UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
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 001-11967
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 327-3000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, July 31, 2005
- ----------------------- -------------------------------------------
.01 Par Value 107,912,127
------------- -----------
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at June 30, 2005
and December 31, 2004 2
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2005 and June 30, 2004 3
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months Ended June 30, 2005 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2005 and June 30, 2004 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. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 42
Item 6. Exhibits 42
Signatures 43
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
At At
(In Thousands, Except Share Data) June 30, 2005 December 31, 2004
- ----------------------------------------------------------------------------------- ------------- -----------------
ASSETS:
Cash and due from banks $ 142,796 $ 138,809
Repurchase agreements 154,264 267,578
Available-for-sale securities:
Encumbered 1,922,681 2,104,239
Unencumbered 223,847 302,644
----------- -----------
2,146,528 2,406,883
Held-to-maturity securities, fair value of $5,602,104 and $6,306,760, respectively:
Encumbered 5,274,297 5,273,385
Unencumbered 348,571 1,029,551
----------- -----------
5,622,868 6,302,936
Federal Home Loan Bank of New York stock, at cost 123,145 163,700
Loans held-for-sale, net 31,080 23,802
Loans receivable:
Mortgage loans, net 13,218,349 12,746,134
Consumer and other loans, net 531,766 517,145
----------- -----------
13,750,115 13,263,279
Allowance for loan losses (82,519) (82,758)
----------- -----------
Loans receivable, net 13,667,596 13,180,521
Mortgage servicing rights, net 15,415 16,799
Accrued interest receivable 80,032 79,144
Premises and equipment, net 153,313 157,107
Goodwill 185,151 185,151
Bank owned life insurance 374,532 374,719
Other assets 129,329 118,720
----------- -----------
Total assets $22,826,049 $23,415,869
=========== ===========
LIABILITIES:
Deposits:
Savings $ 2,779,265 $ 2,929,120
Money market 811,836 965,288
NOW and demand deposit 1,571,911 1,580,714
Liquid certificates of deposit 331,746 --
Certificates of deposit 7,090,469 6,848,135
----------- -----------
Total deposits 12,585,227 12,323,257
Reverse repurchase agreements 6,980,000 7,080,000
Federal Home Loan Bank of New York advances 1,129,000 1,934,000
Other borrowings, net 459,796 455,835
Mortgage escrow funds 139,359 122,088
Accrued expenses and other liabilities 140,026 130,925
----------- -----------
Total liabilities 21,433,408 22,046,105
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,800,000 shares authorized and -0- shares issued and outstanding) -- --
Series B (2,000,000 shares authorized and -0- shares issued and outstanding) -- --
Common stock, $.01 par value; (200,000,000 shares authorized; 166,494,888 shares
issued; and 108,208,696 and 110,304,669 shares
outstanding, respectively) 1,665 1,665
Additional paid-in capital 817,964 811,777
Retained earnings 1,697,453 1,623,571
Treasury stock (58,286,192 and 56,190,219 shares, at cost, respectively) (1,073,435) (1,013,726)
Accumulated other comprehensive loss (26,795) (28,592)
Unallocated common stock held by ESOP (6,608,064 and 6,802,146 shares,
respectively) (24,211) (24,931)
----------- -----------
Total stockholders' equity 1,392,641 1,369,764
----------- -----------
Total liabilities and stockholders' equity $22,826,049 $23,415,869
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In Thousands, Except Share Data) 2005 2004 2005 2004
- ------------------------------------------------------------ ------------ ------------ ------------ ------------
Interest income:
Mortgage loans:
One-to-four family $ 112,898 $ 104,205 $ 224,480 $ 215,555
Multi-family, commercial real estate and construction 58,300 54,634 116,496 108,265
Consumer and other loans 7,475 4,798 14,256 9,688
Mortgage-backed and other securities 88,526 87,809 182,448 177,940
Federal funds sold and repurchase agreements 1,361 222 2,810 376
Federal Home Loan Bank of New York stock 1,650 895 2,823 1,833
------------ ------------ ------------ ------------
Total interest income 270,210 252,563 543,313 513,657
------------ ------------ ------------ ------------
Interest expense:
Deposits 67,065 56,902 132,025 111,132
Borrowed funds 81,798 82,345 164,728 174,696
------------ ------------ ------------ ------------
Total interest expense 148,863 139,247 296,753 285,828
------------ ------------ ------------ ------------
Net interest income 121,347 113,316 246,560 227,829
Provision for loan losses -- -- -- --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 121,347 113,316 246,560 227,829
------------ ------------ ------------ ------------
Non-interest income:
Customer service fees 16,305 14,554 31,251 28,303
Other loan fees 1,082 1,188 2,246 2,450
Net gain on sales of securities -- -- -- 2,372
Mortgage banking (loss) income, net (1,582) 6,251 1,364 5,133
Income from bank owned life insurance 4,190 4,228 8,365 8,678
Other 2,531 1,645 4,042 3,069
------------ ------------ ------------ ------------
Total non-interest income 22,526 27,866 47,268 50,005
------------ ------------ ------------ ------------
Non-interest expense:
General and administrative:
Compensation and benefits 29,967 29,582 60,757 61,046
Occupancy, equipment and systems 15,787 15,774 31,812 32,491
Federal deposit insurance premiums 447 441 895 890
Advertising 1,870 1,701 5,775 3,410
Other 9,492 7,862 18,836 14,566
------------ ------------ ------------ ------------
Total non-interest expense 57,563 55,360 118,075 112,403
------------ ------------ ------------ ------------
Income before income tax expense 86,310 85,822 175,753 165,431
Income tax expense 28,914 28,321 58,878 54,517
------------ ------------ ------------ ------------
Net income $ 57,396 $ 57,501 $ 116,875 $ 110,914
============ ============ ============ ============
Basic earnings per common share $ 0.56 $ 0.53 $ 1.14 $ 1.01
============ ============ ============ ============
Diluted earnings per common share $ 0.55 $ 0.52 $ 1.12 $ 0.99
============ ============ ============ ============
Dividends per common share $ 0.20 $ 0.17 $ 0.40 $ 0.33
============ ============ ============ ============
Basic weighted average common shares 102,253,984 109,429,328 102,704,734 110,152,001
Diluted weighted average common and common equivalent shares 104,184,538 111,189,914 104,568,500 112,102,245
See accompanying Notes to Consolidated Financial Statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2005
Unallocated
Accumulated Common
Additional Other Stock
Common Paid-in Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Total Stock Capital Earnings Stock Loss by ESOP
- ---------------------------------------- ---------- ------ ---------- ---------- ----------- ------------- -----------
Balance at December 31, 2004 $1,369,764 $1,665 $811,777 $1,623,571 $(1,013,726) $(28,592) $(24,931)
Comprehensive income:
Net income 116,875 -- -- 116,875 -- -- --
Other comprehensive income, net of
tax:
Net unrealized gain on securities 1,701 -- -- -- -- 1,701 --
Reclassification of net unrealized
loss on cash flow hedge 96 -- -- -- -- 96 --
----------
Comprehensive income 118,672
----------
Common stock repurchased
(2,610,000 shares) (69,053) -- -- -- (69,053) -- --
Dividends on common stock ($0.40 per
share) (41,099) -- -- (41,099) -- -- --
Exercise of stock options and related
tax benefit (514,027 shares issued) 9,212 -- 1,762 (1,894) 9,344 -- --
Amortization relating to allocation of
ESOP stock 5,145 -- 4,425 -- -- -- 720
---------- ------ -------- ---------- ----------- -------- --------
Balance at June 30, 2005 $1,392,641 $1,665 $817,964 $1,697,453 $(1,073,435) $(26,795) $(24,211)
========== ====== ======== ========== =========== ======== ========
See accompanying Notes to Consolidated Financial Statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30,
-------------------------
(In Thousands) 2005 2004
- ------------------------------------------------------------------------------- ----------- -----------
Cash flows from operating activities:
Net income $ 116,875 $ 110,914
Adjustments to reconcile net income to net cash provided by operating
activities:
Net premium amortization on mortgage loans and mortgage-backed securities 8,776 20,976
Net amortization on consumer and other loans, other securities and
borrowings 2,313 1,905
Net provision for real estate losses 56 --
Depreciation and amortization 6,955 6,666
Net gain on sales of loans and securities (1,628) (4,489)
Originations of loans held-for-sale (183,008) (192,494)
Proceeds from sales and principal repayments of loans held-for-sale 177,358 186,072
Amortization relating to allocation of ESOP stock 5,145 5,204
Increase in accrued interest receivable (888) (794)
Mortgage servicing rights amortization and valuation allowance
adjustments, net of capitalized amounts 1,384 (2,085)
Income from bank owned life insurance, net of insurance proceeds received 187 (4,428)
(Increase) decrease in other assets (8,753) 6,294
Increase in accrued expenses and other liabilities 10,863 5,033
----------- -----------
Net cash provided by operating activities 135,635 138,774
----------- -----------
Cash flows from investing activities:
Originations of loans receivable (1,554,555) (1,576,826)
Loan purchases through third parties (414,951) (506,393)
Principal payments on loans receivable 1,470,856 2,127,155
Purchases of securities held-to-maturity (177,599) (1,124,019)
Purchases of securities available-for-sale (25) (398,593)
Principal payments on securities held-to-maturity 857,438 1,123,394
Principal payments on securities available-for-sale 264,336 399,187
Proceeds from sales of securities available-for-sale -- 22,692
Net redemptions of FHLB-NY stock 40,555 59,750
Proceeds from sales of real estate owned, net 605 1,554
Purchases of premises and equipment, net of proceeds from sales (3,161) (4,662)
----------- -----------
Net cash provided by investing activities 483,499 123,239
----------- -----------
Cash flows from financing activities:
Net increase in deposits 261,970 709,120
Net (decrease) increase in borrowings with original terms of three
months or less (1,005,000) 85,000
Proceeds from borrowings with original terms greater than three months 600,000 2,400,000
Repayments of borrowings with original terms greater than three months (500,000) (3,310,000)
Net increase in mortgage escrow funds 17,271 12,020
Common stock repurchased (69,053) (95,347)
Cash dividends paid to stockholders (41,099) (36,766)
Cash received for stock options exercised 7,450 13,335
----------- -----------
Net cash used in financing activities (728,461) (222,638)
----------- -----------
Net (decrease) increase in cash and cash equivalents (109,327) 39,375
Cash and cash equivalents at beginning of period 406,387 239,754
----------- -----------
Cash and cash equivalents at end of period $ 297,060 $ 279,129
=========== ===========
Supplemental disclosures:
Cash paid during the period:
Interest $ 298,246 $ 298,637
=========== ===========
Income taxes $ 57,829 $ 47,121
=========== ===========
Additions to real estate owned $ 1,154 $ 594
=========== ===========
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, 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 and AF Insurance Agency, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
In addition to Astoria Federal and AF Insurance Agency, Inc., we have another
subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria
Financial Corporation for financial reporting purposes in accordance with U.S.
generally accepted accounting principles, or GAAP. 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,
and $3.9 million of common securities which are 100% owned by Astoria Financial
Corporation, and using the proceeds to acquire Junior Subordinated Debentures
issued by Astoria Financial Corporation. The Junior Subordinated Debentures
total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029
and are the sole assets of Astoria Capital Trust I. The Junior Subordinated
Debentures are prepayable, in whole or in part, at our option on or after
November 1, 2009 at declining premiums to November 1, 2019, after which the
Junior Subordinated Debentures are prepayable at par value. The Capital
Securities have substantially identical repayment provisions as the Junior
Subordinated Debentures. Astoria Financial Corporation has fully and
unconditionally guaranteed the Capital Securities along with all obligations of
Astoria Capital Trust I under the trust agreement relating to the Capital
Securities. See Note 9 of Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data," of our 2004 Annual Report
on Form 10-K for restrictions on our subsidiaries' ability to pay dividends to
us.
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of June 30, 2005 and December
31, 2004, our results of operations for the three and six months ended June 30,
2005 and 2004, changes in our stockholders' equity for the six months ended June
30, 2005 and our cash flows for the six months ended June 30, 2005 and 2004. In
preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities for the consolidated statements of financial condition as of June
30, 2005 and December 31, 2004, and amounts of revenues and expenses in the
consolidated statements of income for the three and six months ended June 30,
2005 and 2004. The results of operations for the three and six months ended June
30, 2005 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 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.
6
These consolidated financial statements should be read in conjunction with our
December 31, 2004 audited consolidated financial statements and related notes
included in our 2004 Annual Report on Form 10-K.
2. Earnings Per Share, or EPS
The following table is a reconciliation of basic and diluted EPS.
For the Three Months Ended June 30,
-----------------------------------------
2005 2004
------------------- -------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (1)
- ------------------------------------- -------- -------- -------- --------
Net income $ 57,396 $ 57,396 $ 57,501 $ 57,501
======== ======== ======== ========
Total weighted average basic
common shares outstanding 102,254 102,254 109,429 109,429
Effect of dilutive securities:
Options -- 1,931 -- 1,761
-------- -------- -------- --------
Total weighted average diluted
common shares outstanding 102,254 104,185 109,429 111,190
======== ======== ======== ========
Net earnings per common share $ 0.56 $ 0.55 $ 0.53 $ 0.52
======== ======== ======== ========
For the Six Months Ended June 30,
-----------------------------------------
2005 2004
------------------- -------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (2) EPS EPS
- ------------------------------------- -------- -------- -------- --------
Net income $116,875 $116,875 $110,914 $110,914
======== ======== ======== ========
Total weighted average basic
common shares outstanding 102,705 102,705 110,152 110,152
Effect of dilutive securities:
Options -- 1,864 -- 1,950
-------- -------- -------- --------
Total weighted average diluted
common shares outstanding 102,705 104,569 110,152 112,102
======== ======== ======== ========
Net earnings per common share $ 1.14 $ 1.12 $ 1.01 $ 0.99
======== ======== ======== ========
(1) Options to purchase 1,455,450 shares of common stock at a price of $24.40
per share were outstanding as of June 30, 2004, but were not included in
the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares for the three
months ended June 30, 2004.
(2) Options to purchase 1,995,150 shares of common stock at prices between
$26.23 per share and $26.63 per share were outstanding as of June 30, 2005,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the six months ended June 30, 2005.
3. Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
7
The following table illustrates the effect on net income and EPS 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 Six Months Ended
June 30, June 30,
-------------------------- ------------------------
(In Thousands, Except Per Share Data) 2005 2004 2005 2004
- --------------------------------------------- ------- ------- -------- --------
Net income:
As reported $57,396 $57,501 $116,875 $110,914
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect 1,460 1,258 3,310 2,714
------- ------- -------- --------
Pro forma $55,936 $56,243 $113,565 $108,200
======= ======= ======== ========
Basic earnings per common share:
As reported $ 0.56 $ 0.53 $ 1.14 $ 1.01
======= ======= ======== ========
Pro forma $ 0.55 $ 0.51 $ 1.11 $ 0.98
======= ======= ======== ========
Diluted earnings per common share:
As reported $ 0.55 $ 0.52 $ 1.12 $ 0.99
======= ======= ======== ========
Pro forma $ 0.54 $ 0.50 $ 1.08 $ 0.96
======= ======= ======== ========
4. Pension Plans and Other Postretirement Benefits
The following tables set forth information regarding the components of net
periodic cost for our defined benefit pension plans and other postretirement
benefit plan.
Other Postretirement
Pension Benefits Benefits
-------------------------- --------------------------
For the Three Months Ended For the Three Months Ended
June 30, June 30,
-------------------------- --------------------------
(In Thousands) 2005 2004 2005 2004
- ---------------------------------- ------- ------- ---- ----
Service cost $ 811 $ 758 $137 $139
Interest cost 2,590 2,425 261 300
Expected return on plan assets (3,112) (2,918) -- --
Amortization of prior service cost 131 40 10 11
Recognized net actuarial loss 654 628 -- 2
Amortization of transition asset -- (8) -- --
------- ------- ---- ----
Net periodic cost $ 1,074 $ 925 $408 $452
======= ======= ==== ====
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
For the Six Months Ended For the Six Months Ended
June 30, June 30,
------------------------ ------------------------
(In Thousands) 2005 2004 2005 2004
- ---------------------------------- ------- ------- ---- ----
Service cost $ 1,708 $ 1,597 $274 $256
Interest cost 5,102 4,869 522 543
Expected return on plan assets (6,106) (5,824) -- --
Amortization of prior service cost 171 80 20 21
Recognized net actuarial loss 1,349 1,247 -- --
Amortization of transition asset -- (17) -- --
------- ------- ---- ----
Net periodic cost $ 2,224 $ 1,952 $816 $820
======= ======= ==== ====
The net periodic cost of our other postretirement benefit plan for the three and
six months ended June 30, 2005 has been reduced as a result of our adoption of
Financial Accounting Standards Board, or FASB, Staff Position No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," in 2004. The reduction was not
material to the net periodic cost of our other postretirement benefit plan for
the three and six months ended June 30, 2005.
8
5. Impact of Accounting Standards and Interpretations
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle and to changes required by an accounting pronouncement when
the pronouncement does not include specific transition provisions. SFAS No. 154
requires retrospective application of changes in accounting principle to prior
periods' financial statements unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. APB Opinion No.
20 previously required that most voluntary changes in accounting principle be
recognized by including the cumulative effect of the change in net income for
the period of the change in accounting principle. SFAS No. 154 carries forward
without change the guidance contained in APB Opinion No. 20 for reporting the
correction of an error in previously issued financial statements and a change in
accounting estimate. SFAS No. 154 also carries forward the guidance in APB
Opinion No. 20 requiring justification of a change in accounting principle on
the basis of preferability. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005,
with early adoption permitted. Our adoption of SFAS No. 154 will not have an
impact on our financial condition or results of operations.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment,"
or SFAS No. 123(R), which requires public entities to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (with limited exceptions). The
fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based
method in SFAS No. 123 in most respects. SFAS No. 123(R) applies to all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. Additionally, beginning on the required effective
date, public entities will recognize compensation cost for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS No. 123
for either recognition or pro forma disclosures. The cumulative effect of
initially applying SFAS No. 123(R), if any, is recognized as of the required
effective date. For periods before the required effective date, public entities
may elect, although they are not required, to retroactively restate financial
statements for prior periods to recognize compensation cost on a basis
consistent with the pro forma disclosures required for those periods by SFAS No.
123. SFAS No. 123(R) is effective as of the beginning of the first annual
reporting period beginning after June 15, 2005 with early adoption encouraged.
The impact of our adoption of SFAS No. 123(R) on our results of operations for
2006 is expected to be a reduction in net income comparable to the reduction
shown in the 2004 pro forma disclosures under SFAS No. 123, which are included
in Note 1 of Notes to Consolidated Financial Statements included in Item 8,
"Financial Statements and Supplementary Data," of our 2004 Annual Report on Form
10-K.
On June 29, 2005, the FASB directed its Staff to issue proposed Staff Position
No. 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF
Issue No. 03-1," which provides implementation guidance on matters such as
impairment evaluations for declines in fair value caused by increases in
interest rates and/or sector spreads, as final. The final Staff Position, to be
retitled Staff Position No. FAS 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," or FSP No. 115-1, will
supersede Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of
Other-
9
Than-Temporary Impairment and Its Application to Certain Investments," and EITF
Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned
Sale of a Security Whose Cost Exceeds Fair Value," and is expected to be issued
in August 2005. FSP No. 115-1 will replace the guidance set forth in paragraphs
10-18 of EITF Issue No. 03-1 with references to existing other-than-temporary
guidance and will codify the guidance set forth in EITF Topic No. D-44 and
clarify that an investor should recognize an impairment loss no later than when
the impairment is deemed other-than-temporary, even if a decision to sell has
not been made. FSP No. 115-1 is to be effective for other-than-temporary
impairment analysis conducted in periods beginning after September 15, 2005. We
do not expect the final issuance of FSP No. 115-1 to have a material impact on
our financial condition or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. These statements may be identified by
the use of the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "outlook," "plan," "potential," "predict," "project," "should,"
"will," "would" and similar terms and phrases, including references to
assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe 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
or affect the value of our investments;
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.
10
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
Executive Summary
The following overview should be read in conjunction with our Management's
Discussion and Analysis of Financial Condition and Results of Operations, or
MD&A, in its entirety.
Astoria Financial Corporation is a Delaware corporation organized as the unitary
savings and loan association holding company of Astoria Federal. Our primary
business is the operation of 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. 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
the interest paid on our deposits and borrowings. Our earnings are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates and U.S. Treasury yield curves,
government policies and actions of regulatory authorities.
As a premier Long Island community bank, our goal is to enhance shareholder
value while building a solid banking franchise. We focus on growing our core
businesses of mortgage lending and retail banking while maintaining superior
asset quality and controlling operating expenses. Additionally, we continue to
provide returns to shareholders through dividends and stock repurchases. We have
been successful in achieving these goals over the past several years and that
trend has continued into 2005.
During the six months ended June 30, 2005, the national and local real estate
markets remained strong and continued to support new and existing home sales.
The Federal Open Market Committee, or FOMC, raised the federal funds rate four
times during the six months ended June 30, 2005. Although the FOMC raised the
federal funds rate during the 2005 second quarter, resulting in an increase in
the three and six month U.S. Treasury yields, medium- and long-term U.S.
Treasury yields decreased. This has resulted in a further flattening of the U.S.
Treasury yield curve, which began in the latter half of 2004 and continued
during the first six months of 2005, and an increase in refinance activity
during the 2005 second quarter, as compared to the 2005 first quarter.
Our total loan portfolio increased during the first half of 2005. This increase
was primarily in our one-to-four family and multi-family and commercial real
estate loan portfolios. Our one-to-four family mortgage loan portfolio increased
due to the overall reduction in repayment activity in the first six months of
2005, coupled with continued strong loan origination volume resulting from the
strength of the purchase mortgage market. Similarly, our multi-family and
commercial real estate loan portfolios increased due to the continued strong
origination volume. Our total non-performing assets declined from December 31,
2004 to June 30, 2005.
Total deposits increased during the six months ended June 30, 2005. This
increase was primarily attributable to our new Liquid certificate of deposit, or
Liquid CD, which was introduced in January of this year. Liquid CDs have
maturities of three months, require the maintenance of a minimum balance and
allow depositors the ability to make periodic deposits
11
to and withdrawals from their account. We consider Liquid CDs as part of our
core deposits, along with savings accounts, money market accounts and NOW and
demand deposit accounts, due to their depositor flexibility. In addition,
certificates of deposit, excluding Liquid CDs, increased as a result of the
continued success of our marketing campaigns which have focused on attracting
medium-term certificates of deposit. Growth in our certificates of deposit
contributes to the management of interest rate risk, enables us to reduce our
borrowing levels and continues to produce new customers from our communities,
creating relationship development opportunities.
Our securities and borrowings portfolios decreased from December 31, 2004, which
is consistent with our strategy of reducing these portfolios through normal cash
flow in response to the continued flattening of the U.S. Treasury yield curve.
Net income for the three months ended June 30, 2005 decreased slightly compared
to the three months ended June 30, 2004. The decrease in net income was due to a
decrease in non-interest income, coupled with an increase in non-interest
expense, substantially offset by an increase in net interest income. The
decrease in non-interest income was primarily due to the decrease in mortgage
banking income, net, partially offset by an increase in customer service fees.
The increase in non-interest expense was primarily attributable to an increase
in legal fees related to our goodwill litigation trial. The increase in net
interest income was primarily the result of an increase in interest income,
partially offset by an increase in interest expense. The increase in interest
income was primarily due to the increase in the average balance of
interest-earning assets, coupled with a decrease in net premium amortization on
our mortgage-backed securities and mortgage loan portfolios. The decrease in net
premium amortization was primarily due to the reduction in repayment levels
during 2005, as well as the reduced amount of unamortized premium remaining in
our mortgage-backed securities portfolio. The increase in interest expense is
primarily due to an increase in interest expense on certificates of deposit,
including Liquid CDs, as a result of the increase in the average balances of
these deposits.
Net income for the six months ended June 30, 2005 increased compared to the six
months ended June 30, 2004. The increase in net income was primarily due to an
increase in net interest income, partially offset by an increase in non-interest
expense and a decrease in non-interest income. The principal reasons for the
increase in net interest income for the six months ended June 30, 2005 are
consistent with the principal reasons for the changes noted for the three months
ended June 30, 2005. The increase in non-interest expense relates primarily to
increases in advertising expense and legal fees related to our goodwill
litigation trial. The decrease in non-interest income relates primarily to
decreases in mortgage banking income, net and net gain on sales of securities,
partially offset by an increase in customer service fees.
Our net interest rate spread and our net interest margin for the three and six
months ended June 30, 2005 increased compared to the three and six months ended
June 30, 2004, primarily due to an increase in the yield on average
interest-earning assets, primarily due to the decrease in net premium
amortization discussed previously.
We continue to face a challenging operating environment as a result of rising
short-term interest rates and a continuing flattening of the U.S. Treasury yield
curve. Accordingly, we expect to continue our strategy of reducing the
securities and borrowings portfolios through normal cash flow, while we
emphasize deposit and loan growth, all of which will continue to improve the
quality of the balance sheet and earnings and should help maintain the net
interest margin at current to slightly lower levels in the second half of 2005.
This strategy should
12
better position us to take advantage of more profitable asset growth
opportunities when the yield curve steepens.
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 aforementioned 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 of Notes to Consolidated Financial Statements included in Item 8,
"Financial Statements and Supplementary Data," of our 2004 Annual Report on Form
10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005 and this report, contains a summary of our significant accounting
policies. Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. Our policies with respect to the methodologies used to
determine the allowance for loan losses, the valuation of mortgage servicing
rights, or MSR, and judgments regarding goodwill and securities impairment are
our most critical accounting policies because they are important to the
presentation of our financial condition and results of operations, involve a
higher degree of complexity and require management to make difficult and
subjective judgments which often require assumptions or estimates about highly
uncertain matters. The use of different judgments, assumptions and estimates
could result in material differences in our results of operations or financial
condition. These critical accounting policies and their application are reviewed
quarterly with the Audit Committee of our Board of Directors. The following
description of these policies should be read in conjunction with the
corresponding section of our 2004 Annual Report on Form 10-K.
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 recognition 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.
Individual loan loss reviews are completed quarterly for all classified loans.
Individual loan loss reviews are generally completed annually for multi-family,
commercial real estate and construction loans which exceed $2.5 million at
origination, commercial business loans which exceed $200,000 at origination,
one-to-four family loans which exceed $1.0 million at
13
origination and debt restructurings. In addition, we generally review annually
at least fifty percent of the outstanding balances of multi-family, commercial
real estate and construction loans to single borrowers with concentrations in
excess of $2.5 million.
The primary considerations in establishing specific valuation allowances are the
appraised value of a loan's underlying collateral and the loan's payment
history. Other current and anticipated economic conditions on which our specific
valuation allowances rely are the impact that national and/or local economic and
business conditions may have on borrowers, the impact that local real estate
markets may have on collateral values and the level and direction of interest
rates and their combined effect on real estate values and the ability of
borrowers to service debt. We also review all regulatory notices, bulletins and
memoranda with the purpose of identifying upcoming changes in regulatory
conditions which may impact our calculation of specific valuation allowances.
The Office of Thrift Supervision, or OTS, periodically reviews our specific
reserve methodology during regulatory examinations and any comments regarding
changes to reserves are considered by management in determining specific
valuation allowances.
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 analyze our historical loan loss experience by category
(loan type) over 5, 10, and 12-year periods. Losses within each loan category
are stress tested by applying the highest level of charge-offs and the lowest
amount of recoveries as a percentage of the average portfolio balance during
those respective time horizons. The resulting allowance percentages are used as
an integral part of our judgment in developing estimated loss percentages to
apply to the portfolio. 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. We also evaluate and consider the allowance
ratios and coverage percentages set forth in both peer group and regulatory
agency data; however, our focus is primarily on our historical loss experience
and the impact of current economic conditions. 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.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining our general valuation
allowances. Our evaluations of general valuation allowances 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, we periodically 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.
14
Our loss experience in 2005 has been consistent with our loss experience over
the past several years. Our 2005 analyses did not result in any change in our
methodology for determining our general and specific valuation allowances or our
emphasis on the factors that we consider in establishing such allowances.
Accordingly, such analyses did not indicate that changes in our allowance
coverage percentages were required. Our allowance for loan losses to total loans
was 0.60% at June 30, 2005 and 0.62% at December 31, 2004. We believe our
current allowance for loan losses is adequate to reflect the risks inherent in
our loan portfolio.
As indicated above, actual results could differ from our estimates 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 that
reflect the risks inherent in our loan portfolio, future adjustments may be
necessary if economic or market conditions differ 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 Part II,
Item 7, "MD&A," in our 2004 Annual Report on Form 10-K.
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.
Impairment exists if the carrying value of MSR exceeds the estimated fair value.
The estimated fair value of MSR is obtained through independent third party
valuations.
At June 30, 2005, our MSR, net, had an estimated fair value of $15.4 million and
were valued based on expected future cash flows considering a weighted average
discount rate of 9.08%, a weighted average constant prepayment rate on mortgages
of 17.41% and a weighted average life of 4.3 years. At December 31, 2004, our
MSR, net, had an estimated fair value of $16.8 million and were valued based on
expected future cash flows considering a weighted average discount rate of
9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and a
weighted average life of 4.8 years. The increase in the weighted average
constant prepayment rate from December 31, 2004 to June 30, 2005 reflects the
decrease in long-term interest rates from December 31, 2004 to June 30, 2005.
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. Assuming an
increase in interest rates of 100 basis points at June 30, 2005, the estimated
fair value of our MSR would have been $5.9 million greater. Assuming a decrease
in interest rates of 100 basis points at June 30, 2005, the estimated fair value
of our MSR would have been $7.0 million lower.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested, at least
annually, for impairment at the reporting unit level. Impairment exists when the
carrying amount of goodwill exceeds its implied fair value. As of June 30, 2005,
the carrying amount of our goodwill totaled
15
$185.2 million. 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.
On September 30, 2004 we performed our annual goodwill impairment test. We
determined the fair value of our reporting unit to be in excess of its carrying
amount by $1.27 billion, using the quoted market price of our common stock on
our impairment testing date as the basis for determining the fair value.
Accordingly, as of our annual impairment test date, there was no indication of
goodwill impairment. We would test our goodwill for impairment between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of our reporting unit below its carrying amount. No events
have occurred and no circumstances have changed since our annual impairment test
date that would more likely than not reduce the fair value of our reporting unit
below its carrying amount. The identification of additional reporting units or
the use of other 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/loss in stockholders' equity. Debt 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 fair values of our
securities, which are primarily fixed rate mortgage-backed securities at June
30, 2005, are based on published or securities dealers' market values and are
affected by changes in interest rates. In general, as interest rates rise, the
fair value of fixed rate securities will decrease; as interest rates fall, the
fair 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 cost basis is other-than-temporary. We
generally view changes in fair value caused by changes in interest rates as
temporary, which is consistent with our experience. If we deem such decline to
be other-than-temporary, the security is written down to a new cost basis and
the resulting loss is charged to earnings. There were no securities write-downs
during the six months ended June 30, 2005. At June 30, 2005, we had 178
securities with an estimated fair value totaling $5.72 billion which had an
unrealized loss totaling $78.9 million. Of the securities in an unrealized loss
position at June 30, 2005, $2.02 billion, with an unrealized loss of $52.8
million, have been in a continuous unrealized loss position for more than twelve
months. At June 30, 2005, the impairments are deemed temporary based on the
direct relationship of the decline in fair value to movements in interest rates,
the life of the investments and the high credit quality.
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. The most significant
liquidity challenge we face is the variability in cash flows as a result of
mortgage refinance activity. Principal payments on loans and securities totaled
$2.59 billion for the six months ended June 30, 2005 and $3.65 billion for the
six months ended June 30, 2004. The decrease in loan and securities repayments
was primarily the result of the lower levels of mortgage loan refinance activity
we experienced during the six months ended June 30, 2005, compared to the six
months ended June 30, 2004.
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 $135.6 million during the six months ended June 30, 2005 and $138.8
million during the six months ended June 30, 2004. Deposits increased $262.0
16
million during the six months ended June 30, 2005 and $709.1 million during the
six months ended June 30, 2004. The net increases in deposits for the six months
ended June 30, 2005 and 2004 reflect our continued emphasis on attracting
customer deposits through competitive rates, extensive product offerings and
quality service. As previously discussed, the net increase in deposits for the
six months ended June 30, 2005 is primarily attributable to an increase in
certificates of deposit as a result of the success of our new Liquid CDs and our
marketing campaigns which have focused on attracting medium-term certificates of
deposit. During the six months ended June 30, 2005, $2.09 billion of
certificates of deposit, including Liquid CDs, with a weighted average rate of
2.80% and a weighted average maturity at inception of nineteen months, matured
and $2.54 billion of certificates of deposit, including Liquid CDs, were issued
or repriced, with a weighted average rate of 2.94% and a weighted average
maturity at inception of fourteen months.
Net borrowings decreased $901.0 million during the six months ended June 30,
2005 and $828.3 million during the six months ended June 30, 2004. The decrease
in net borrowings during the six months ended June 30, 2005 reflects our
strategy of reducing the securities and borrowings portfolios through normal
cash flow in response to the continued flattening of the U.S. Treasury yield
curve. The decrease in net borrowings during the six months ended June 30, 2004
was the result of the repayment of certain high cost borrowings as they matured.
Our primary use of funds is for the origination and purchase of mortgage loans.
Gross mortgage loans originated and purchased during the six months ended June
30, 2005 totaled $1.99 billion, of which $1.58 billion were originations and
$411.1 million were purchases. This compares to gross mortgage loans originated
and purchased during the six months ended June 30, 2004 totaling $2.10 billion,
of which $1.60 billion were originations and $501.5 million were purchases.
Total mortgage loans originated include originations of loans held-for-sale
totaling $181.7 million during the six months ended June 30, 2005 and $190.7
million during the six months ended June 30, 2004. Purchases of securities
totaled $177.6 million during the six months ended June 30, 2005 and $1.52
billion during the six months ended June 30, 2004. The decrease in securities
purchases during the six months ended June 30, 2005 reflects our previously
discussed strategy of reducing the securities and borrowings portfolios.
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 repurchase agreements, our most liquid assets, totaled $297.1
million at June 30, 2005 and $406.4 million at December 31, 2004. Borrowings
maturing over the next twelve months total $2.35 billion with a weighted average
rate of 2.95%. We have the flexibility to either repay or rollover these
borrowings as they mature. In addition, we have $3.67 billion in certificates of
deposit, including Liquid CDs, with a weighted average rate of 2.92% 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.
17
The following table details our borrowing and certificate of deposit maturities
and their weighted average rates as of June 30, 2005:
Borrowings Certificates of Deposit
------------------- -----------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- ------------------------------------- ------- ------- ------ --------
Contractual Maturity:
Within twelve months $2,349(1) 2.95% $3,667 2.92%
Thirteen to twenty-four months 1,720 2.85 1,770 3.85
Twenty-five to thirty-six months 1,900(2) 4.22 1,071 3.89
Thirty-seven to forty-eight months 1,720(3) 4.69 534 4.13
Forty-nine to sixty months -- -- 320 4.24
Over five years 879(4) 4.35 60 4.64
------ ---- ------ ----
Total $8,568 3.70% $7,422 3.44%
====== ==== ====== ====
(1) Includes $1.18 billion of overnight and other short-term borrowings with a
weighted average rate of 3.35%.
(2) Includes $980.0 million of borrowings, with a weighted average rate of
5.30%, which are callable by the counterparty within the next twelve months
and at various times thereafter.
(3) Includes $1.20 billion of borrowings, with a weighted average rate of
5.21%, which are callable by the counterparty within the next twelve months
and at various times thereafter.
(4) Includes $500.0 million of borrowings, with a weighted average rate of
2.25%, which are callable by the counterparty in 2007 and at various times
thereafter.
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 through our subsidiary, Astoria Capital Trust I, and
senior debt. Holding company debt obligations are included in other borrowings.
Our ability to continue to access the capital markets for additional financing
at favorable terms may be limited by, among other things, market demand,
interest rates, our capital levels, Astoria Federal's ability to pay dividends
to Astoria Financial Corporation, our credit profile and our business model.
Astoria Financial Corporation's primary uses of funds include payment of
dividends, payment of principal and interest on its debt obligations and
repurchases of common stock. Astoria Financial Corporation paid interest on its
debt obligations totaling $16.5 million during the six months ended June 30,
2005. Our payment of dividends and repurchases of our common stock totaled
$110.2 million during the six months ended June 30, 2005. Our ability to pay
dividends, service our debt obligations and repurchase common stock is dependent
primarily upon receipt of capital distributions from Astoria Federal. Since
Astoria Federal is a federally chartered savings association, there are limits
on its ability to make distributions to Astoria Financial Corporation.
On June 1, 2005, we paid a quarterly cash dividend of $0.20 per share on shares
of our common stock outstanding as of the close of business on May 16, 2005
totaling $20.5 million. On July 20, 2005, we declared a quarterly cash dividend
of $0.20 per share on shares of our common stock payable on September 1, 2005 to
stockholders of record as of the close of business on August 15, 2005.
On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan
authorizing the purchase, at management's discretion, of 12,000,000 shares, or
approximately 10% of our common stock then outstanding, over a two year period
in open-market or privately negotiated transactions. During the six months ended
June 30, 2005, we repurchased 2,610,000 shares of our common stock at an
aggregate cost of $69.1 million. In total, as of June 30, 2005, we repurchased
7,765,200 shares of our common stock, at an aggregate cost of $196.7 million,
18
under the tenth stock repurchase plan. For further information on our common
stock repurchases, see Part II, Item 2, "Unregistered Sales of Equity Securities
and Use of Proceeds."
See "Financial Condition" for a further discussion of the changes in
stockholders' equity.
At June 30, 2005, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.71%, leverage
capital ratio of 6.71% and total risk-based capital ratio of 13.33%. 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%. As of June 30, 2005,
Astoria Federal continues to be a well capitalized institution.
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the
normal course of our business in order to meet the financing needs of our
customers and in connection with our overall interest rate risk management
strategy. These instruments involve, to varying degrees, elements of credit,
interest rate and liquidity risk. In accordance with GAAP, these instruments are
either not recorded in the consolidated financial statements or are recorded in
amounts that differ from the notional amounts. Such instruments primarily
include lending commitments, lease commitments and derivative instruments.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Derivative instruments may include
interest rate caps, locks and swaps which are recorded as either assets or
liabilities in the consolidated statements of financial condition at fair value.
Additionally, in connection with our mortgage banking activities, we have
commitments to fund loans held-for-sale and commitments to sell loans which are
considered derivative instruments. Commitments to sell loans totaled $99.2
million at June 30, 2005. The fair values of our mortgage banking derivative
instruments are immaterial to our financial condition and results of operations.
We also have contractual obligations related to operating lease commitments
which have not changed significantly from December 31, 2004.
The following table details our contractual obligations as of June 30, 2005.
Payments due by period
---------------------------------------------------------------
Less than One to Three to More than
(In Thousands) Total One Year Three Years Five Years Five Years
- ---------------------------------------------------- ---------- ---------- ----------- ---------- ----------
Contractual Obligations:
Borrowings with original terms greater than three
months $7,392,866 $1,174,000 $3,620,000 $1,720,000 $878,866
Commitments to originate and purchase loans (1) 678,001 678,001 -- -- --
Commitments to fund unused lines of credit (2) 421,583 421,583 -- -- --
---------- ---------- ---------- ---------- --------
Total $8,492,450 $2,273,584 $3,620,000 $1,720,000 $878,866
========== ========== ========== ========== ========
(1) Commitments to originate and purchase loans include commitments to
originate loans held-for-sale.
(2) Unused lines of credit relate primarily to home equity lines of credit.
In addition to the contractual obligations previously discussed, we have
contingent liabilities related to assets sold with recourse and standby letters
of credit. Contingent liabilities related to assets sold with recourse and
standby letters of credit as of June 30, 2005 have not changed significantly
from December 31, 2004.
19
For further information regarding our off-balance sheet arrangements and
contractual obligations, see Part II, Item 7, "MD&A," in our 2004 Annual Report
on Form 10-K.
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
At June 30, 2005 At December 31, 2004
---------------------- ----------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- --------------------------------- ----------- -------- ----------- --------
Mortgage loans (gross):
One-to-four family $ 9,267,038 67.81% $ 9,054,747 68.68%
Multi-family 2,725,621 19.94 2,558,935 19.41
Commercial real estate 1,018,998 7.46 944,859 7.17
Construction 132,589 0.97 117,766 0.89
----------- ------ ----------- ------
Total mortgage loans 13,144,246 96.18 12,676,307 96.15
----------- ------ ----------- ------
Consumer and other loans (gross):
Home equity 479,638 3.51 466,087 3.53
Commercial 24,070 0.18 21,819 0.17
Other 17,823 0.13 19,382 0.15
----------- ------ ----------- ------
Total consumer and other loans 521,531 3.82 507,288 3.85
----------- ------ ----------- ------
Total loans (gross) 13,665,777 100.00% 13,183,595 100.00%
Net unamortized premiums and
deferred loan costs 84,338 79,684
----------- -----------
Total loans 13,750,115 13,263,279
Allowance for loan losses (82,519) (82,758)
----------- -----------
Total loans, net $13,667,596 $13,180,521
=========== ===========
20
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
the dates indicated.
At June 30, 2005 At December 31, 2004
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
- ------------------------------------ ---------- ---------- ---------- ----------
Securities available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE (1) issuance $1,890,112 $1,849,030 $2,125,549 $2,077,902
Non-GSE issuance 69,824 66,730 78,974 75,715
GSE pass-through certificates 104,554 107,316 123,029 126,570
---------- ---------- ---------- ----------
Total mortgage-backed securities 2,064,490 2,023,076 2,327,552 2,280,187
---------- ---------- ---------- ----------
Other securities:
FNMA and FHLMC preferred stock 123,495 120,956 123,495 123,548
Other securities 2,507 2,496 3,152 3,148
---------- ---------- ---------- ----------
Total other securities 126,002 123,452 126,647 126,696
---------- ---------- ---------- ----------
Total securities available-for-sale $2,190,492 $2,146,528 $2,454,199 $2,406,883
========== ========== ========== ==========
Securities held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $5,168,283 $5,151,000 $5,772,676 $5,778,885
Non-GSE issuance 419,556 415,482 480,053 476,707
GSE pass-through certificates 7,186 7,520 9,154 9,691
---------- ---------- ---------- ----------
Total mortgage-backed securities 5,595,025 5,574,002 6,261,883 6,265,283
Obligations of states and
political subdivisions and
corporate debt securities 27,843 28,102 41,053 41,477
---------- ---------- ---------- ----------
Total securities held-to-maturity $5,622,868 $5,602,104 $6,302,936 $6,306,760
========== ========== ========== ==========
(1) Government-sponsored enterprise
21
Comparison of Financial Condition as of June 30, 2005 and December 31, 2004 and
Operating Results for the Three and Six Months Ended June 30, 2005 and 2004
Financial Condition
Total assets decreased $589.8 million to $22.83 billion at June 30, 2005, from
$23.42 billion at December 31, 2004. The primary reasons for the decrease in
total assets were decreases in mortgage-backed and other securities and
repurchase agreements, partially offset by an increase in loans receivable.
Mortgage loans, net, increased $472.2 million to $13.22 billion at June 30,
2005, from $12.75 billion at December 31, 2004. This increase was due to
increases in each of our mortgage loan portfolios. Gross mortgage loans
originated and purchased during the six months ended June 30, 2005 totaled $1.99
billion, of which $1.58 billion were originations and $411.1 million were
purchases. This compares to gross mortgage loans originated and purchased during
the six months ended June 30, 2004 totaling $2.10 billion, of which $1.60
billion were originations and $501.5 million were purchases. Total mortgage
loans originated include originations of loans held-for-sale totaling $181.7
million during the six months ended June 30, 2005 and $190.7 million during the
six months ended June 30, 2004. Mortgage loan repayments decreased to $1.33
billion for the six months ended June 30, 2005, from $2.00 billion for the six
months ended June 30, 2004. The declines in the levels of mortgage loan
originations, purchases and repayments for the six months ended June 30, 2005,
as compared to the six months ended June 30, 2004, were primarily the result of
the lower levels of refinance activity previously discussed.
Our mortgage loan portfolio, as well as our originations and purchases,
continues to consist primarily of one-to-four family mortgage loans. Our
one-to-four family mortgage loans increased $212.3 million to $9.27 billion at
June 30, 2005, from $9.05 billion at December 31, 2004, and represented 67.8% of
our total loan portfolio at June 30, 2005. The lower levels of loan prepayments
and continued strength of the purchase mortgage market resulted in continued
one-to-four family mortgage loan portfolio growth, which began in the 2004
fourth quarter.
Our multi-family mortgage loan portfolio increased $166.7 million to $2.73
billion at June 30, 2005, from $2.56 billion at December 31, 2004. Our
commercial real estate loan portfolio increased $74.1 million to $1.02 billion
at June 30, 2005, from $944.9 million at December 31, 2004. Multi-family and
commercial real estate loan originations totaled $498.5 million for the six
months ended June 30, 2005 and $514.1 million for the six months ended June 30,
2004. The average loan balance within our combined multi-family and commercial
real estate portfolio continues to be less than $1.0 million and the average
loan-to-value ratio, based on current principal balance and original appraised
value, continues to be less than 65%.
Mortgage-backed and other securities decreased $940.4 million to $7.77 billion
at June 30, 2005, from $8.71 billion at December 31, 2004. This decrease was
primarily the result of principal payments received of $1.12 billion, partially
offset by purchases during the first quarter totaling $177.6 million, and
reflects our previously discussed strategy of reducing the securities and
borrowings portfolios through normal cash flow in the current interest rate
environment. At June 30, 2005, our securities portfolio is comprised primarily
of fixed rate real estate mortgage investment conduit, or REMIC, and
collateralized mortgage obligation, or
22
CMO, mortgage-backed securities with a weighted average life of 2.8 years. The
amortized cost of our fixed rate REMICs and CMOs totaled $7.53 billion at June
30, 2005. Included in this total is $1.21 billion of securities which have a
remaining gross premium of $8.7 million, a weighted average current coupon of
4.92%, a weighted average collateral coupon of 5.98% and a weighted average life
of 2.1 years. The remaining $6.32 billion of these securities have a remaining
gross discount of $22.2 million, a weighted average current coupon of 4.20%, a
weighted average collateral coupon of 5.72% and a weighted average life of 2.9
years. Included in the totals for discount securities are $690.2 million of
securities at par.
Deposits increased $262.0 million to $12.59 billion at June 30, 2005, from
$12.32 billion at December 31, 2004, primarily due to increases in Liquid CDs
and certificates of deposit, partially offset by decreases in money market,
savings and NOW and demand deposit accounts. Our new Liquid CDs totaled $331.7
million at June 30, 2005. Certificates of deposit increased $242.3 million to
$7.09 billion at June 30, 2005, from $6.85 billion at December 31, 2004,
primarily due to the continued success of our certificate of deposit marketing
campaigns previously discussed. We continue to experience intense competition
for deposits, particularly money market and checking accounts. Savings accounts
decreased $149.9 million since December 31, 2004 to $2.78 billion at June 30,
2005. Money market accounts decreased $153.5 million since December 31, 2004 to
$811.8 million at June 30, 2005. NOW and demand deposit accounts also decreased
slightly at June 30, 2005 compared to December 31, 2004.
Total borrowings, net, decreased $901.0 million to $8.57 billion at June 30,
2005, from $9.47 billion at December 31, 2004, which was primarily the result of
a decrease in Federal Home Loan Bank of New York, or FHLB-NY, advances. The net
decrease in total borrowings reflects our previously discussed strategy of
reducing the securities and borrowings portfolios. For additional information,
see "Liquidity and Capital Resources."
Stockholders' equity increased to $1.39 billion at June 30, 2005, from $1.37
billion at December 31, 2004. The increase in stockholders' equity was the
result of net income of $116.9 million, the effect of stock options exercised
and related tax benefit of $9.2 million and the amortization of the allocated
portion of shares held by the employee stock ownership plan, or ESOP, of $5.1
million. These increases were partially offset by common stock repurchased of
$69.1 million and dividends declared of $41.1 million.
Results of Operations
General
Net income for the three months ended June 30, 2005 totaled $57.4 million,
compared to $57.5 million for the three months ended June 30, 2004. Diluted
earnings per common share increased to $0.55 per share for the three months
ended June 30, 2005, from $0.52 per share for the three months ended June 30,
2004. Return on average assets decreased to 1.00% for the three months ended
June 30, 2005, from 1.03% for the three months ended June 30, 2004. Return on
average stockholders' equity increased to 16.66% for the three months ended June
30, 2005, from 16.55% for the three months ended June 30, 2004. Return on
average tangible stockholders' equity, which represents average stockholders'
equity less average goodwill, increased to 19.24% for the three months ended
June 30, 2005, from 19.09% for the three months ended June 30, 2004.
23
Net income for the six months ended June 30, 2005 increased $6.0 million to
$116.9 million, from $110.9 million for the six months ended June 30, 2004.
Diluted earnings per common share increased to $1.12 per share for the six
months ended June 30, 2005, from $0.99 per share for the six months ended June
30, 2004. Return on average assets increased to 1.01% for the six months ended
June 30, 2005, from 0.99% for the six months ended June 30, 2004, primarily due
to the increase in net income, partially offset by an increase in the average
balance of total assets. Return on average stockholders' equity increased to
17.02% for the six months ended June 30, 2005, from 15.85% for the six months
ended June 30, 2004. Return on average tangible stockholders' equity increased
to 19.68% for the six months ended June 30, 2005, from 18.27% for the six months
ended June 30, 2004. The increases in the returns on average stockholders'
equity and average tangible stockholders' equity were primarily due to the
increase in net income, coupled with a decrease in the average balance of
stockholders' equity for the six months ended June 30, 2005, compared to the six
months ended June 30, 2004.
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 and their related impact on cash flows. See Item 3,
"Quantitative and Qualitative Disclosures About Market Risk," for further
discussion of the potential impact of changes in interest rates on our results
of operations.
For the three months ended June 30, 2005, net interest income increased $8.0
million to $121.3 million, from $113.3 million for the three months ended June
30, 2004. For the six months ended June 30, 2005, net interest income increased
$18.8 million to $246.6 million, from $227.8 million for the six months ended
June 30, 2004. The increases in net interest income for the three and six months
ended June 30, 2005 were primarily the result of increases in interest income,
partially offset by increases in interest expense. The increases in interest
income were primarily due to increases in the average balances of
interest-earning assets, coupled with decreases in net premium amortization on
our mortgage-backed securities and mortgage loan portfolios. Net premium
amortization on our mortgage-backed securities and mortgage loan portfolios
decreased $8.2 million to $4.5 million for the three months ended June 30, 2005,
from $12.7 million for the three months ended June 30, 2004, and decreased $12.2
million to $8.8 million for the six months ended June 30, 2005, from $21.0
million for the six months ended June 30, 2004. The decreases in net premium
amortization were primarily due to the lower repayment levels during 2005 as
compared to 2004, as well as the reduced amount of unamortized net premium
remaining in our mortgage-backed securities portfolio. The increases in interest
expense were primarily due to increases in the average balances of our
certificates of deposit and our new Liquid CDs.
The average balance of net interest-earning assets increased $105.9 million to
$685.2 million for the three months ended June 30, 2005, from $579.3 million for
the three months ended June 30, 2004. The average balance of net
interest-earning assets increased $42.5 million to $667.5 million for the six
months ended June 30, 2005, from $625.0 million for the six months ended June
30, 2004. The increase in the average balance of net interest-earning assets for
both the three and six months ended June 30, 2005 was primarily the result of an
increase in
24
the average balance of total interest-earning assets, partially offset by an
increase in the average balance of total interest-bearing liabilities.
The net interest margin increased to 2.21% for the three months ended June 30,
2005, from 2.13% for the three months ended June 30, 2004, and increased to
2.22% for the six months ended June 30, 2005, from 2.14% for the six months
ended June 30, 2004. The net interest rate spread increased to 2.12% for the
three months ended June 30, 2005, from 2.06% for the three months ended June 30,
2004, and increased to 2.14% for the six months ended June 30, 2005, from 2.06%
for the six months ended June 30, 2004. The increases in the net interest margin
and net interest rate spread were primarily due to an increase in the yield on
interest-earning assets, primarily due to the decline in net premium
amortization on our mortgage-backed securities and mortgage loan portfolios,
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."
Average Balance Sheet
The following tables set forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the three and
six months ended June 30, 2005 and 2004. 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.
25
For the Three Months Ended June 30,
-----------------------------------------------------------------------------
2005 2004
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------- ----------- -------- ------------ ----------- -------- ------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,342,312 $112,898 4.83% $ 8,862,057 $104,205 4.70%
Multi-family, commercial real
estate and construction 3,827,458 58,300 6.09 3,350,010 54,634 6.52
Consumer and other loans (1) 529,679 7,475 5.64 466,745 4,798 4.11
----------- -------- ----------- --------
Total loans 13,699,449 178,673 5.22 12,678,812 163,637 5.16
Mortgage-backed and other
securities (2) 7,997,687 88,526 4.43 8,337,650 87,809 4.21
Federal funds sold and repurchase
agreements 189,058 1,361 2.88 94,515 222 0.94
FHLB-NY stock 126,518 1,650 5.22 155,471 895 2.30
----------- -------- ----------- --------
Total interest-earning assets 22,012,712 270,210 4.91 21,266,448 252,563 4.75
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 851,531 938,614
----------- -----------
Total assets $23,049.394 $22,390,213
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,827,699 2,831 0.40 $ 3,003,085 2,988 0.40
Money market 848,457 2,037 0.96 1,119,810 1,510 0.54
NOW and demand deposit 1,597,270 235 0.06 1,556,821 230 0.06
Liquid certificates of deposit 291,669 1,872 2.57 -- -- --
----------- -------- ----------- --------
Total core deposits 5,565,095 6,975 0.50 5,679,716 4,728 0.33
Certificates of deposit 7,004,979 60,090 3.43 6,018,057 52,174 3.47
----------- -------- ----------- --------
Total deposits 12,570,074 67,065 2.13 11,697,773 56,902 1.95
Borrowed funds 8,757,467 81,798 3.74 8,989,389 82,345 3.66
----------- -------- ----------- --------
Total interest-bearing liabilities 21,327,541 148,863 2.79 20,687,162 139,247 2.69
-------- --------
Non-interest-bearing liabilities 343,422 312,905
----------- -----------
Total liabilities 21,670,963 21,000,067
Stockholders' equity 1,378,431 1,390,146
----------- -----------
Total liabilities and stockholders' equity $23,049,394 $22,390,213
=========== ===========
Net interest income/net interest rate
spread (3) $121,347 2.12% $113,316 2.06%
======== ==== ======== ====
Net interest-earning assets/net interest
margin (4) $ 685,171 2.21% $ 579,286 2.13%
=========== ==== =========== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.03x 1.03x
=========== ===========
- ----------
(1) Mortgage loans 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) 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.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
26
For the Six Months Ended June 30,
-----------------------------------------------------------------------------
2005 2004
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------- ----------- -------- ------------ ----------- -------- ------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,306,432 $224,480 4.82% $ 8,951,550 $215,555 4.82%
Multi-family, commercial real
estate and construction 3,754,593 116,496 6.21 3,301,619 108,265 6.56
Consumer and other loans (1) 526,117 14,256 5.42 458,421 9,688 4.23
----------- -------- ----------- --------
Total loans 13,587,142 355,232 5.23 12,711,590 333,508 5.25
Mortgage-backed and other
securities (2) 8,259,673 182,448 4.42 8,351,335 177,940 4.26
Federal funds sold and repurchase
agreements 216,177 2,810 2.60 79,704 376 0.94
FHLB-NY stock 134,388 2,823 4.20 191,641 1,833 1.91
----------- -------- ----------- --------
Total interest-earning assets 22,197,380 543,313 4.90 21,334,270 513,657 4.82
-------- --------
Goodwill 185,151 185,151
Other non-interest-earning assets 858,133 891,331
----------- -----------
Total assets $23,240,664 $22,410,752
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings $ 2,848,793 5,673 0.40 $ 2,981,642 5,933 0.40
Money market 881,618 3,959 0.90 1,153,993 3,118 0.54
NOW and demand deposit 1,578,781 465 0.06 1,511,777 451 0.06
Liquid certificates of deposit 234,291 2,945 2.51 -- -- --
----------- -------- ----------- --------
Total core deposits 5,543,483 13,042 0.47 5,647,412 9,502 0.34
Certificates of deposit 6,969,312 118,983 3.41 5,831,038 101,630 3.49
----------- -------- ----------- --------
Total deposits 12,512,795 132,025 2.11 11,478,450 111,132 1.94
Borrowed funds 9,017,082 164,728 3.65 9,230,800 174,696 3.79
----------- -------- ----------- --------
Total interest-bearing liabilities 21,529,877 296,753 2.76 20,709,250 285,828 2.76
-------- --------
Non-interest-bearing liabilities 337,679 301,887
----------- -----------
Total liabilities 21,867,556 21,011,137
Stockholders' equity 1,373,108 1,399,615
----------- -----------
Total liabilities and stockholders' equity $23,240,664 $22,410,752
=========== ===========
Net interest income/net interest rate
spread (3) $246,560 2.14% $227,829 2.06%
======== ==== ======== ====
Net interest-earning assets/net interest
margin (4) $ 667,503 2.22% $ 625,020 2.14%
=========== ==== =========== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.03x 1.03x
=========== ===========
- ----------
(1) Mortgage loans 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) 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.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
27
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Three Months Ended June 30, 2005 Six Months Ended June 30, 2005
Compared to Compared to
Three Months Ended June 30, 2004 Six Months Ended June 30, 2004
-------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
-------------------------------- ------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- --------------------------------------- ------- ------- ------- ------- ------- -------
Interest-earning assets:
Mortgage loans:
One-to-four family $ 5,756 $ 2,937 $ 8,693 $ 8,925 $ -- $ 8,925
Multi-family, commercial
real estate and construction 7,430 (3,764) 3,666 14,247 (6,016) 8,231
Consumer and other loans 712 1,965 2,677 1,572 2,996 4,568
Mortgage-backed and other securities (3,706) 4,423 717 (2,002) 6,510 4,508
Federal funds sold and repurchase
agreements 372 767 1,139 1,197 1,237 2,434
FHLB-NY stock (193) 948 755 (678) 1,668 990
------- ------- ------- ------- ------- -------
Total 10,371 7,276 17,647 23,261 6,395 29,656
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings (157) -- (157) (260) -- (260)
Money market (433) 960 527 (866) 1,707 841
NOW and demand deposit 5 -- 5 14 -- 14
Liquid certificates of deposit 1,872 -- 1,872 2,945 -- 2,945
Certificates of deposit 8,521 (605) 7,916 19,704 (2,351) 17,353
Borrowed funds (2,243) 1,696 (547) (3,840) (6,128) (9,968)
------- ------- ------- ------- ------- -------
Total 7,565 2,051 9,616 17,697 (6,772) 10,925
------- ------- ------- ------- ------- -------
Net change in net interest income $ 2,806 $ 5,225 $ 8,031 $ 5,564 $13,167 $18,731
======= ======= ======= ======= ======= =======
Interest Income
Interest income for the three months ended June 30, 2005 increased $17.6 million
to $270.2 million, from $252.6 million for the three months ended June 30, 2004.
This increase was primarily the result of an increase of $746.3 million in the
average balance of interest-earning assets to $22.01 billion for the three
months ended June 30, 2005, from $21.27 billion for the three months ended June
30, 2004, coupled with an increase in the average yield on interest-earning
assets to 4.91% for the three months ended June 30, 2005, from 4.75% for the
three months ended June 30, 2004. The increase in the average balance of
interest-earning assets was primarily due to increases in the average balances
of loans and federal funds sold and repurchase agreements, partially offset by a
decrease in the average balance of mortgage-backed and other securities. The
increase in the average yield on interest-earning assets was primarily the
result of the decrease in net premium amortization on our mortgage-backed
securities and mortgage loan portfolios, previously discussed.
28
Interest income on one-to-four family mortgage loans increased $8.7 million to
$112.9 million for the three months ended June 30, 2005, from $104.2 million for
the three months ended June 30, 2004, which was primarily the result of an
increase of $480.3 million in the average balance of such loans, coupled with an
increase in the average yield to 4.83% for the three months ended June 30, 2005,
from 4.70% for the three months ended June 30, 2004. The increase in the average
balance of one-to-four family mortgage loans is the result of the strong levels
of originations and purchases which have outpaced the levels of repayments over
the past nine months. The increase in the average yield on one-to-four family
mortgage loans reflects the impact of the previously discussed reduction in loan
premium amortization, partially offset by the impact of the low interest rate
environment as higher rate loans were repaid and replaced with lower yielding
new originations and purchases throughout most of 2004 and 2005.
Interest income on multi-family, commercial real estate and construction loans
increased $3.7 million to $58.3 million for the three months ended June 30,
2005, from $54.6 million for the three months ended June 30, 2004, which was
primarily the result of an increase of $477.4 million in the average balance of
such loans, partially offset by a decrease in the average yield to 6.09% for the
three months ended June 30, 2005, from 6.52% for the three months ended June 30,
2004. The increase in the average balance of multi-family, commercial real
estate and construction loans reflects the continued strong levels of
originations, coupled with the fact that repayment activity within this
portfolio is generally not as significant as that which we have experienced in
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
significant growth in the portfolio in the relatively low interest rate
environment, coupled with a decrease of $1.1 million in prepayment penalties for
the three months ended June 30, 2005 compared to the three months ended June 30,
2004.
Interest income on consumer and other loans increased $2.7 million to $7.5
million for the three months ended June 30, 2005, from $4.8 million for the
three months ended June 30, 2004, primarily due to an increase in the average
yield to 5.64% for the three months ended June 30, 2005, from 4.11% for the
three months ended June 30, 2004, coupled with an increase of $62.9 million in
the average balance of the portfolio. The increase in the average yield on
consumer and other loans was primarily the result of an increase in the average
yield on our home equity lines of credit which are adjustable rate loans which
generally reset monthly and are indexed to the prime rate. The prime rate
increased 125 basis points during the latter half of 2004 and 100 basis points
during the first half of 2005. The increase in the average balance of consumer
and other loans was due to the increase in home equity lines of credit as a
result of the continued strong housing market and relatively low interest rate
environment. Home equity lines of credit represented 92.0% of this portfolio at
June 30, 2005.
Interest income on mortgage-backed and other securities increased $717,000 to
$88.5 million for the three months ended June 30, 2005, from $87.8 million for
the three months ended June 30, 2004. This increase was primarily the result of
an increase in the average yield to 4.43% for the three months ended June 30,
2005, from 4.21% for the three months ended June 30, 2004, partially offset by a
decrease of $340.0 million in the average balance of the portfolio. The increase
in the average yield on mortgage-backed and other securities reflects the
previously discussed reduction in net premium amortization. Net premium
amortization on mortgage-backed and other securities decreased $4.3 million to
net discount accretion of $310,000 for the three months ended June 30, 2005,
from net premium amortization of $4.0 million for the three months ended June
30, 2004. The decrease in the average balance of mortgage-backed and other
securities reflects our previously discussed strategy of reducing the securities
and borrowings portfolios.
29
Interest income on federal funds sold and repurchase agreements increased $1.1
million to $1.4 million for the three months ended June 30, 2005, as a result of
an increase in the average yield to 2.88% for the three months ended June 30,
2005, from 0.94% for the three months ended June 30, 2004, coupled with an
increase of $94.5 million in the average balance of the portfolio. The increase
in the average yield reflects the FOMC federal funds rate increases previously
discussed totaling 125 basis points in the latter half of 2004 and 100 basis
points in the first half of 2005. Interest income on FHLB-NY stock increased
$755,000 to $1.7 million for the three months ended June 30, 2005, from $895,000
for the three months ended June 30, 2004, primarily as a result of increases in
the dividend rate paid by the FHLB-NY.
Interest income for the six months ended June 30, 2005 increased $29.6 million
to $543.3 million, from $513.7 million for the six months ended June 30, 2004.
This increase was primarily the result of an increase of $863.1 million in the
average balance of interest-earning assets to $22.20 billion for the six months
ended June 30, 2005, from $21.33 billion for the six months ended June 30, 2004,
coupled with an increase in the average yield on interest-earning assets to
4.90% for the six months ended June 30, 2005, from 4.82% for the six months
ended June 30, 2004. The increase in the average balance of interest-earning
assets was primarily due to increases in the average balances of loans and
federal funds sold and repurchase agreements, partially offset by decreases in
the average balances of mortgage-backed and other securities and FHLB-NY stock.
Interest income on one-to-four family mortgage loans increased $8.9 million to
$224.5 million for the six months ended June 30, 2005, from $215.6 million for
the six months ended June 30, 2004, which was primarily the result of an
increase of $354.9 million in the average balance of such loans. As previously
discussed, the average yield on our one-to-four family mortgage loan portfolio
has been positively impacted by the reduction in loan premium amortization.
However, for the six months ended June 30, 2005, this benefit was offset by the
previously discussed impact of the low interest rate environment and, as a
result, the average yield on our one-to-four family mortgage loan portfolio
remained at 4.82% for the six months ended June 30, 2005 and 2004.
Interest income on multi-family, commercial real estate and construction loans
increased $8.2 million to $116.5 million for the six months ended June 30, 2005,
from $108.3 million for the six months ended June 30, 2004, which was primarily
the result of an increase of $453.0 million in the average balance of such
loans, partially offset by a decrease in the average yield to 6.21% for the six
months ended June 30, 2005, from 6.56% for the six months ended June 30, 2004.
Prepayment penalties were substantially the same for the six months ended June
30, 2005 compared to the six months ended June 30, 2004.
Interest income on consumer and other loans increased $4.6 million to $14.3
million for the six months ended June 30, 2005, from $9.7 million for the six
months ended June 30, 2004, primarily due to an increase in the average yield to
5.42% for the six months ended June 30, 2005, from 4.23% for the six months
ended June 30, 2004, coupled with an increase of $67.7 million in the average
balance of the portfolio.
Interest income on mortgage-backed and other securities increased $4.5 million
to $182.4 million for the six months ended June 30, 2005, from $177.9 million
for the six months ended June 30, 2004. This increase was primarily the result
of an increase in the average yield to 4.42% for the six months ended June 30,
2005, from 4.26% for the six months ended June 30, 2004, partially offset by a
decrease of $91.7 million in the average balance of the portfolio. Net premium
amortization on mortgage-backed and other securities decreased $7.3 million to
net discount
30
accretion of $375,000 for the six months ended June 30, 2005, from net premium
amortization of $6.9 million for the six months ended June 30, 2004.
Interest income on federal funds sold and repurchase agreements increased $2.4
million to $2.8 million for the six months ended June 30, 2005 as a result of an
increase in the average yield to 2.60% for the six months ended June 30, 2005,
from 0.94% for the six months ended June 30, 2004, coupled with an increase of
$136.5 million in the average balance of the portfolio. Interest income on
FHLB-NY stock increased $990,000 to $2.8 million for the six months ended June
30, 2005, from $1.8 million for the six months ended June 30, 2004.
The principal reasons for the changes in the average yields and average balances
of the various assets noted above for the six months ended June 30, 2005 are
consistent with the principal reasons for the changes noted for the three months
ended June 30, 2005, previously discussed.
Interest Expense
Interest expense for the three months ended June 30, 2005 increased $9.7 million
to $148.9 million, from $139.2 million for the three months ended June 30, 2004.
This increase was primarily the result of an increase of $640.4 million in the
average balance of interest-bearing liabilities to $21.33 billion for the three
months ended June 30, 2005, from $20.69 billion for the three months ended June
30, 2004, coupled with an increase in the average cost of interest-bearing
liabilities to 2.79% for the three months ended June 30, 2005, from 2.69% for
the three months ended June 30, 2004. The increase in the average balance of
interest-bearing liabilities was primarily due to an increase in the average
balance of deposits, partially offset by a decrease in the average balance of
borrowed funds. The increase in the average cost of interest-bearing liabilities
reflects the impact of the significant increases in the average balances of
certificates of deposit and our new Liquid CDs, which have a higher average cost
than our other deposit products, coupled with the impact of the increase in
short-term interest rates over the past year on our short-term borrowings.
Interest expense on deposits increased $10.2 million, to $67.1 million for the
three months ended June 30, 2005, from $56.9 million for the three months ended
June 30, 2004, primarily due to an increase of $872.3 million in the average
balance of total deposits. The increase in the average balance of total deposits
was primarily the result of increases in the average balances of certificates of
deposit and Liquid CDs, partially offset by decreases in the average balances of
money market and savings accounts, primarily as a result of continued intense
competition for these types of deposits. The average cost of total deposits
increased to 2.13% for the three months ended June 30, 2005, from 1.95% for the
three months ended June 30, 2004, primarily due to the previously discussed
significant increases in the average balances of certificates of deposit and
Liquid CDs.
Interest expense on certificates of deposit, excluding Liquid CDs, increased
$7.9 million to $60.1 million for the three months ended June 30, 2005, from
$52.2 million for the three months ended June 30, 2004, primarily due to an
increase of $986.9 million in the average balance, slightly offset by a decrease
in the average cost to 3.43% for the three months ended June 30, 2005, from
3.47% for the three months ended June 30, 2004. The increase in the average
balance of certificates of deposit was primarily a result of the success of our
marketing campaigns which focused on attracting medium-term certificates of
deposit as part of our interest rate risk management strategy to extend
liabilities as well as to enable us to reduce borrowings. During the three
months ended June 30, 2005, excluding Liquid CDs, $804.4 million of certificates
of deposit, with a weighted average rate of 2.54% and a weighted average
maturity at inception of
31
seventeen months, matured and $839.4 million of certificates of deposit were
issued or repriced, with a weighted average rate of 3.09% and a weighted average
maturity at inception of sixteen months. Interest expense on Liquid CDs totaled
$1.9 million for the three months ended June 30, 2005. Our new Liquid CDs had an
average balance of $291.7 million and an average cost of 2.57% for the three
months ended June 30, 2005.
Interest expense on borrowed funds for the three months ended June 30, 2005
decreased $547,000 to $81.8 million, from $82.3 million for the three months
ended June 30, 2004, resulting from a decrease of $231.9 million in the average
balance, partially offset by an increase in the average cost to 3.74% for the
three months ended June 30, 2005, from 3.66% for the three months ended June 30,
2004. The decrease in the average balance of borrowed funds was primarily the
result of our previously discussed strategy of reducing the securities and
borrowings portfolios. The increase in the average cost of borrowed funds
reflects the impact of the increase in short-term interest rates over the past
year on our short-term borrowings.
Interest expense for the six months ended June 30, 2005 increased $11.0 million
to $296.8 million, from $285.8 million for the six months ended June 30, 2004.
This increase was primarily the result of an increase of $820.6 million in the
average balance of interest-bearing liabilities to $21.53 billion for the six
months ended June 30, 2005, from $20.71 billion for the six months ended June
30, 2004, partially offset by decreases in the average cost of borrowed funds
and certificates of deposit, excluding Liquid CDs. The increase in the average
balance of interest-bearing liabilities was primarily due to an increase in the
average balance of deposits, partially offset by a decrease in the average
balance of borrowed funds. Although the average cost of borrowed funds and
certificates of deposit decreased, the average cost of total interest-bearing
liabilities remained at 2.76% for the six months ended June 30, 2005 as compared
to the six months ended June 30, 2004, primarily due to the impact of the
significant increases in the average balances of certificates of deposit and
Liquid CDs, which have a higher average cost than our other deposit products.
Interest expense on deposits increased $20.9 million to $132.0 million for the
six months ended June 30, 2005, from $111.1 million for the six months ended
June 30, 2004, primarily due to an increase of $1.03 billion in the average
balance of total deposits. The average cost of total deposits increased to 2.11%
for the six months ended June 30, 2005, from 1.94% for the six months ended June
30, 2004. The principal reasons for the changes in the average balance and
average cost of total deposits for the six months ended June 30, 2005 are
consistent with the principal reasons for the changes noted for the three months
ended June 30, 2005, previously discussed.
Interest expense on certificates of deposit, excluding Liquid CDs, increased
$17.4 million to $119.0 million for the six months ended June 30, 2005, from
$101.6 million for the six months ended June 30, 2004, primarily due to an
increase of $1.14 billion in the average balance, partially offset by a decrease
in the average cost to 3.41% for the six months ended June 30, 2005, from 3.49%
for the six months ended June 30, 2004. The increase in the average balance of
certificates of deposit is primarily due to the success of our marketing
campaigns, previously discussed. During the six months ended June 30, 2005,
excluding Liquid CDs, $1.82 billion of certificates of deposit, with a weighted
average rate of 2.85% and a weighted average maturity at inception of twenty-one
months, matured and $1.95 billion of certificates of deposit were issued or
repriced, with a weighted average rate of 3.04% and a weighted average maturity
at inception of eighteen months. Interest expense on Liquid CDs totaled $2.9
million for the six months ended June 30, 2005. Our new Liquid CDs had an
average balance of $234.3 million and an average cost of 2.51% for the six
months ended June 30, 2005.
32
Interest expense on borrowed funds for the six months ended June 30, 2005
decreased $10.0 million to $164.7 million, from $174.7 million for the six
months ended June 30, 2004, resulting from a decrease in the average cost to
3.65% for the six months ended June 30, 2005, from 3.79% for the six months
ended June 30, 2004, coupled with a decrease of $213.7 million in the average
balance. The decrease in the average cost of borrowed funds reflects the impact
of the repayment and refinancing of higher cost borrowings as they matured at
substantially lower rates during the six months ended June 30, 2004, coupled
with the use of short-term borrowings. The decrease in the average balance of
borrowed funds was primarily the result of our previously discussed strategy of
reducing the securities and borrowings portfolios.
Provision for Loan Losses
During the three and six months ended June 30, 2005 and 2004, no provision for
loan losses was recorded. We review our allowance for loan losses on a quarterly
basis. Our 2005 analyses did not indicate that a change in our allowance for
loan losses was warranted. Our net charge-off experience for the six months
ended June 30, 2005 remained at an annualized rate of less than one basis point
of average loans outstanding and was one basis point of average loans
outstanding, annualized, for the three months ended June 30, 2005. We believe
our current allowance for loan losses is adequate to reflect the risks inherent
in our loan portfolio.
The allowance for loan losses totaled $82.5 million at June 30, 2005 and $82.8
million at December 31, 2004. Net loan charge-offs totaled $211,000 for the
three months ended June 30, 2005, compared to $148,000 for the three months
ended June 30, 2004, and $239,000 for the six months ended June 30, 2005,
compared to $303,000 for the six months ended June 30, 2004. Non-performing
loans decreased $3.9 million to $28.7 million at June 30, 2005, from $32.6
million at December 31, 2004. The allowance for loan losses as a percentage of
non-performing loans increased to 287.86% at June 30, 2005, from 254.02% at
December 31, 2004, primarily due to the decrease in non-performing loans from
December 31, 2004 to June 30, 2005. The allowance for loan losses as a
percentage of total loans was 0.60% at June 30, 2005 and 0.62% at December 31,
2004. For further discussion of non-performing loans and the allowance for loan
losses, see "Critical Accounting Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the three months ended June 30, 2005 decreased $5.4
million to $22.5 million, from $27.9 million for the three months ended June 30,
2004, primarily due to a decrease in mortgage banking income, net. For the six
months ended June 30, 2005, non-interest income decreased $2.7 million to $47.3
million, from $50.0 million for the six months ended June 30, 2004, primarily
due to a decrease in mortgage banking income, net, coupled with a decrease in
net gain on sales of securities. These decreases in non-interest income for the
three and six months ended June 30, 2005, compared to the three and six months
ended June 30, 2004, were partially offset by increases in customer service fees
and other non-interest income.
Mortgage banking income, net, which includes loan servicing fees, net gain on
sales of loans, amortization of MSR and valuation allowance adjustments for the
impairment of MSR, decreased $7.9 million to a mortgage banking loss, net of
$1.6 million for the three months ended June 30, 2005, compared to mortgage
banking income, net of $6.3 million for the three months ended June 30, 2004.
For the six months ended June 30, 2005, mortgage banking income, net, decreased
$3.7 million to mortgage banking income, net of $1.4 million, compared to
mortgage banking income, net of $5.1 million for the six months ended June 30,
2004. These decreases were primarily due to changes in the valuation allowance
for the impairment of MSR. We recorded provisions in the valuation allowance for
the impairment of MSR of $2.5 million
33
for the three months ended June 30, 2005 and $67,000 for the six months ended
June 30, 2005, compared to recoveries of $5.2 million for the three months ended
June 30, 2004 and $3.8 million for the six months ended June 30, 2004. The
provisions recorded during the three and six months ended June 30, 2005 were
primarily due to an increase in projected loan prepayment speeds as of June 30,
2005, which was a result of the decrease in medium- and long-term interest rates
from March 31, 2005 to June 30, 2005. The recoveries recorded during the three
and six months ended June 30, 2004 reflect a decrease in projected loan
prepayment speeds as of June 30, 2004, which was a result of the increase in
interest rates from March 31, 2004 to June 30, 2004.
Customer service fees increased $1.7 million to $16.3 million for the three
months ended June 30, 2005, from $14.6 million for the three months ended June
30, 2004 and increased $3.0 million to $31.3 million for the six months ended
June 30, 2005, from $28.3 million for the six months ended June 30, 2004. The
increases were primarily due to increases in insufficient fund fees related to
transaction accounts, commissions on sales of annuities and an increase in the
monthly service fees charged to customers for membership in our Plus Package
program, which offers credit card protection and purchase discounts, among other
benefits. Other non-interest income increased $886,000 to $2.5 million for the
three months ended June 30, 2005, from $1.6 million for the three months ended
June 30, 2004 and $973,000 to $4.0 million for the six months ended June 30,
2005, from $3.1 million for the six months ended June 30, 2004. These increases
were primarily due to a gain recognized on the sale of an inactive subsidiary in
the 2005 second quarter.
There were no sales of securities during the six months ended June 30, 2005.
During the six months ended June 30, 2004, we sold other securities with an
amortized cost of $20.3 million for a net gain of $2.4 million. Gains on sales
of securities have been used in the past as a natural hedge to offset MSR
valuation allowance adjustments caused by the impairment of MSR.
Non-Interest Expense
Non-interest expense increased $2.2 million to $57.6 million for the three
months ended June 30, 2005, from $55.4 million for the three months ended June
30, 2004, primarily due to an increase in other expense. For the six months
ended June 30, 2005, non-interest expense increased $5.7 million to $118.1
million, from $112.4 million for the six months ended June 30, 2004, primarily
due to increases in other expense and advertising expense, partially offset by
decreases in compensation and benefits expense and occupancy, equipment and
systems expense.
Other expense increased $1.6 million to $9.5 million for the three months ended
June 30, 2005, from $7.9 million for the three months ended June 30, 2004 and
increased $4.2 million to $18.8 million for the six months ended June 30, 2005,
from $14.6 million for the six months ended June 30, 2004, primarily due to
increased legal fees and other costs as a result of the trial in the action
entitled The Long Island Savings Bank, FSB et al. vs. The United States pending
in the United States Court of Federal Claims. See Part II, Item 1, "Legal
Proceedings" for further discussion of this action. As a result of the
completion of the trial phase of this lawsuit, we anticipate a significant
reduction in legal fees related to the goodwill litigation in the second half of
2005 as compared to the first half of 2005.
Advertising expense increased $2.4 million to $5.8 million for the six months
ended June 30, 2005, from $3.4 million for the six months ended June 30, 2004,
primarily due to increased advertising related to, among other things, the
introduction of a business banking marketing campaign in the 2005 first quarter.
34
Our percentage of general and administrative expense to average assets was 1.00%
for the three months ended June 30, 2005 and 1.02% for the six months ended June
30, 2005, compared to 0.99% for the three months ended June 30, 2004 and 1.00%
for the six months ended June 30, 2004. The efficiency ratio, which represents
general and administrative expense divided by the sum of net interest income
plus non-interest income, was 40.01% for the three months ended June 30, 2005
and 40.19% for the six months ended June 30, 2005, compared to 39.21% for the
three months ended June 30, 2004 and 40.46% for the six months ended June 30,
2004.
Income Tax Expense
Income tax expense totaled $28.9 million for the three months ended June 30,
2005 and $58.9 million for the six months ended June 30, 2005, representing an
effective tax rate of 33.5% for the three and six months ended June 30, 2005.
Income tax expense totaled $28.3 million for the three months ended June 30,
2004 and $54.5 million for the six months ended June 30, 2004, representing an
effective tax rate of 33.0% for the three and six months ended June 30, 2004.
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. 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 strengthen our financial condition.
Non-Performing Assets
The following table sets forth information regarding non-performing assets at
the dates indicated.
At June 30, At December 31,
(Dollars in Thousands) 2005 2004
- ------------------------------------------------- ----------- ---------------
Non-accrual delinquent mortgage loans (1) $26,193 $31,462
Non-accrual delinquent consumer and other loans 589 544
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 1,884 573
------- -------
Total non-performing loans 28,666 32,579
Real estate owned, net (3) 1,414 920
------- -------
Total non-performing assets $30,080 $33,499
======= =======
Non-performing loans to total loans 0.21% 0.25%
Non-performing loans to total assets 0.13 0.14
Non-performing assets to total assets 0.13 0.14
Allowance for loan losses to non-performing loans 287.86 254.02
Allowance for loan losses to total loans 0.60 0.62
(1) Includes multi-family and commercial real estate loans totaling $5.4
million at June 30, 2005 and $11.5 million at December 31, 2004.
(2) Mortgage loans delinquent 90 days or more and still accruing interest
consist solely of loans delinquent 90 days or more as to their maturity
date but not their interest due.
(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 on mortgage loans when such loans become 90
days delinquent as to their interest due, even though in some instances the
borrower has only missed two payments. As of June 30, 2005, $6.8 million of
mortgage loans classified as non-performing had missed only two payments. We
discontinue accruing interest on consumer and other loans when such loans become
90 days delinquent as to their payment due. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$855,000 for the six months ended June 30, 2005 and $884,000 for the six months
ended June 30, 2004. This compares to actual payments recorded as interest
income, with respect to such loans, of $325,000 for the six months ended June
30, 2005 and $368,000 for the six months ended June 30, 2004.
In addition to the non-performing loans, we had $1.5 million of potential
problem loans at June 30, 2005, compared to $4.1 million at December 31, 2004.
Such loans are 60-89 days delinquent as shown in the following table.
Delinquent Loans
The following table shows a comparison of delinquent loans at the dates
indicated.
At June 30, 2005 At December 31, 2004
---------------------------------- ----------------------------------
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 5 $ 422 92 $20,757 6 $ 805 98 $20,497
Multi-family -- -- 9 2,979 4 460 12 8,843
Commercial real estate -- -- 5 3,107 -- -- 4 2,695
Construction 1 490 2 1,234 2 1,994 -- --
Consumer and other loans 57 555 54 589 56 880 57 544
--- ------ --- ------- --- ------ --- -------
Total delinquent loans 63 $1,467 162 $28,666 68 $4,139 171 $32,579
=== ====== === ======= === ====== === =======
Delinquent loans to total loans 0.01% 0.21% 0.03% 0.25%
36
Allowance for Loan Losses
The following table sets forth the change in our allowance for losses on loans
for the six months ended June 30, 2005.
(In Thousands)
--------------
Balance at December 31, 2004 $82,758
Provision charged to operations --
Charge-offs:
One-to-four family (163)
Consumer and other loans (294)
-------
Total charge-offs (457)
-------
Recoveries:
One-to-four family 8
Multi-family 34
Consumer and other loans 176
-------
Total recoveries 218
-------
Net charge-offs (239)
-------
Balance at June 30, 2005 $82,519
=======
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. The objective of our IRR management policy is to maintain an
appropriate mix and level of assets, liabilities and off-balance sheet items to
enable us to meet our earnings and/or growth objectives, while maintaining
specified minimum capital levels as required by the OTS, in the case of Astoria
Federal, and as established by our Board of Directors. We use a variety of
analyses to monitor, control and adjust our asset and liability positions,
primarily interest rate sensitivity gap analysis, or gap analysis, and net
interest income sensitivity, or NII sensitivity, analysis. Additional IRR
modeling is done by Astoria Federal in conformity with OTS requirements.
Gap Analysis
Gap analysis measures the difference between the amount of interest-earning
assets anticipated to mature or reprice within specific time periods and the
amount of interest-bearing liabilities anticipated to mature or reprice within
the same time periods. The following table, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at June 30, 2005 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. As indicated
in the Gap Table, our one-year cumulative gap at June 30, 2005 was negative
6.01%. This compares to a one-year cumulative gap of negative 2.87% at December
31, 2004.
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.
37
At June 30, 2005
--------------------------------------------------------------------
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) $ 3,463,808 $4,936,206 $4,356,466 $ 390,149 $13,146,629
Consumer and other loans (1) 488,692 21,986 10,884 -- 521,562
Repurchase agreements 154,264 -- -- -- 154,264
Mortgage-backed and other securities
available-for-sale 423,345 677,669 602,611 491,830 2,195,455
Mortgage-backed and other securities
held-to-maturity 1,445,988 2,015,262 1,538,336 631,660 5,631,246
FHLB-NY stock -- -- -- 123,145 123,145
----------- ---------- ---------- ----------- -----------
Total interest-earning assets 5,976,097 7,651,123 6,508,297 1,636,784 21,772,301
Net unamortized purchase premiums and
deferred costs (2) 21,202 26,004 23,299 492 70,997
----------- ---------- ---------- ----------- -----------
Net interest-earning assets (3) 5,997,299 7,677,127 6,531,596 1,637,276 21,843,298
----------- ---------- ---------- ----------- -----------
Interest-bearing liabilities:
Savings 152,986 305,974 305,974 2,014,331 2,779,265
Money market 655,571 16,449 16,449 123,367 811,836
NOW and demand deposit 43,802 87,600 87,600 1,352,909 1,571,911
Liquid certificates of deposit 331,746 -- -- -- 331,746
Certificates of deposit 3,336,757 2,840,613 853,477 59,622 7,090,469
Borrowed funds, net (4) 2,848,252 3,618,680 1,718,952 378,029 8,563,913
----------- ---------- ---------- ----------- -----------
Total interest-bearing liabilities 7,369,114 6,869,316 2,982,452 3,928,258 21,149,140
----------- ---------- ---------- ----------- -----------
Interest sensitivity gap (1,371,815) 807,811 3,549,144 (2,290,982) $ 694,158
=========== ========== ========== =========== ===========
Cumulative interest sensitivity gap $(1,371,815) $ (564,004) $2,985,140 $ 694,158
=========== ========== ========== ===========
Cumulative interest sensitivity gap as
a percentage of total assets (6.01)% (2.47)% 13.08% 3.04%
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities 81.38% 96.04% 117.33% 103.28%
(1) Mortgage loans and consumer and other loans include loans held-for-sale and
exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
(3) Includes securities available-for-sale at amortized cost.
(4) Excludes the hedge accounting adjustment on our Junior Subordinated
Debentures.
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 July 1, 2005 would decrease by approximately 4.61% from the base
projection. At December 31, 2004, in the up 200 basis point scenario, our
projected net interest income for the twelve month period beginning January 1,
2005 would have decreased by approximately 4.50% from the base projection.
Assuming the entire yield curve was to decrease 200 basis points, through
quarterly parallel decrements of 50 basis points and remain at that level
thereafter, our projected net interest income for the twelve month period
beginning July 1, 2005 would increase by approximately 1.34% from the base
projection. The interest rate environment which existed at December 31, 2004
prevented 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 the assumptions which would have been used for a down 200 basis point
interest rate scenario related to asset and liability pricing, market yields and
customer behavior, given the low level of interest rates, would not have
produced reasonable and meaningful results. However, assuming the entire yield
curve was to decrease 100 basis points, through quarterly parallel decrements of
25 basis points, and remain at that level thereafter, our projected net interest
income for the twelve month period beginning January 1, 2005 would have
decreased by approximately 1.12% from the base projection. At June 30, 2005, in
the down 100 basis point scenario, our projected net interest income for the
twelve month period beginning July 1, 2005 would increase by approximately 0.62%
from the base projection.
Various shortcomings are inherent in both the Gap Table and NII sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from the NII sensitivity analysis. These include income from bank owned life
insurance, changes in the fair value of MSR and the mark-to-market adjustments
on certain derivative instruments. With respect to these items alone, and
assuming the entire yield curve was to increase 200 basis points, through
quarterly parallel increments of 50 basis points and remain at that level
thereafter, our projected net income for the twelve month period beginning July
1, 2005 would increase by
39
approximately $6.3 million. Conversely, assuming the entire yield curve was to
decrease 200 basis points, through quarterly parallel decrements of 50 basis
points, and remain at that level thereafter, our projected net income for the
twelve month period beginning July 1, 2005 would decrease by approximately $8.2
million with respect to these items alone.
For further information regarding our market risk and the limitations of our gap
analysis and NII sensitivity analysis, see Part II, Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk," included in our 2004 Annual Report
on Form 10-K.
ITEM 4. Controls and Procedures
George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and
Monte N. Redman, our Executive Vice President and Chief Financial Officer,
conducted an evaluation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2005. Based
upon their evaluation, they each found that our disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the reports we file and submit under the Exchange Act is recorded, processed,
summarized and reported as and when required and that such information is
accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting that
occurred during the three months ended June 30, 2005 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 affect on
our financial condition, results of operations 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 and the timing of such outcomes are uncertain
and there can be no assurance that we will benefit financially from such
litigation.
The trial in the action entitled The Long Island Savings Bank, FSB et al vs. The
United States commenced on January 18, 2005 and concluded on July 7, 2005. In
our closing argument on July 7, 2005, we asked the Court to award damages
totaling $594.0 million from the U.S. government for breach of contract in
connection with a 1983 Assistance Agreement between the Long Island Savings
Bank, FSB, which was acquired by us in 1998, and the Federal Savings and Loan
Insurance Corporation. The United States is contesting both their liability and
the extent of damages. We are currently awaiting the decision of the Court. No
assurance can be given as to the timing or content of the Court's decision or
the ultimate outcome in this matter.
40
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the repurchases of our common stock by month
during the three months ended June 30, 2005.
Total Number Maximum
Total of Shares Number of Shares
Number of Average Purchased as Part that May Yet Be
Shares Price Paid of Publicly Purchased Under the
Period Purchased per Share Announced Plans Plans
- --------------------- --------- ---------- ----------------- -------------------
April 1, 2005 through
April 30, 2005 335,000 $25.52 335,000 5,399,800
May 1, 2005 through
May 31, 2005 780,000 $27.40 780,000 4,619,800
June 1, 2005 through
June 30, 2005 385,000 $28.02 385,000 4,234,800
--------- ------ ---------
Total 1,500,000 $27.14 1,500,000
========= ====== =========
All of the shares repurchased during the three months ended June 30, 2005 were
repurchased under our tenth stock repurchase plan, approved by our Board of
Directors on May 19, 2004, which authorized the purchase, at management's
discretion, of 12,000,000 shares, or approximately 10% of our common stock then
outstanding, over a two year period in open-market or privately negotiated
transactions.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of shareholders, referred to as the Annual Meeting, was held
May 18, 2005. At the Annual Meeting, our shareholders re-elected George L.
Engelke, Jr., Peter C. Haeffner, Jr., Ralph F. Palleschi and Leo J. Waters as
directors, each to serve for a three year term, and Robert J. Conway as director
to serve for a two year term. In all cases, directors serve until their
respective successors are duly elected and qualified. The shareholders also
approved the 2005 Re-designated, Amended and Restated Stock Incentive Plan for
Officers and Employees of Astoria Financial Corporation and ratified our
appointment of KPMG LLP as our independent registered public accounting firm for
our 2005 fiscal year.
The number of votes cast with respect to each matter acted upon at the Annual
Meeting was as follows:
(a) Election of Directors:
For Withheld
---------- ---------
George L. Engelke, Jr. 94,596,232 7,651,366
Robert J. Conway 98,568,398 3,679,200
Peter C. Haeffner, Jr. 98,808,005 3,439,593
Ralph F. Palleschi 98,504,280 3,743,318
Leo J. Waters 98,746,837 3,500,761
There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
41
(b) Approval of the 2005 Re-designated, Amended and Restated Stock Incentive
Plan for Officers and Employees of Astoria Financial Corporation:
For: 64,360,408
Against: 21,841,058
Abstained: 620,043
There were 15,426,089 broker held non-voted shares represented at the
meeting with respect to this proposal.
(c) Ratification of the appointment of KPMG LLP as the independent registered
public accounting firm of Astoria Financial Corporation for the 2005 fiscal
year:
For: 100,611,862
Against: 1,271,512
Abstained: 364,224
There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.1 2005 Re-designated, Amended and Restated Stock Incentive Plan for
Officers and Employees of Astoria Financial Corporation
(Incorporated by reference to Astoria Financial Corporation's Form
14-A Definitive Proxy Statement filed on April 11, 2005 (File
Number 001-11967)).
31.1 Certifications of Chief Executive Officer.
31.2 Certifications of Chief Financial Officer.
32.1 Written Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350. Pursuant to SEC rules, this exhibit will not be deemed filed
for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that section.
32.2 Written Statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350. Pursuant to SEC rules, this exhibit will not be deemed filed
for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that section.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Astoria Financial Corporation
Dated: August 4, 2005 By: /s/ Monte N. Redman
-----------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
43
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.1 2005 Re-designated, Amended and Restated Stock Incentive Plan for
Officers and Employees of Astoria Financial Corporation
(Incorporated by reference to Astoria Financial Corporation's Form
14-A Definitive Proxy Statement filed on April 11, 2005 (File
Number 001-11967)).
31.1 Certifications of Chief Executive Officer.
31.2 Certifications of Chief Financial Officer.
32.1 Written Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350. Pursuant to SEC rules, this exhibit will not be deemed filed
for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that section.
32.2 Written Statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350. Pursuant to SEC rules, this exhibit will not be deemed filed
for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that section.
44