,405 (15,769) (14,364)
Money market (1,751) (4,040) (5,791) (5,572) (13,862) (19,434)
NOW and demand deposit 152 (791) (639) 399 (1,745) (1,346)
Certificates of deposit 1,748 (7,033) (5,285) 5,767 (25,489) (19,722)
Borrowed funds 8,910 (22,017) (13,107) 19,520 (67,616) (48,096)
- ----------------------------------------------------------------------------------------------------------------------
Total 9,407 (39,040) (29,633) 21,519 (124,481) (102,962)
- ----------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,645 $(38,137) $(36,492) $ 6,336 $ (74,865) $ (68,529)
======================================================================================================================
Interest Income
Interest income for the three months ended September 30, 2003 decreased $66.1
million to $247.3 million, from $313.4 million for the three months ended
September 30, 2002. This decrease was primarily the result of a decrease in the
average yield on interest-earning assets to 4.72% for the three months ended
September 30, 2003, from 6.07% for the three months ended September 30, 2002,
partially offset by an increase of $328.0 million in the average balance of
interest-earning assets to $20.96 billion for the three months ended September
30, 2003, from $20.63 billion for the three months ended September 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 resulted in
continued high levels of repayments on our mortgage-backed securities and
one-to-four family mortgage loan portfolios and accelerated premium
amortization. The increase in the average balance of interest-earning assets was
primarily due to increases in the average balances of mortgage-backed securities
and multi-family, commercial real estate and construction loans, partially
offset by decreases in the average balances of one-to-four family mortgage
loans, other securities and federal funds sold and repurchase agreements.
26
Interest income on one-to-four family mortgage loans decreased $43.9 million to
$110.3 million for the three months ended September 30, 2003, from $154.2
million for the three months ended September 30, 2002, which was the result of a
decrease in the average yield to 4.93% for the three months ended September 30,
2003, from 6.16% for the three months ended September 30, 2002, coupled with a
decrease of $1.07 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 as higher rate loans were repaid and
replaced with lower yielding new originations and purchases, coupled with the
lower repricing of adjustable rate mortgage, or ARM, loans. Additionally, the
yield has been negatively impacted by accelerated loan premium amortization,
discussed previously, as a result of the increased refinance activity. The
decrease in the average balance of one-to-four family mortgage loans reflects
the extraordinarily high level of repayment activity, due to refinancings,
particularly in the second half of 2002 and continuing in 2003, partially offset
by originations and purchases of one-to-four family mortgage loans. The
previously discussed increase in medium- and long-term U.S. Treasury rates
during the quarter ended September 30, 2003 has resulted in a reduction in the
one-to-four family mortgage refinance applications received in August and
September, which should reduce the repayments on our mortgage loans in the 2003
fourth quarter.
Interest income on multi-family, commercial real estate and construction loans
increased $10.8 million to $53.4 million for the three months ended September
30, 2003, from $42.6 million for the three months ended September 30, 2002,
which was primarily the result of an increase of $691.0 million in the average
balance of such loans, partially offset by a decrease in the average yield to
7.48% for the three months ended September 30, 2003, from 7.87% for the three
months ended September 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
repayment activity within this portfolio is not as significant as that which we
have experienced on our one-to-four family mortgage loan portfolio in part due
to the prepayment penalties associated with these loans. The decrease in the
average yield on multi-family, commercial real estate and construction loans
reflects the growth in this portfolio resulting from lower yielding new
originations due to the impact of the lower interest rate environment. The yield
on multi-family, commercial real estate and construction loans has not declined
to the same extent as the yield on one-to-four family mortgage loans primarily
as a result of the lower level of repayment activity within this portfolio as
well as the additional income from prepayment penalties received on loans which
have prepaid. Prepayment penalties totaled $5.8 million for the three months
ended September 30, 2003 and $1.4 million for the three months ended September
30, 2002.
Interest income on consumer and other loans decreased $56,000 for the three
months ended September 30, 2003 compared to the three months ended September 30,
2002 resulting from a decrease in the average yield to 4.58% for the three
months ended September 30, 2003, from 5.93% for the three months ended September
30, 2002, partially offset by an increase of $90.3 million in the average
balance of this portfolio. The changes in interest income on consumer and other
loans are primarily attributable to home equity lines of credit which represent
90.0% of this portfolio at September 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 fourth quarter of 2002 and 25 basis points
in June 2003 resulting in the lower average yield experienced in the third
quarter of 2003 compared to the third quarter of 2002.
27
Interest income on mortgage-backed securities decreased $20.3 million to $71.3
million for the three months ended September 30, 2003, from $91.6 million for
the three months ended September 30, 2002. This decrease was the result of a
decrease in the average yield to 3.49% for the three months ended September 30,
2003, from 5.74% for the three months ended September 30, 2002, partially offset
by an increase of $1.80 billion in the average balance of the portfolio. The
decrease in the average yield on mortgage-backed securities reflects the
substantial turnover we have experienced in this portfolio as a result of the
lower interest rate 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,
primarily REMICs and CMOs, during the second half of 2002 and throughout 2003 to
effectively deploy our cash flows in excess of mortgage and other loan fundings,
partially offset by increased levels of principal repayments due to the lower
interest rate environment. At September 30, 2003, our REMIC and CMO securities
comprised 97.6% of our total mortgage-backed securities portfolio. We have
remaining a net premium of $28.7 million on these securities consisting of $47.2
million of gross premium and $18.5 million of gross discount. The premium REMIC
and CMO securities carry a weighted average coupon of 5.10% and the discount
REMIC and CMO securities carry a weighted average coupon of 4.10%. The average
life of our REMIC and CMO securities was approximately 3.3 years at September
30, 2003.
Interest income on other securities decreased $9.3 million to $7.3 million for
the three months ended September 30, 2003, from $16.6 million for the three
months ended September 30, 2002. This decrease resulted from a decrease of
$450.5 million in the average balance of this portfolio, coupled with a decrease
in the average yield to 6.09% for the three months ended September 30, 2003,
from 7.17% for the three months ended September 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 other securities includes dividends on FHLB-NY stock. Dividends on FHLB-NY
stock totaled $3.7 million for the three months ended September 30, 2003 and
$2.1 million for the three months ended September 30, 2002. The FHLB-NY has
announced that they will not pay a dividend to stockholders in October 2003.
Interest income on federal funds sold and repurchase agreements decreased $3.4
million as a result of a decrease of $737.2 million in the average balance of
the portfolio, coupled with a decrease in the average yield to 0.97% for the
three months ended September 30, 2003, from 1.73% for the three months ended
September 30, 2002.
Interest income for the nine months ended September 30, 2003 decreased $171.4
million to $799.1 million, from $970.5 million for the nine months ended
September 30, 2002. This decrease was primarily the result of a decrease in the
average yield on interest-earning assets to 5.03% for the nine months ended
September 30, 2003, from 6.18% for the nine months ended September 30, 2002,
partially offset by an increase of $229.6 million in the average balance of
interest-earning assets to $21.17 billion for the nine months ended September
30, 2003, from $20.94 billion for the nine months ended September 30, 2002.
Consistent with the changes noted for the three months ended September 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.
28
Interest income on one-to-four family mortgage loans decreased $129.1 million to
$355.1 million for the nine months ended September 30, 2003, from $484.2 million
for the nine months ended September 30, 2002, which was the result of a decrease
in the average yield to 5.26% for the nine months ended September 30, 2003, from
6.32% for the nine months ended September 30, 2002, coupled with a decrease of
$1.23 billion in the average balance of such loans.
Interest income on multi-family, commercial real estate and construction loans
increased $31.4 million to $149.1 million for the nine months ended September
30, 2003, from $117.7 million for the nine months ended September 30, 2002,
which was primarily the result of an increase of $651.4 million in the average
balance of such loans, partially offset by a decrease in the average yield to
7.55% for the nine months ended September 30, 2003, from 7.92% for the nine
months ended September 30, 2002. Prepayment penalties totaled $11.4 million for
the nine months ended September 30, 2003 and $3.2 million for the nine months
ended September 30, 2002.
Interest income on consumer and other loans increased $1.8 million for the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002 resulting from an increase of $116.5 million in the average balance of this
portfolio, partially offset by a decrease in the average yield to 4.78% for the
nine months ended September 30, 2003, from 5.90% for the nine months ended
September 30, 2002.
Interest income on mortgage-backed securities decreased $35.8 million to $253.5
million for the nine months ended September 30, 2003, from $289.3 million for
the nine months ended September 30, 2002. This decrease was the result of a
decrease in the average yield to 4.01% for the nine months ended September 30,
2003, from 5.93% for the nine months ended September 30, 2002, partially offset
by an increase of $1.92 billion in the average balance of the portfolio.
Interest income on other securities decreased $30.3 million to $25.4 million for
the nine months ended September 30, 2003, from $55.7 million for the nine months
ended September 30, 2002. This decrease resulted from a decrease of $541.8
million in the average balance of this portfolio, coupled with a decrease in the
average yield to 6.15% for the nine months ended September 30, 2003, from 6.80%
for the nine months ended September 30, 2002. Dividends on FHLB-NY stock totaled
$10.6 million for the nine months ended September 30, 2003 and $7.6 million for
the nine months ended September 30, 2002.
Interest income on federal funds sold and repurchase agreements decreased $9.5
million as a result of a decrease of $689.5 million in the average balance of
the portfolio, coupled with a decrease in the average yield to 1.14% for the
nine months ended September 30, 2003, from 1.70% for the nine months ended
September 30, 2002.
The principal reasons for the changes in the average yields and average balances
of the various assets noted above for the nine months ended September 30, 2003
are consistent with the principal reasons for the changes noted for the three
months ended September 30, 2003, previously discussed.
Interest Expense
Interest expense for the three months ended September 30, 2003 decreased $29.7
million to $167.6 million, from $197.3 million for the three months ended
September 30, 2002. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 3.24% for the three months ended
September 30, 2003, from 3.95% for the three months ended September 30, 2002,
partially offset by an increase of $687.2 million in the average balance of
interest-bearing liabilities to $20.67 billion for the three months ended
September 30, 2003, from
29
$19.98 billion for the three months ended September 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 and deposits.
Interest expense on deposits decreased $16.5 million, to $55.2 million for the
three months ended September 30, 2003, from $71.7 million for the three months
ended September 30, 2002, reflecting a decrease in the average cost of deposits
to 1.96% for the three months ended September 30, 2003, from 2.56% for the three
months ended September 30, 2002, slightly offset by an increase of $35.4 million
in the average balance of total deposits. The decrease in the average cost of
total deposits was driven by decreases in rates in all deposit categories as a
result of the 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.
Interest expense on money market accounts decreased $5.8 million reflecting a
decrease in the average cost to 0.59% for the three months ended September 30,
2003, from 1.66% for the three months ended September 30, 2002, coupled with a
decrease of $522.3 million in the average balance of such accounts. Interest
paid on money market accounts is on a tiered basis with 83.2% of the balance at
September 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 $5.3 million resulting
from a decrease in the average cost to 3.67% for the three months ended
September 30, 2003, from 4.19% for the three months ended September 30, 2002,
partially offset by an increase of $172.1 million in the average balance.
Interest expense on savings accounts decreased $4.8 million which was
attributable to a decrease in the average cost to 0.43% for the three months
ended September 30, 2003, from 1.13% for the three months ended September 30,
2002, slightly offset by an increase of $129.4 million in the average balance.
Interest expense on NOW and demand deposit accounts decreased $639,000 as a
result of a decrease in the average cost to 0.08% for the three months ended
September 30, 2003, from 0.29% for the three months ended September 30, 2002,
partially offset by an increase of $256.2 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 September 30, 2003
decreased $13.2 million to $112.4 million, from $125.6 million for the three
months ended September 30, 2002, resulting from a decrease in the average cost
of borrowings to 4.77% for the three months ended September 30, 2003, from 5.73%
for the three months ended September 30, 2002, partially offset by an increase
of $651.8 million in the average balance. The decrease in the average cost of
borrowings for the three months ended September 30, 2003 as compared to the
three months ended September 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 our use of short-term borrowings during the quarter to fund
our loan originations and security purchases which were subsequently repaid
prior to quarter end with the cash flows from loan and security repayments, as
well as the issuance of $250.0 million senior unsecured notes during the quarter
ended December 31, 2002.
30
Interest expense for the nine months ended September 30, 2003 decreased $102.9
million to $514.2 million, from $617.1 million for the nine months ended
September 30, 2002. This decrease was primarily the result of a decrease in the
average cost of interest-bearing liabilities to 3.29% for the nine months ended
September 30, 2003, from 4.07% for the nine months ended September 30, 2002,
partially offset by an increase of $577.0 million in the average balance of
interest-bearing liabilities to $20.81 billion for the nine months ended
September 30, 2003, from $20.23 billion for the nine months ended September 30,
2002. Consistent with the changes noted for the three months ended September 30,
2003, 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 and the increase in the average
balance of interest-bearing liabilities was attributable to increases in both
borrowings and deposits.
Interest expense on deposits decreased $54.9 million, to $170.6 million for the
nine months ended September 30, 2003, from $225.5 million for the nine months
ended September 30, 2002, reflecting a decrease in the average cost of deposits
to 2.03% for the nine months ended September 30, 2003, from 2.71% for the nine
months ended September 30, 2002, partially offset by an increase of $103.3
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 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.
Interest expense on certificates of deposit decreased $19.7 million resulting
from a decrease in the average cost to 3.73% for the nine months ended September
30, 2003, from 4.37% for the nine months ended September 30, 2002, partially
offset by an increase of $179.4 million in the average balance. Interest expense
on money market accounts decreased $19.4 million reflecting a decrease in the
average cost to 0.75% for the nine months ended September 30, 2003, from 1.92%
for the nine months ended September 30, 2002, coupled with a decrease of $470.5
million in the average balance of such accounts. Interest expense on savings
accounts decreased $14.4 million which was attributable to a decrease in the
average cost to 0.47% for the nine months ended September 30, 2003, from 1.20%
for the nine months ended September 30, 2002, partially offset by an increase of
$165.0 million in the average balance. Interest expense on NOW and demand
deposit accounts decreased $1.3 million as a result of a decrease in the average
cost to 0.12% for the nine months ended September 30, 2003, from 0.28% for the
nine months ended September 30, 2002, partially offset by an increase of $229.5
million in the average balance of these accounts.
Interest expense on borrowed funds for the nine months ended September 30, 2003
decreased $48.1 million to $343.6 million, from $391.7 million for the nine
months ended September 30, 2002, resulting from a decrease in the average cost
of borrowings to 4.77% for the nine months ended September 30, 2003, from 5.72%
for the nine months ended September 30, 2002, partially offset by an increase of
$473.7 million in the average balance.
The principal reasons for the changes in the average costs and average balances
of deposits and borrowings noted above for the nine months ended September 30,
2003 are consistent with the principal reasons for the changes noted for the
three months ended September 30, 2003, previously discussed.
31
Provision for Loan Losses
During the nine months ended September 30, 2003, no provision for loan losses
was recorded. The provision for loan losses totaled $301,000 for the three
months ended September 30, 2002 and $2.3 million for the nine months ended
September 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 portfolio.
The allowance for loan losses totaled $83.2 million at September 30, 2003 and
$83.5 million at December 31, 2002. Net loan charge-offs totaled $185,000 for
the three months ended September 30, 2003 compared to $258,000 for the three
months ended September 30, 2002. Net loan charge-offs totaled $341,000 for the
nine months ended September 30, 2003 compared to $944,000 for the nine months
ended September 30, 2002. Non-performing loans decreased $1.2 million to $33.3
million at September 30, 2003, from $34.5 million at December 31, 2002. The
allowance for loan losses as a percentage of non-performing loans increased to
250.11% at September 30, 2003, from 242.04% at December 31, 2002, primarily due
to the decrease in non-performing loans from December 31, 2002 to September 30,
2003. The allowance for loan losses as a percentage of total loans was 0.68% at
September 30, 2003 and 0.69% at December 31, 2002. For further discussion of
non-performing loans and allowance for loan losses, see "Critical Accounting
Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the three months ended September 30, 2003 increased $8.7
million, to $33.9 million, from $25.2 million for the three months ended
September 30, 2002, primarily due to an increase in mortgage banking income,
net, partially offset by a decrease in net gain on sales of securities. For the
nine months ended September 30, 2003, non-interest income increased $14.8
million, to $91.3 million, from $76.5 million for the nine months ended
September 30, 2002, primarily due to an increase in mortgage banking income,
net, coupled with an increase in net gain on sales of securities.
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, increased $13.6 million to net mortgage banking income of
$6.0 million for the three months ended September 30, 2003, from net mortgage
banking loss of $7.6 million for the three months ended September 30, 2002 and
increased $9.5 million to net mortgage banking income of $6.0 million for the
nine months ended September 30, 2003, from net mortgage banking loss of $3.5
million for the nine months ended September 30, 2002. These increases are
primarily due to the changes in the valuation allowance adjustments for the
impairment of MSR, to recoveries recorded during the three and nine months ended
September 30, 2003 compared to provisions recorded during the three and nine
months ended September 30, 2002, and increases in net gain on sales of loans,
partially offset by decreases in loan servicing fees and increases in
amortization of MSR.
32
We recorded a recovery in the valuation allowance of MSR of $2.9 million for the
three months ended September 30, 2003 compared to a provision of $9.1 million
for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, we recorded a recovery of $157,000 in the valuation
allowance of MSR compared to a provision of $10.2 million for the nine months
ended September 30, 2002. The recovery in the valuation allowance of MSR for the
three and nine month periods ended September 30, 2003 is a result of a decrease
in projected loan prepayment speeds as of September 30, 2003, compared to the
increased projected loan prepayment speeds used in calculating our MSR
valuations over the past several quarters as a result of the declining interest
rate environment we had experienced during those periods. The decrease in
projected loan prepayment speeds as of September 30, 2003 reflects the increase
in interest rates from June 30, 2003 to September 30, 2003. Net gain on sales of
loans increased $3.2 million to $4.3 million for the three months ended
September 30, 2003, from $1.1 million for the three months ended September 30,
2002 and increased $6.3 million to $10.2 million for the nine months ended
September 30, 2003, from $3.9 million for the nine months ended September 30,
2002. The increases in net gain on sales of loans were primarily due to more
favorable pricing opportunities during the three and nine months ended September
30, 2003 as compared to the three and nine months ended September 30, 2002 and
increases in the volume of fixed rate loans originated and sold into the
secondary market during these periods. The prevailing interest rate environment
during the nine months ended September 30, 2003 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. Loan servicing fees, which
include all contractual and ancillary servicing revenue we receive, decreased
$1.3 million to $1.8 million for the three months ended September 30, 2003, from
$3.1 million for the three months ended September 30, 2002 and decreased $3.3
million to $6.2 million for the nine months ended September 30, 2003, from $9.5
million for the nine months ended September 30, 2002, primarily as a result of a
decrease in the balance of loans serviced for others to $1.98 billion at
September 30, 2003, from $2.92 billion at September 30, 2002. The decrease in
the balance of loans serviced for others was the result of a reduction in that
portfolio due to increased repayments in the lower interest rate environment
which have exceeded the level of new servicing volume from loan sales.
Amortization of MSR increased $344,000 to $3.0 million for the three months
ended September 30, 2003, from $2.7 million for the three months ended September
30, 2002 and increased $3.9 million to $10.6 million for the nine months ended
September 30, 2003, from $6.7 million for the nine months ended September 30,
2002. The increases in MSR amortization are attributable to the continued high
level of mortgage loan repayments experienced during the nine months ended
September 30, 2003.
Net gain on sales of securities totaled $4.5 million for the three months ended
September 30, 2003 and $14.7 million for the nine months ended September 30,
2003. Net gain on sales of securities totaled $8.5 million for the three and
nine months ended September 30, 2002. These gains offset the provision for the
valuation allowance of MSR in 2002 and the first half of 2003 and a portion of
the negative effect of the reduced net interest margin in 2003.
Income from BOLI decreased $754,000 to $4.9 million for the three months ended
September 30, 2003, from $5.7 million for the three months ended September 30,
2002 and decreased $750,000 to $15.2 million for the nine months ended September
30, 2003, from $15.9 million for the nine months ended September 30, 2002. These
decreases are primarily attributable to a reduction in the yield on the BOLI
investment as a result of the lower interest rate environment.
33
Non-Interest Expense
Non-interest expense increased $2.8 million to $51.4 million for the three
months ended September 30, 2003, from $48.6 million for the three months ended
September 30, 2002 and increased $8.2 million to $155.2 million for the nine
months ended September 30, 2003, from $147.0 million for the nine months ended
September 30, 2002. The increases in non-interest expense were primarily due to
increases in occupancy, equipment and systems expense, compensation and benefits
expense and advertising. For the nine months ended September 30, 2003 these
increases were partially offset by a decrease in other non-interest expense.
Occupancy, equipment and systems expense increased $1.7 million to $15.1 million
for the three months ended September 30, 2003, from $13.4 million for the three
months ended September 30, 2002 and increased $5.3 million to $44.9 million for
the nine months ended September 30, 2003, from $39.6 million for the nine months
ended September 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. Compensation and benefits expense increased $566,000 to
$27.2 million for the three months ended September 30, 2003, from $26.6 million
for the three months ended September 30, 2002 and increased $4.6 million to
$83.6 million for the nine months ended September 30, 2003, from $79.0 million
for the nine months ended September 30, 2002. The increases were primarily
attributable to increases in pension and other postretirement benefits expense
and salary expense, partially offset by a decrease in ESOP expense. 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. The increase in salary expense is primarily attributable to staff
additions and normal performance increases. The decrease in ESOP expense is
primarily attributable to a lower average market value of our common stock
during the nine months ended September 30, 2003 compared to the nine months
ended September 30, 2002.
Advertising expense increased $504,000 to $1.5 million for the three months
ended September 30, 2003 from $997,000 for the three months ended September 30,
2002 and increased $1.1 million to $4.7 million for the nine months ended
September 30, 2003 from $3.6 million for the nine months ended September 30,
2002. For the nine months ended September 30, 2003, other non-interest expense
decreased $2.7 million to $20.6 million from $23.3 million for the nine months
ended September 30, 2002 primarily due to the market value adjustments on $300.0
million notional amount of interest rate cap agreements.
Our percentage of general and administrative expense to average assets increased
to 0.92% for the three months ended September 30, 2003 and 0.91% for the nine
months ended September 30, 2003, compared to 0.89% for the three months ended
September 30, 2002 and 0.88% for the nine months ended September 30, 2002
primarily due to the previously discussed increases in general and
administrative expense. The efficiency ratio, which represents general and
administrative expense divided by the sum of net interest income plus
non-interest income, was 45.29% for the three months ended September 30, 2003
and 41.26% for the nine months ended September 30, 2003, compared to 34.37% for
the three months ended September 30, 2002 and 34.19% for the nine months ended
September 30, 2002. The increases in the efficiency ratios are primarily
attributable to the decreases in net interest income for the three and nine
months ended September 30, 2003 compared to the three and nine months ended
September 30, 2002, discussed previously.
34
Income Tax Expense
For the three months ended September 30, 2003, income tax expense totaled $20.5
million, representing an effective tax rate of 33.0%, compared to $30.2 million,
representing an effective tax rate of 32.7%, for the three months ended
September 30, 2002. For the nine months ended September 30, 2003, income tax
expense totaled $72.1 million, representing an effective tax rate of 32.6%,
compared to $93.3 million, representing an effective tax rate of 33.2%, for the
nine months ended September 30, 2002.
Asset Quality
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, 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. 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.
Non-Performing Assets
The following table sets forth information regarding non-performing assets at
September 30, 2003 and December 31, 2002. In addition to the non-performing
loans, we had $1.3 million of potential problem loans at September 30, 2003
compared to $1.5 million at December 31, 2002. Such loans are 60-89 days
delinquent as shown on page 36.
At September 30, At December 31,
(Dollars in Thousands) 2003 2002
- --------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $31,840 $31,997
Non-accrual delinquent consumer and other loans 794 1,485
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 633 1,035
- ----------------------------------------------------------------------------------
Total non-performing loans 33,267 34,517
Real estate owned, net (3) 572 1,091
- ----------------------------------------------------------------------------------
Total non-performing assets $33,839 $35,608
==================================================================================
Non-performing loans to total loans 0.27% 0.29%
Non-performing loans to total assets 0.15 0.16
Non-performing assets to total assets 0.15 0.16
Allowance for loan losses to non-performing loans 250.11 242.04
Allowance for loan losses to total loans 0.68 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.
35
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of September 30, 2003, $7.4 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
$1.7 million for the nine months ended September 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 $997,000 for the nine months
ended September 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 $3.7 million at September
30, 2003 and $5.0 million at December 31, 2002.
Delinquent Loans
The following table shows a comparison of delinquent loans at September 30, 2003
and December 31, 2002.
At September 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 9 $ 561 149 $24,942 12 $ 417 185 $30,130
Multi-family -- -- 13 6,771 1 192 6 2,114
Commercial real estate -- -- 1 760 2 324 1 788
Consumer and other loans 93 744 97 794 85 571 131 1,485
- ---------------------------------------------------------------------------------------------------
Total delinquent loans 102 $1,305 260 $33,267 100 $1,504 323 $34,517
===================================================================================================
Delinquent loans to total loans 0.01% 0.27% 0.01% 0.29%
Allowance for Loan Losses
The following table sets forth the change in our allowance for loan losses for
the nine months ended September 30, 2003.
(In Thousands)
--------------
Balance at December 31, 2002 $83,546
Provision charged to operations --
Charge-offs:
One-to-four family (142)
Consumer and other (941)
- -----------------------------------------------------------------------------
Total charge-offs (1,083)
- -----------------------------------------------------------------------------
Recoveries:
One-to-four family 103
Commercial real estate 20
Consumer and other 619
- -----------------------------------------------------------------------------
Total recoveries 742
- -----------------------------------------------------------------------------
Net charge-offs (341)
- -----------------------------------------------------------------------------
Balance at September 30, 2003 $83,205
=============================================================================
36
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 38, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at September 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. The major factors affecting
mortgage prepayment rates are prevailing interest rates and related mortgage
refinancing opportunities. Prepayment rates will also vary due to a number of
other factors, including the regional economy in the area where the underlying
collateral is located, seasonal factors, demographic variables and the
assumability of the underlying mortgages.
The Gap Table does not indicate the impact of general interest rate movements on
our net interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates are
current trends and historical repricing experience with respect to similar
products. As a result, different assumptions may be used at different points in
time.
The Gap Table includes $2.29 billion of callable borrowings classified according
to their maturity dates, primarily in the more than three years to five years
category, which are callable within one year and at various times thereafter. In
addition, the Gap Table includes callable securities with an amortized cost of
$162.0 million classified according to their call dates, of
37
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 September 30, 2003 was 4.85%. 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 nine months 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 September 30, 2003.
At September 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) $ 4,634,254 $2,801,469 $3,085,394 $ 1,330,874 $11,851,991
Consumer and other loans (1) 387,409 22,513 -- -- 409,922
Federal funds sold and repurchase
agreements 71,354 -- -- -- 71,354
Mortgage-backed and other securities
available-for-sale and FHLB stock 2,134,193 658,763 509,254 413,828 3,716,038
Mortgage-backed and other securities
held-to-maturity 2,734,117 1,128,975 572,710 449,117 4,884,919
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,961,327 4,611,720 4,167,358 2,193,819 20,934,224
Net unamortized purchase premiums
and deferred costs (2) 47,354 23,197 22,195 10,173 102,919
- ------------------------------------------------------------------------------------------------------------
Net interest-earning assets (3) 10,008,681 4,634,917 4,189,553 2,203,992 21,037,143
- ------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 161,866 323,736 323,736 2,131,259 2,940,597
Money market 1,116,862 19,948 19,948 149,612 1,306,370
NOW and demand deposit 41,126 82,259 82,259 1,274,041 1,479,685
Certificates of deposit 2,658,287 2,020,755 716,325 90,868 5,486,235
Borrowed funds 4,959,564 1,117,226 2,618,561 378,526 9,073,877
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,937,705 3,563,924 3,760,829 4,024,306 20,286,764
- ------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 1,070,976 1,070,993 428,724 (1,820,314) $ 750,379
============================================================================================================
Cumulative interest sensitivity gap $ 1,070,976 $2,141,969 $2,570,693 $ 750,379
============================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets 4.85% 9.71% 11.65% 3.40%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 111.98% 117.13% 115.81% 103.70%
(1) Mortgage and consumer and other loans include loans held-for-sale and
exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
(3) Includes securities available-for-sale at amortized cost.
38
NII Sensitivity Analysis
In managing IRR, we also use an internal income simulation model for our NII
sensitivity analyses. These analyses measure changes in projected net interest
income over various time periods resulting from hypothetical changes in interest
rates. The interest rate scenarios most commonly analyzed reflect gradual and
reasonable changes over a specified time period, which is typically one year.
The base net interest income projection utilizes similar assumptions as those
reflected in the Gap Table, assumes that cash flows are reinvested in similar
assets and liabilities and that interest rates as of the reporting date remain
constant over the projection period. For each alternative interest rate
scenario, corresponding changes in the cash flow and repricing assumptions of
each financial instrument are made to determine the impact on net interest
income.
Assuming the entire yield curve was to increase 200 basis points, through
quarterly parallel increments of 50 basis points, and remain at that level
thereafter, our projected net interest income for the twelve month period
beginning October 1, 2003 would increase by approximately 1.74% 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 October 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 nine months
ended September 30, 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
39
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 September 30, 2003. Based upon their evaluation, they each found that our
disclosure controls and procedures were adequate to ensure that information
required to be disclosed in the reports we file and submit under the Exchange
Act is recorded, processed, summarized and reported as and when required.
There were no 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
Not applicable.
ITEM 5. Other Information
Not applicable.
40
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 September 9, 2003, which includes under Item
9 and Item 12 of Form 8-K a press release dated August 28, 2003, which
announced our participation in an investor conference on September 9,
2003 sponsored by Lehman Brothers and the text of a written
presentation of financial results and trends through the period ended
June 30, 2003 delivered to investors at the Lehman Brothers' Financial
Services conference on September 9, 2003 and made available to
interested investors and analysts during the quarter ended September
30, 2003. This report has been furnished but not filed pursuant to
Regulation FD and Regulation G.
2. Report on Form 8-K dated August 29, 2003, which includes under Item 5
of Form 8-K a press release dated August 29, 2003, which announced the
redemption of our 12% Noncumulative Perpetual Preferred Stock, Series
B on October 1, 2003.
3. Report on Form 8-K/A dated August 4, 2003, which includes under Item 9
and Item 12 of Form 8-K/A the text of a written presentation of
financial results and trends through the period ended June 30, 2003
made available to interested investors and analysts during the quarter
ending September 30, 2003. This report has been furnished but not
filed pursuant to Regulation FD and Regulation G.
4. Report on Form 8-K dated August 4, 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
June 30, 2003 made available to interested investors and analysts
during the quarter ending September 30, 2003. This report has been
furnished but not filed pursuant to Regulation FD and Regulation G.
41
5. Report on Form 8-K dated July 17, 2003, which includes under Item 9 of
Form 8-K (including Item 12 disclosures) a press release dated July
17, 2003 which includes highlights of our financial results for the
quarter ended June 30, 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: November 10, 2003 By: /s/ Monte N. Redman
----------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
42
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.
43