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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(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 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, April 30, 2002
----------------------- --------------------------------------------
.01 Par Value 89,929,751
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at March 31, 2002 2
and December 31, 2001
Consolidated Statements of Income for the Three Months 3
Ended March 31, 2002 and March 31, 2001
Consolidated Statement of Changes in Stockholders' Equity for the 4
Three Months Ended March 31, 2002
Consolidated Statements of Cash Flows for the Three Months Ended 5
March 31, 2002 and March 31, 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
(a) Exhibits
(11) Statement Regarding Computation of Per Share Earnings
(b) Reports on Form 8-K
Signatures 31
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AT AT
MARCH 31, DECEMBER 31,
(In Thousands, Except Share Data) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 157,696 $ 144,694
Federal funds sold and repurchase agreements 681,890 1,309,164
Available-for-sale securities:
Encumbered 2,480,426 3,176,977
Unencumbered 443,711 372,206
- ---------------------------------------------------------------------------------------------------------------------------------
2,924,137 3,549,183
Held-to-maturity securities, fair value of $4,780,980 and $4,468,200, respectively:
Encumbered 4,655,146 4,201,503
Unencumbered 142,693 262,425
- ---------------------------------------------------------------------------------------------------------------------------------
4,797,839 4,463,928
Federal Home Loan Bank of New York stock, at cost 242,973 250,450
Loans held-for-sale 28,414 43,390
Loans receivable:
Mortgage loans, net 12,145,360 11,924,134
Consumer and other loans, net 263,172 243,127
- ---------------------------------------------------------------------------------------------------------------------------------
12,408,532 12,167,261
Allowance for loan losses (82,947) (82,285)
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net 12,325,585 12,084,976
Mortgage servicing rights, net 35,708 35,295
Accrued interest receivable 96,979 96,273
Premises and equipment, net 151,283 149,753
Goodwill 185,151 185,151
Bank owned life insurance 347,013 242,751
Other assets 132,302 112,698
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $22,106,970 $22,667,706
=================================================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,690,731 $ 2,588,143
Money market 1,962,684 1,955,286
NOW 1,232,982 1,199,966
Certificates of deposit 5,210,408 5,160,298
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 11,096,805 10,903,693
Reverse repurchase agreements 6,885,000 7,385,000
Federal Home Loan Bank of New York advances 1,664,450 1,914,000
Other borrowings, net 399,377 399,587
Mortgage escrow funds 160,428 116,395
Accrued expenses and other liabilities 220,551 281,445
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 20,426,611 21,000,120
Guaranteed preferred beneficial interest in junior subordinated debentures (capital
trust securities) 125,000 125,000
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,225,000 shares authorized and -0- shares issued and outstanding) -- --
Series B (2,000,000 shares authorized, issued and outstanding) 2,000 2,000
Common stock, $.01 par value; (200,000,000 shares authorized;
110,996,592 shares issued; and 90,073,751 and 90,766,744 shares
outstanding, respectively) 1,110 1,110
Additional paid-in capital 828,142 822,652
Retained earnings 1,244,770 1,207,742
Treasury stock (20,922,841 and 20,229,848 shares, at cost, respectively) (484,348) (459,471)
Accumulated other comprehensive loss:
Net unrealized loss on securities, net of taxes (7,289) (1,967)
Unallocated common stock held by ESOP (29,026) (29,480)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,555,359 1,542,586
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,106,970 $22,667,706
=================================================================================================================================
See accompanying notes to consolidated financial statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(In Thousands, Except Share Data) 2002 2001
- ---------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans $202,798 $203,191
Consumer and other loans 3,802 4,879
Mortgage-backed securities 100,496 127,716
Other securities 19,656 32,089
Federal funds sold and repurchase agreements 4,138 4,678
- ---------------------------------------------------------------------------------------------------
Total interest income 330,890 372,553
- ---------------------------------------------------------------------------------------------------
Interest expense:
Deposits 78,227 105,564
Borrowed funds 134,632 143,628
- ---------------------------------------------------------------------------------------------------
Total interest expense 212,859 249,192
- ---------------------------------------------------------------------------------------------------
Net interest income 118,031 123,361
Provision for loan losses 1,004 1,002
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 117,027 122,359
- ---------------------------------------------------------------------------------------------------
Non-interest income:
Customer service and other loan fees 16,053 13,067
Loan servicing fees 3,233 3,980
Net gain on sales of loans 1,549 333
Income from bank owned life insurance 4,262 4,182
Other 3,217 1,150
- ---------------------------------------------------------------------------------------------------
Total non-interest income 28,314 22,712
- ---------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 26,068 23,107
Occupancy, equipment and systems 13,175 12,981
Federal deposit insurance premiums 505 497
Advertising 1,027 1,854
Other 7,075 6,220
- ---------------------------------------------------------------------------------------------------
Total general and administrative 47,850 44,659
Net amortization of mortgage servicing rights 1,354 3,115
Goodwill litigation 279 1,021
Capital trust securities 3,104 3,104
Amortization of goodwill -- 4,811
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 52,587 56,710
- ---------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect
of accounting change 92,754 88,361
Income tax expense 31,536 31,651
- ---------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 61,218 56,710
Cumulative effect of accounting change, net of tax -- (2,294)
- ---------------------------------------------------------------------------------------------------
Net income 61,218 54,416
Preferred dividends declared (1,500) (1,500)
- ---------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 59,718 $ 52,916
- ---------------------------------------------------------------------------------------------------
Basic earnings per common share:
Income before accounting change $ 0.70 $ 0.60
Cumulative effect of accounting change, net of tax -- (0.03)
- ---------------------------------------------------------------------------------------------------
Net basic earnings per common share $ 0.70 $ 0.57
- ---------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before accounting change $ 0.69 $ 0.58
Cumulative effect of accounting change, net of tax -- (0.03)
- ---------------------------------------------------------------------------------------------------
Net diluted earnings per common share $ 0.69 $ 0.55
- ---------------------------------------------------------------------------------------------------
Dividends per common share $ 0.17 $ 0.13
- ---------------------------------------------------------------------------------------------------
Basic weighted average common shares 85,478,138 93,509,362
Diluted weighted average common and common equivalent shares 87,041,932 95,396,688
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
UNALLOCATED
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HELD
(In Thousands, Except Share Data) TOTAL STOCK STOCK CAPITAL EARNINGS STOCK LOSS BY ESOP
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,542,586 $2,000 $1,110 $822,652 $1,207,742 $(459,471) $(1,967) $(29,480)
Comprehensive income:
Net income 61,218 -- -- -- 61,218 -- -- --
Other comprehensive loss,
net of tax:
Net unrealized loss on
securities (7,494) -- -- -- -- -- (7,494) --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 2,172 -- -- -- -- -- 2,172 --
--------
Comprehensive income 55,896
--------
Common stock repurchased
(1,206,200 shares) (36,548) -- -- -- -- (36,548) -- --
Dividends on common and preferred
stock and amortization of
purchase premium (16,988) -- -- (324) (16,664) -- -- --
Exercise of stock options and
related tax benefit
(513,207 shares issued) 8,016 -- -- 3,871 (7,526) 11,671 -- --
Amortization relating to allocation
of ESOP stock 2,397 -- -- 1,943 -- -- -- 454
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $1,555,359 $2,000 $1,110 $828,142 $1,244,770 $(484,348) $(7,289) $(29,026)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(In Thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 61,218 $ 54,416
Adjustments to reconcile net income to net cash provided
by operating activities:
Net accretion of discounts, premiums and deferred loan costs (1,972) (10,595)
Net provision for loan and real estate losses 1,004 1,016
Depreciation and amortization 2,768 3,202
Net gain on sales of loans (1,549) (333)
Proceeds from sales of loans held-for-sale, net of originations 16,525 (9,674)
Amortization of goodwill -- 4,811
Cumulative effect of accounting change, net of tax -- 2,294
Amortization of allocated and earned shares from ESOP 2,397 1,602
Increase in accrued interest receivable (706) (571)
Mortgage servicing rights amortization and valuation
allowance, net of capitalized amounts (413) 2,634
Income from bank owned life insurance (4,262) (4,182)
(Increase) decrease in other assets (15,829) 2,325
Decrease in accrued expenses and other liabilities (57,023) (41,006)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,158 5,939
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans held-for-investment (1,052,660) (437,433)
Loan purchases through third parties (454,598) (258,518)
Principal repayments on loans held-for-investment 1,254,041 611,985
Principal payments on mortgage-backed securities held-to-maturity 759,606 65,790
Principal payments on mortgage-backed securities available-for-sale 618,245 220,709
Purchases of mortgage-backed securities held-to-maturity (1,109,091) --
Proceeds from maturities of other securities available-for-sale 66 28,083
Proceeds from maturities of other securities held-to-maturity 25,316 138,297
Redemption of FHLB stock 7,477 --
Proceeds from sales of real estate owned, net 1,262 825
Purchases of premises and equipment, net of proceeds from sales (4,298) (1,457)
Purchases of bank owned life insurance (100,000) --
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (54,634) 368,281
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 193,112 265,992
Net decrease in reverse repurchase agreements (500,000) --
Net decrease in FHLB of New York advances (249,550) (46,000)
Net decrease in other borrowings -- (3,365)
Increase in mortgage escrow funds 44,033 43,192
Cost to repurchase common stock (36,548) (63,236)
Cash dividends paid to stockholders (16,988) (14,468)
Cash received for options exercised 4,145 11,271
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (561,796) 193,386
- --------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (614,272) 567,606
Cash and cash equivalents at beginning of period 1,453,858 307,251
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 839,586 $ 874,857
==============================================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 222,725 $ 253,338
==============================================================================================================
Income taxes $ 7,481 $ 62
==============================================================================================================
Additions to real estate owned $ 946 $ 1,413
==============================================================================================================
See accompanying notes to consolidated financial statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal; Astoria Capital Trust I; and AF Insurance Agency, Inc. As used in this
quarterly report, "we," "us" and "our" refer to Astoria Financial Corporation
and its consolidated subsidiaries, including Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., depending on the context. All significant
inter-company accounts and transactions have been eliminated in consolidation.
In our opinion, the accompanying consolidated financial statements contain all
adjustments necessary for a fair presentation of our financial condition as of
March 31, 2002 and December 31, 2001, our results of operations for the three
months ended March 31, 2002 and 2001, changes in our stockholders' equity for
the three months ended March 31, 2002 and our cash flows for the three months
ended March 31, 2002 and 2001. In preparing the consolidated financial
statements, we are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities in the consolidated statements of
financial condition as of March 31, 2002 and December 31, 2001, and amounts of
revenues and expenses in the consolidated statements of income for the three
months ended March 31, 2002 and 2001. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the results of
operations to be expected for the remainder of the year. Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, or GAAP, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain reclassifications
have been made to prior year amounts to conform to the current year
presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2001 audited consolidated financial statements and related notes
included in our 2001 Annual Report on Form 10-K.
6
2. EARNINGS PER SHARE, OR EPS
The following table is a reconciliation of basic and diluted EPS.
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2)
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $61,218 $61,218 $56,710 $56,710
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
- -----------------------------------------------------------------------------------------------------------------------
59,718 59,718 55,210 55,210
Cumulative effect of accounting
change, net of tax -- -- (2,294) (2,294)
- -----------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders $59,718 $59,718 $52,916 $52,916
- -----------------------------------------------------------------------------------------------------------------------
Total weighted average basic
common shares outstanding 85,478 85,478 93,509 93,509
Effect of dilutive securities:
Options -- 1,564 -- 1,888
- -----------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 85,478 87,042 93,509 95,397
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Income before cumulative effect
of accounting change $ 0.70 $ 0.69 $ 0.60 $ 0.58
Cumulative effect of accounting
change, net of tax -- -- (0.03) (0.03)
- -----------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 0.70 $ 0.69 $ 0.57 $ 0.55
- -----------------------------------------------------------------------------------------------------------------------
(1) Options to purchase 467,000 shares of common stock at prices between $29.06
per share and $29.88 per share were outstanding as of March 31, 2002, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares for the three months ended March 31, 2002.
(2) Options to purchase 520,304 shares of common stock at prices between $28.31
per share and $29.88 per share were outstanding as of March 31, 2001, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares for the three months ended March 31, 2001.
3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, "Business Combinations," or
SFAS No. 141, and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," or SFAS No. 142. SFAS No. 141 requires that all
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method, the purchase method, and that goodwill and other intangible assets
acquired in a business combination shall be accounted for in accordance with the
provisions of SFAS No. 142. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Previously,
goodwill and other intangible assets were amortized in determining net income.
SFAS No. 142 assumes goodwill has an indefinite useful life and should not be
amortized, but rather tested, at least annually, for impairment. SFAS No. 142
also provides specific guidance for testing goodwill for impairment.
7
Effective January 1, 2002, we ceased recording goodwill amortization amounting
to approximately $19.1 million annually, or approximately $0.21 per diluted
common share, based on diluted weighted average common and common equivalent
shares outstanding for the year ended December 31, 2001. Upon adoption of SFAS
No. 142, we performed a transitional goodwill impairment evaluation. We
identified a single reporting unit, for purposes of our goodwill impairment
testing, and determined the fair value of this reporting unit to be in excess of
its carrying value. As such, at the date of our adoption of SFAS No. 142, no
indication of goodwill impairment exists.
The following table reconciles reported net income and earnings per share to net
income and earnings per share excluding the amortization of goodwill.
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(In Thousands, Except Per Share Data) 2002 2001
- -------------------------------------------------------------------
Net income:
Reported net income $61,218 $54,416
Add back: goodwill amortization -- 4,811
- -------------------------------------------------------------------
Adjusted net income $61,218 $59,227
===================================================================
Basic earnings per common share:
Reported net income $ 0.70 $ 0.57
Goodwill amortization -- 0.05
- -------------------------------------------------------------------
Adjusted net income $ 0.70 $ 0.62
===================================================================
Diluted earnings per common share:
Reported net income $ 0.69 $ 0.55
Goodwill amortization -- 0.05
- -------------------------------------------------------------------
Adjusted net income $ 0.69 $ 0.60
===================================================================
Mortgage servicing rights, or MSR, net totaled $35.7 million at March 31, 2002
and $35.3 million at December 31, 2001. MSR amortization for the three months
ended March 31, 2002 totaled $2.2 million. As of March 31, 2002, estimated
future MSR amortization through 2007 is as follows: $4.8 million for the
remainder of 2002, $5.7 million for 2003, $4.8 million for 2004, $4.0 million
for 2005, $3.4 million for 2006, and $2.8 million for 2007. Actual results may
vary depending upon the level of repayments of the loans currently serviced.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS
No. 144, which replaced Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The adoption of SFAS No. 144 did not
have a material impact on our financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements may be identified by the use of the words "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may,"
8
"outlook," "plan," "potential," "predict," "project," "should," "will," "would"
and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate under the circumstances. These statements
are not guarantees of future performance and are subject to risks, uncertainties
and other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
- the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
- there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
- changes in the interest rate environment may reduce interest
margins;
- changes in deposit flows, loan demand or real estate values may
adversely affect our business;
- changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
- general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
- legislation or regulatory changes may adversely affect our business;
- technological changes may be more difficult or expensive than we
anticipate;
- success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
- litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
GENERAL
We are a Delaware corporation organized as the unitary savings and loan
association holding company of Astoria Federal. We are headquartered in Lake
Success, New York and our primary business is the operation of our wholly-owned
subsidiary, Astoria Federal. Astoria Federal's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments on loans and
securities, and borrowed funds, primarily in one-to-four family mortgage loans
and mortgage-backed securities, and, to a lesser extent, multi-family mortgage
loans and commercial real estate loans. To a much smaller degree, we also invest
in construction loans and consumer and other loans. In addition, Astoria Federal
invests in U.S. Government and federal agency securities and other investments
permitted by federal laws and regulations.
9
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. General and
administrative expense consists of compensation and benefits, occupancy,
equipment and systems expense, federal deposit insurance premiums, advertising
and other operating expenses. Other non-interest expense consists of net
amortization of mortgage servicing rights, goodwill litigation expense, capital
trust securities expense and, prior to January 1, 2002, amortization of
goodwill. Our earnings are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates and U.S.
Treasury yield curves, government policies and actions of regulatory
authorities.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and variable annuity agent and property and casualty insurance
broker. Through contractual agreements with The Treiber Group LLC and IFS
Agencies, Inc., AF Insurance Agency, Inc. provides insurance products to the
customers of Astoria Federal. Astoria Capital Trust I was formed in 1999 for the
purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital
Securities due November 1, 2029 and prepayable at our option on or after
November 1, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is cash provided by principal and interest payments
on loans and mortgage-backed and other securities. Principal payments on loans
and mortgage-backed securities and proceeds from maturities of other securities
totaled $2.66 billion for the three months ended March 31, 2002 and $1.06
billion for the three months ended March 31, 2001. The increase in loan and
security repayments was primarily the result of the increase in mortgage loan
refinance activity due to the lower interest rate environment during the first
three months of 2002 compared to the same period in 2001. During the year ended
December 31, 2001, the Federal Open Market Committee, or FOMC, reduced the
federal funds rate on eleven separate occasions by a total of 475 basis points.
Net cash provided by operating activities totaled $2.2 million during the three
months ended March 31, 2002 and $5.9 million during the three months ended March
31, 2001. During the three months ended March 31, 2002, net borrowings decreased
$749.8 million, while net deposits increased $193.1 million. During the three
months ended March 31, 2001, net borrowings decreased $47.6 million, while net
deposits increased $266.0 million. The changes in borrowings and deposits are
consistent with our strategy of repositioning the balance sheet through, in
part, a shift in our liability mix toward lower costing and less interest rate
sensitive core deposits. Core deposits include savings, money market, NOW and
demand deposit accounts. The net increases in deposits for the three months
ended March 31, 2002 and 2001 reflect our continued emphasis on attracting
customer deposits through competitive rates, extensive product offerings and
quality service.
Our primary use of funds is for the origination and purchase of mortgage loans.
Cash flow in excess of mortgage and other loan fundings was primarily utilized
for both the purchase of mortgage-backed securities and the repayment of
borrowings during the quarter ended March 31, 2002. During the three months
ended March 31, 2002, our gross originations and
10
purchases of mortgage loans totaled $1.55 billion, compared to $709.0 million
during the three months ended March 31, 2001. This increase was primarily
attributable to the lower interest rate environment during the first quarter of
2002 compared to the first quarter of 2001, which resulted in an increase in
mortgage refinance activity. Our loan originations have outpaced the increased
level of repayments in the first quarter of 2002, resulting in an overall
increase in our loan portfolio from December 31, 2001 to March 31, 2002.
Purchases of mortgage-backed securities totaled $1.11 billion during the three
months ended March 31, 2002. There were no securities purchases for the three
months ended March 31, 2001.
The rapid decline in interest rates in 2001 resulted in a significant increase
in loan and securities repayments which has continued during the first quarter
of 2002. Should the pace of repayment activity remain at its recent levels and
cash inflows continue to exceed mortgage and other loan fundings, we may
continue to purchase mortgage-backed securities as we have done in the latter
half of 2001 and through the first quarter of 2002. If repayment activity
declines in the future, we will likely reduce our purchases of mortgage-backed
securities. This activity is consistent with our strategy of repositioning the
balance sheet with an emphasis on the origination of mortgage loans.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, with maturities of
three months or less, our most liquid assets, totaled $839.6 million at March
31, 2002, compared to $1.45 billion at December 31, 2001. The decrease in our
liquidity is primarily the result of the repayment of $750.0 million of
borrowings which matured in the first quarter of 2002 and had a weighted
average rate of 7.01%. Borrowings maturing in the next nine months total $1.05
billion with a weighted average rate of 6.66%. We have the flexibility to either
repay or rollover such borrowings as they mature. In addition, we have $2.23
billion in certificates of deposit with a weighted average rate of 3.80%
maturing over the next nine months. We expect to retain a significant portion of
such deposits based on our competitive pricing and historical experience.
Retained deposits and refinanced borrowings should carry lower weighted average
rates, assuming that interest rates remain near their current levels.
The most significant liquidity challenge we face is the variability in cash
flows as a result of mortgage refinance activity. As mortgage interest rates
decline, customers' refinance activities tend to accelerate, causing the cash
flow from both our mortgage loan portfolio and our mortgage-backed securities
portfolio to accelerate. When mortgage interest rates increase, the opposite
effect tends to occur. In addition, as mortgage interest rates decrease,
customers tend to prefer fixed rate mortgage loan products over variable rate
products. Since we generally sell our fifteen year and thirty year fixed rate
loan production into the secondary mortgage market, the origination of such
products for sale does not significantly reduce our liquidity.
Stockholders' equity increased to $1.56 billion at March 31, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $61.2 million, the effect of stock options exercised and
related tax benefit of $8.0 million, and the amortization of the allocated
portion of shares held by the employee stock ownership plan, or ESOP, of $2.4
million. These increases were partially offset by repurchases of our common
stock of $36.5 million, dividends declared of $17.0 million and a $5.3 million
increase in accumulated other comprehensive loss, net of tax.
11
On March 1, 2002, we paid a quarterly cash dividend of $0.17 per share on shares
of our common stock outstanding as of the close of business on February 15,
2002, totaling $15.5 million. During the three months ended March 31, 2002, we
declared a cash dividend on our Series B Preferred Stock aggregating $1.5
million. On April 17, 2002, we declared a quarterly cash dividend of $0.20 per
share on shares of our common stock payable on June 3, 2002 to stockholders of
record as of the close of business on May 15, 2002.
On September 17, 2001, our Board of Directors approved our eighth stock
repurchase plan authorizing the purchase, at management's discretion, of
10,000,000 shares, or approximately 11% of our common stock then outstanding,
over a two year period in open-market or privately negotiated transactions.
During the three months ended March 31, 2002, we repurchased 1,206,200 shares of
our common stock at an aggregate cost of $36.5 million. In total, 4,240,800
shares have been purchased under the eighth stock repurchase plan.
At March 31, 2002, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.34%, leverage
capital ratio of 6.34% and risk-based capital ratio of 14.31%. The minimum
regulatory requirements were a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and risk-based capital ratio of 8.00%.
LOAN PORTFOLIO
The following table sets forth the composition of our loans receivable and loans
held-for-sale portfolios at March 31, 2002 and December 31, 2001.
AT MARCH 31, 2002 AT DECEMBER 31, 2001
----------------------------------- -------------------------------
PERCENT PERCENT
(Dollars in Thousands) AMOUNT OF TOTAL AMOUNT OF TOTAL
- -----------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS (1):
One-to-four family $10,214,544 82.67% $10,146,555 83.63%
Multi-family 1,197,358 9.69 1,094,312 9.02
Commercial real estate 625,960 5.07 598,334 4.93
Construction 56,164 0.45 50,739 0.42
- -----------------------------------------------------------------------------------------------------------------
Total mortgage loans 12,094,026 97.88 11,889,940 98.00
- -----------------------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (2):
Home equity 212,389 1.72 189,259 1.56
Passbook 8,661 0.07 9,012 0.07
Other 41,010 0.33 43,821 0.37
- -----------------------------------------------------------------------------------------------------------------
Total consumer and other loans 262,060 2.12 242,092 2.00
- -----------------------------------------------------------------------------------------------------------------
TOTAL LOANS 12,356,086 100.00% 12,132,032 100.00%
Unamortized premiums, discounts and
deferred loan costs and fees, net 80,860 78,619
Allowance for loan losses (82,947) (82,285)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $12,353,999 $12,128,366
=================================================================================================================
(1) Includes loans classified as held-for-sale totaling $25.6 million at March
31, 2002 and $41.5 million at December 31, 2001.
(2) Includes loans classified as held-for-sale totaling $2.8 million at March
31, 2002 and $1.9 million at December 31, 2001.
12
SECURITIES PORTFOLIO
The following tables set forth the amortized cost and estimated fair value of
mortgage-backed securities and other securities available-for-sale and
held-to-maturity at March 31, 2002 and December 31, 2001.
AT
-------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
-------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
(In Thousands) COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
Mortgage-backed securities:
Agency pass-through certificates $ 404,452 $ 415,027 $ 450,742 $ 462,748
REMICs and CMOs:
Agency issuance 1,014,495 1,020,444 1,402,241 1,402,093
Non-agency issuance 948,567 960,013 1,132,384 1,150,122
- ------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,367,514 2,395,484 2,985,367 3,014,963
- ------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 369,237 349,789 362,888 359,561
FNMA and FHLMC preferred stock 120,015 114,376 120,015 111,276
Corporate debt and other securities 68,191 64,488 68,292 63,383
- ------------------------------------------------------------------------------------------------------
Total other securities 557,443 528,653 551,195 534,220
- ------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,924,957 $2,924,137 $3,536,562 $3,549,183
======================================================================================================
HELD-TO-MATURITY:
Mortgage-backed securities:
Agency pass-through certificates $ 32,962 $ 33,703 $ 36,620 $ 37,543
REMICs and CMOs:
Agency issuance 2,871,442 2,875,328 2,979,357 2,975,780
Non-agency issuance 1,507,665 1,494,475 1,043,110 1,049,426
- ------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,412,069 4,403,506 4,059,087 4,062,749
- ------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 343,277 334,972 362,034 362,628
Obligations of states and
political subdivisions 42,493 42,502 42,807 42,823
- ------------------------------------------------------------------------------------------------------
Total other securities 385,770 377,474 404,841 405,451
- ------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $4,797,839 $4,780,980 $4,463,928 $4,468,200
======================================================================================================
13
COMPARISON OF FINANCIAL CONDITION AS OF
MARCH 31, 2002 AND DECEMBER 31, 2001
AND OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001
FINANCIAL CONDITION
Total assets decreased $560.7 million to $22.11 billion at March 31, 2002, from
$22.67 billion at December 31, 2001. We continued our strategy of repositioning
the balance sheet through increases in deposits and loans and decreases in
securities and borrowings. The primary reason for the decrease in total assets
was the decrease in federal funds sold and repurchase agreements which were
utilized for the repayment of various borrowings which matured during the
quarter ended March 31, 2002.
Mortgage loans, net, including mortgage loans held-for-sale, increased $205.3
million to $12.17 billion at March 31, 2002, from $11.97 billion at December 31,
2001. Gross mortgage loans originated and purchased during the three months
ended March 31, 2002 totaled $1.55 billion, of which $1.10 billion were
originations and $451.5 million were purchases. This compares to $452.9 million
of originations and $256.1 million of purchases for a total of $709.0 million
during the three months ended March 31, 2001. The increase in mortgage loan
originations and purchases was primarily a result of the lower interest rate
environment in the first quarter of 2002 compared to the first quarter of 2001,
which has increased the level of mortgage refinance activity. This increase was
partially offset by an increase in mortgage loan repayments to $1.21 billion for
the three months ended March 31, 2002, from $583.6 million for the three months
ended March 31, 2001, which was also primarily a result of the decrease in
market interest rates in the 2002 first quarter over the comparable 2001 period.
Our mortgage loan portfolios, as well as our originations and purchases,
continue to consist primarily of one-to-four family mortgage loans. Our
one-to-four family mortgage loans, which represent 82.7% of our total loan
portfolio at March 31, 2002, increased $68.0 million to $10.21 billion at
March 31, 2002, from $10.15 billion at December 31, 2001. Our multi-family
mortgage loans increased $103.0 million to $1.20 billion at March 31, 2002, from
$1.09 billion at December 31, 2001. Our commercial real estate loans increased
$27.7 million to $626.0 million at March 31, 2002, from $598.3 million at
December 31, 2001.
Mortgage-backed securities decreased $266.5 million to $6.81 billion at March
31, 2002, from $7.07 billion at December 31, 2001. This decrease was primarily
the result of principal payments received of $1.38 billion and a decrease in the
net unrealized gain on mortgage-backed securities available-for-sale of $1.6
million, offset by purchases of $1.11 billion.
In addition to the changes noted above in the mortgage-backed securities and
mortgage loan portfolios, other securities decreased $24.7 million to $914.4
million at March 31, 2002, from $939.1 million at December 31, 2001, primarily
due to $25.4 million in securities which were called or matured coupled with an
increase in the net unrealized loss on securities available-for-sale of $11.8
million, partially offset by the net accretion of discounts of $12.5 million.
The increase in the unrealized loss on securities available-for-sale is related
to the increase in medium term market interest rates during the first quarter of
2002 from December 31, 2001. Federal funds sold and repurchase agreements
decreased $627.3 million to $681.9 million at
14
March 31, 2002, from $1.31 billion at December 31, 2001. This decrease was
primarily attributable to the repayment of $750.0 million of borrowings which
matured during the quarter. Bank Owned Life Insurance, or BOLI, increased $104.2
million to $347.0 million at March 31, 2002, from $242.8 million at December 31,
2001, primarily as a result of an additional $100.0 million purchase made in the
first quarter of 2002. The BOLI is classified as a non-interest earning asset.
Consistent with our strategy of repositioning the balance sheet, we also
continued shifting our liability emphasis from borrowings to deposits,
particularly lower costing core deposits. Deposits increased $193.1 million to
$11.10 billion at March 31, 2002, from $10.90 billion at December 31, 2001. The
increase in deposits was primarily due to an increase of $143.0 million in core
deposits to $5.89 billion at March 31, 2002, from $5.74 billion at December 31,
2001, which was attributable to our continued emphasis on deposit generation
through competitive rates, extensive product offerings and quality service.
Reverse repurchase agreements decreased $500.0 million to $6.89 billion at March
31, 2002, from $7.39 billion at December 31, 2001. Federal Home Loan Bank of New
York advances decreased $249.6 million to $1.66 billion at March 31, 2002, from
$1.91 billion at December 31, 2001. The decreases in borrowings are the result
of the repayment of various borrowings which matured during the three months
ended March 31, 2002.
Stockholders' equity increased to $1.56 billion at March 31, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $61.2 million, the effect of stock options exercised and
related tax benefit of $8.0 million, and the amortization of the allocated
portion of shares held by the ESOP of $2.4 million. These increases were
partially offset by repurchases of our common stock of $36.5 million, dividends
declared of $17.0 million and a $5.3 million increase in accumulated other
comprehensive loss, net of tax.
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended March 31, 2002 increased $6.8 million to
$61.2 million, from $54.4 million for the three months ended March 31, 2001. For
the three months ended March 31, 2002, diluted earnings per common share
increased to $0.69 per share, as compared to $0.55 per share for the three
months ended March 31, 2001. Return on average assets increased to 1.09% for the
three months ended March 31, 2002, from 0.97% for the three months ended March
31, 2001. Return on average stockholders' equity increased to 15.72% for the
three months ended March 31, 2002, from 13.88% for the three months ended March
31, 2001. Return on average tangible stockholders' equity increased to 17.85%
for the three months ended March 31, 2002, from 15.94% for the three months
ended March 31, 2001.
The results of operations for the three months ended March 31, 2002 include the
benefit derived from the adoption of SFAS No. 142. SFAS No. 142 eliminated
goodwill amortization, which totaled $4.8 million for the quarter ended March
31, 2001. The results of operations for the three months ended March 31, 2001
include a $2.3 million, after tax, charge for the cumulative effect of
accounting change related to the adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
15
Activities," or SFAS No. 133, and Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133," or SFAS No. 138,
effective January 1, 2001.
NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
primarily upon the volume of interest-earning assets and interest-bearing
liabilities and the corresponding interest rates earned or paid. Our net
interest income is significantly impacted by changes in interest rates and
market yield curves. See Item 3, "Quantitative and Qualitative Disclosures About
Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the three months ended March 31, 2002, net interest income decreased $5.4
million to $118.0 million, from $123.4 million for the three months ended March
31, 2001. This decrease was partially the result of a decrease of $369.6 million
in the average balance of net interest-earning assets to $848.1 million for the
three months ended March 31, 2002, from $1.22 billion for the three months ended
March 31, 2001. The decrease in the average balance of net interest-earning
assets was the result of a $223.6 million decrease in the average balance of
total interest-earning assets to $21.27 billion for the three months ended March
31, 2002, from $21.50 billion for the three months ended March 31, 2001, coupled
with a $146.0 million increase in the average balance of total interest-bearing
liabilities to $20.42 billion for the three months ended March 31, 2002, from
$20.28 billion for the three months ended March 31, 2001. The net interest rate
spread increased to 2.05% for the three months ended March 31, 2002, from 2.01%
for the three months ended March 31, 2001. The change in the net interest rate
spread is the result of a decrease in the average cost of interest-bearing
liabilities to 4.17% for the three months ended March 31, 2002, from 4.92% for
the three months ended March 31, 2001, partially offset by a decrease in the
average yield on interest-earning assets to 6.22% for the three months ended
March 31, 2002, from 6.93% for the three months ended March 31, 2001. The net
interest margin decreased to 2.22% for the three months ended March 31, 2002,
from 2.30% for the three months ended March 31, 2001. The changes in average
interest-earning assets and interest-bearing liabilities and their related
yields and costs are discussed in greater detail under "Interest Income" and
"Interest Expense."
ANALYSIS OF NET INTEREST INCOME
The following table sets forth certain information about the average balances of
our assets and liabilities and the related yields and costs for the three months
ended March 31, 2002 and 2001. Average yields are derived by dividing income by
the average balance of the related assets and average costs are derived by
dividing expense by the average balance of the related liabilities, for the
periods shown. Average balances are derived from average daily balances. The
average balance of loans receivable includes loans on which we have discontinued
accruing interest. The yields and costs include fees, costs, premiums and
discounts which are considered adjustments to interest rates.
16
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST BALANCE INTEREST COST
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS: (ANNUALIZED) (ANNUALIZED)
Interest-earning assets:
Mortgage loans (1):
One-to-four family $10,397,683 $166,509 6.41% $ 9,986,522 $175,520 7.03%
Multi-family, commercial
and construction 1,810,016 36,289 8.02 1,332,364 27,671 8.31
Consumer and other loans (1) 255,055 3,802 5.96 188,626 4,879 10.35
----------- -------- ----------- --------
Total loans 12,462,754 206,600 6.63 11,507,512 208,070 7.23
Mortgage-backed securities (2) 6,627,950 100,496 6.06 7,848,310 127,716 6.51
Other securities (2)(3) 1,188,237 19,656 6.62 1,795,952 32,089 7.15
Federal funds sold and
repurchase agreements 993,080 4,138 1.67 343,900 4,678 5.44
----------- -------- ----------- --------
Total interest-earning assets 21,272,021 330,890 6.22 21,495,674 372,553 6.93
-------- --------
Non-interest-earning assets 1,206,482 879,997
----------- -----------
Total assets $22,478,503 $22,375,671
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,633,088 8,103 1.23 $ 2,437,685 12,161 2.00
Certificates of deposit 5,149,262 58,939 4.58 5,162,621 73,687 5.71
NOW 1,192,758 825 0.28 1,002,920 1,393 0.56
Money market 1,956,641 10,360 2.12 1,520,725 18,323 4.82
----------- -------- ----------- --------
Total deposits 10,931,749 78,227 2.86 10,123,951 105,564 4.17
Borrowed funds 9,492,125 134,632 5.67 10,153,928 143,628 5.66
----------- -------- ----------- --------
Total interest-bearing liabilities 20,423,874 212,859 4.17 20,277,879 249,192 4.92
-------- --------
Non-interest-bearing liabilities 497,268 529,614
----------- -----------
Total liabilities 20,921,142 20,807,493
Stockholders' equity 1,557,361 1,568,178
----------- -----------
Total liabilities and stockholders'
equity $22,478,503 $22,375,671
=========== ===========
Net interest income/net interest
rate spread $118,031 2.05% $123,361 2.01%
-------- ---- -------- ----
Net interest-earning assets/net
interest margin $ 848,147 2.22% $ 1,217,795 2.30%
----------- ---- ----------- ----
Ratio of interest-earning assets
to interest-bearing liabilities 1.04x 1.06x
----- -----
- ---------------------
(1) Mortgage loans and consumer and other loans include non-performing loans
and exclude the allowance for loan losses.
(2) Securities available-for-sale are reported at average amortized cost.
(3) Other securities include Federal Home Loan Bank of New York stock.
17
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 MARCH 31, 2002
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------
INCREASE (DECREASE)
-------------------------------------
(In Thousands) VOLUME RATE NET
- --------------------------------------------------------------------------------------------
Interest-earning assets:
One-to-four family loans $ 6,985 $(15,996) $ (9,011)
Multi-family, commercial and construction loans 9,614 (996) 8,618
Consumer and other loans . 1,390 (2,467) (1,077)
Mortgage-backed securities (18,843) (8,377) (27,220)
Other securities (10,199) (2,234) (12,433)
Federal funds sold and repurchase
agreements 4,346 (4,886) (540)
- --------------------------------------------------------------------------------------------
Total (6,707) (34,956) (41,663)
- --------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 918 (4,976) (4,058)
Certificates of deposit (191) (14,557) (14,748)
NOW 230 (798) (568)
Money market 4,254 (12,217) (7,963)
Borrowed funds (9,253) 257 (8,996)
- --------------------------------------------------------------------------------------------
Total (4,042) (32,291) (36,333)
- --------------------------------------------------------------------------------------------
Net change in net interest income $ (2,665) $ (2,665) $ (5,330)
- --------------------------------------------------------------------------------------------
INTEREST INCOME
Interest income for the three months ended March 31, 2002 decreased $41.7
million to $330.9 million, from $372.6 million for the three months ended March
31, 2001. This decrease was the result of a decrease in the average yield on
interest-earning assets to 6.22% for the three months ended March 31, 2002, from
6.93% for the three months ended March 31, 2001, coupled with a decrease of
$223.6 million in the average balance of interest-earning assets to $21.27
billion for the three months ended March 31, 2002, from $21.50 billion for the
three months ended March 31, 2001. The decrease in the average yield on
interest-earning assets was due to the decreases in the average yields on all
asset categories, which reflects the lower interest rate environment during the
first quarter of 2002 compared to the first quarter of 2001. The decrease in the
average balance of interest-earning assets was primarily due to decreases in the
average balances of mortgage-backed securities and other securities, resulting
from principal repayments, maturities and calls, partially offset by increases
in the average balances of mortgage loans and federal funds sold and repurchase
agreements. During the first quarter of 2002, we purchased an additional $100.0
million of BOLI which also contributed to the decrease in the average balance of
interest-earnings assets. The shift in the average balances
18
of interest-earning assets reflects our decision over the past several years to
reposition the balance sheet while continuing to emphasize mortgage lending.
Interest income on one-to-four family mortgage loans decreased $9.0 million to
$166.5 million for the three months ended March 31, 2002, from $175.5 million
for the three months ended March 31, 2001, which was primarily the result of a
decrease in the average yield to 6.41% for the three months ended March 31,
2002, from 7.03% for the three months ended March 31, 2001, partially offset by
a $411.2 million increase in the average balance of such loans. Interest income
on multi-family, commercial real estate and construction loans increased $8.6
million to $36.3 million for the three months ended March 31, 2002, from $27.7
million for the three months ended March 31, 2001, which was primarily the
result of a $477.7 million increase in the average balance of such loans,
slightly offset by a decrease in the average yield to 8.02% for the three months
ended March 31, 2002, from 8.31% for the three months ended March 31, 2001. The
increase in the average balance of multi-family, commercial real estate and
construction loans reflects the increase in originations of such loans, coupled
with the fact that we have not experienced significant repayment activity within
this portfolio primarily due to the prepayment penalties associated with early
repayment of these loans. The increase in the average balance of total mortgage
loans reflects our continued emphasis on the origination of mortgage loans. The
decrease in the average yields reflects the lower interest rate environment
during the first quarter of 2002 as compared to the first quarter of 2001.
Interest income on consumer and other loans decreased $1.1 million resulting
from a decrease in the average yield to 5.96% for the three months ended March
31, 2002, from 10.35% for the three months ended March 31, 2001, partially
offset by an increase of $66.4 million in the average balance of this portfolio.
The decrease in the average yield on consumer and other loans is primarily the
result of a decrease in the average yield on our home equity loans, which
represent 81.0% of our consumer and other loan portfolio at March 31, 2002. Home
equity loans are adjustable rate loans which generally reset monthly and are
indexed to the prime rate. The prime rate decreased 475 basis points during the
year ended December 31, 2001 in response to the FOMC rate reductions discussed
previously.
Interest income on mortgage-backed securities decreased $27.2 million to $100.5
million for the three months ended March 31, 2002, from $127.7 million for the
three months ended March 31, 2001. This decrease was the result of a $1.22
billion decrease in the average balance of the portfolio, coupled with a
decrease in the average yield to 6.06% for the three months ended March 31,
2002, from 6.51% for the three months ended March 31, 2001. Interest income on
other securities decreased $12.4 million, resulting from a decrease of $607.7
million in the average balance of this portfolio, primarily due to securities
being called throughout 2001 as a result of the declining interest rate
environment. This decrease was coupled with a decrease in the average yield to
6.62% for the three months ended March 31, 2002, from 7.15% for the three months
ended March 31, 2001. Interest income on federal funds sold and repurchase
agreements decreased $540,000 as a result of a decrease in the average yield to
1.67% for the three months ended March 31, 2002, from 5.44% for the three months
ended March 31, 2001, partially offset by an increase of $649.2 million in the
average balance of the portfolio. Despite strong loan originations, our cash
flows from operations, loan and securities repayments and deposit growth
exceeded loan originations and other investment purchases, resulting in the
significant increase in the average balance of federal funds sold and repurchase
agreements for the three months ended March 31, 2002 compared to the three
months ended March 31, 2001.
19
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2002 decreased $36.3
million to $212.9 million, from $249.2 million for the three months ended March
31, 2001. This decrease was primarily the result of a decrease in the average
cost of interest-bearing liabilities to 4.17% for the three months ended March
31, 2002, from 4.92% for the three months ended March 31, 2001. The decrease in
the overall average cost of our interest-bearing liabilities reflects the impact
of the lower interest rate environment, which has prevailed since 2001, on the
cost of our deposits. The average balance of interest-bearing liabilities
increased $146.0 million for the quarter ended March 31, 2002 compared to the
quarter ended March 31, 2001. The increase in the average balance of
interest-bearing liabilities was attributable to an increase in deposits,
partially offset by a decrease in borrowings, which is consistent with our
strategy of repositioning the balance sheet.
Interest expense on deposits decreased $27.4 million, to $78.2 million for the
three months ended March 31, 2002, from $105.6 million for the three months
ended March 31, 2001, reflecting a decrease in the average cost of deposits to
2.86% for the three months ended March 31, 2002, from 4.17% for the three months
ended March 31, 2001, partially offset by an increase of $807.8 million in the
average balance of total deposits. The decrease in the average cost of total
deposits was driven by decreases in rates, primarily on our certificates of
deposit and money market accounts, as a result of the lower interest rate
environment which has continued into 2002. The increase in the average balance
of total deposits was primarily the result of an increase in the average balance
of money market accounts.
Interest expense on certificates of deposit decreased $14.7 million resulting
from a decrease in the average cost to 4.58% for the three months ended March
31, 2002, from 5.71% for the three months ended March 31, 2001, coupled with a
decrease in the average balance of $13.4 million. The decrease in the average
cost of certificates of deposit is due to the effect of the lower interest rate
environment which has prevailed since 2001.
Interest expense on money market accounts decreased $8.0 million reflecting a
decrease in the average cost to 2.12% for the three months ended March 31, 2002,
from 4.82% for the three months ended March 31, 2001, partially offset by an
increase of $435.9 million in the average balance of such accounts. Interest
paid on money market accounts is on a tiered basis with 90.05% of the balance in
the highest tier (accounts with balances of $50,000 and higher). The yield on
the highest tier is priced relative to the discount rate for the three-month
U.S. Treasury bill, which provides an attractive short-term yield for our
customers. The decrease in the average cost of these deposits is reflective of
the lower market interest rates in the first quarter of 2002 compared to the
first quarter of 2001.
Interest expense on savings accounts decreased $4.1 million which was
attributable to a decrease in the average cost to 1.23% for the three months
ended March 31, 2002, from 2.00% for the three months ended March 31, 2001,
partially offset by an increase of $195.4 million in the average balance.
Interest expense on NOW accounts decreased $568,000 as a result of a decrease in
the average cost to 0.28% for the three months ended March 31, 2002, from 0.56%
for the three months ended March 31, 2001, partially offset by an increase of
$189.8 million in the average balance.
20
Interest expense on borrowed funds for the three months ended March 31, 2002
decreased $9.0 million to $134.6 million, from $143.6 million for three months
ended March 31, 2001, resulting from a decrease of $661.8 million in the average
balance, partially offset by a slight increase in the average cost of borrowings
to 5.67% for the three months ended March 31, 2002, from 5.66% for the three
months ended March 31, 2001. During the quarter ended March 31, 2002, $750.0
million in borrowings with an average rate of 7.01% were repaid. An additional
$1.05 billion in borrowings, with an average rate of 6.66%, will mature during
the remainder of 2002, which should result in a reduction in our cost of
borrowings, through either the refinancing of those borrowings at lower rates,
assuming that interest rates remain near their current levels, or the repayment
of those borrowings.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $1.0 million for the three months ended March
31, 2002 and 2001. The allowance for loan losses increased to $82.9 million at
March 31, 2002, from $82.3 million at December 31, 2001. The provision for loan
losses for 2002 and the resultant increase in the allowance for loan losses
reflect the overall increase in our loan portfolio, particularly increases in
our multi-family and commercial real estate loan portfolios. Net loan
charge-offs totaled $342,000 for the three months ended March 31, 2002 compared
to $299,000 for the three months ended March 31, 2001. Non-performing loans
decreased $3.9 million to $33.2 million at March 31, 2002, from $37.1 million at
December 31, 2001. The allowance for loan losses as a percentage of
non-performing loans increased to 250.00% at March 31, 2002, from 221.70% at
December 31, 2001 primarily due to the decrease in non-performing loans from
December 31, 2001 to March 31, 2002. The allowance for loan losses as a
percentage of total loans decreased slightly to 0.67% at March 31, 2002, from
0.68% at December 31, 2001. For further discussion of non-performing loans and
allowance for loan losses, see "Asset Quality."
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2002 increased $5.6
million, or 24.7%, to $28.3 million, from $22.7 million for the three months
ended March 31, 2001. The increase in non-interest income is primarily due to
increases in customer service and other loan fees and net gain on sales of
loans.
Customer service and other loan fees increased $3.0 million to $16.1 million for
the three months ended March 31, 2002, from $13.1 million for the three months
ended March 31, 2001. The increase in customer service fees was primarily
attributable to an increase in the number of demand deposit and NOW accounts, an
increase in customer service fees which became effective during the first
quarter of 2001, and continued focus on our retail sales initiatives, which
include the introduction of our "PEAK Process," which is an interactive,
disciplined sales and service approach, in the first quarter of 2002.
Net gain on sales of loans increased $1.2 million to $1.5 million for the three
months ended March 31, 2002, from $333,000 for the three months ended March 31,
2001. The increase in the net gain on sales of loans is primarily due to an
increase in the volume of fixed rate loans originated and sold into the
secondary market. The current interest rate environment has resulted in a
significant increase in refinance activity and greater demand for fixed rate
loans, the majority of which are not retained for our portfolio.
21
Loan servicing fees decreased $747,000 to $3.2 million for the three months
ended March 31, 2002, from $4.0 million for the three months ended March 31,
2001. Loan servicing fees include all contractual and ancillary servicing
revenue we receive. The decrease in loan servicing fees was the result of a
decrease in the balance of loans serviced for others to $3.20 billion at March
31, 2002, from $3.79 billion at March 31, 2001. The decrease in the balance of
loans serviced for others is the result of runoff in that portfolio, due to
repayments exceeding the level of new servicing volume from loan sales.
Income from BOLI was $4.3 million for the three months ended March 31, 2002,
compared to $4.2 million for the three months ended March 31, 2001. Increases in
the cash surrender value of BOLI are recorded as income. Other non-interest
income increased $2.0 million to $3.2 million for the three months ended March
31, 2002, from $1.2 million for the three months ended March 31, 2001. This
increase is primarily due to income related to the sale of Prudential Financial,
Inc. stock, which was received as a result of the conversion of Prudential
Financial, Inc. from a mutual company to a stock company, and income from an
investment in a limited partnership.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 2002 was $52.6
million, a decrease of $4.1 million from $56.7 million for the three months
ended March 31, 2001. The primary reason for this decrease is the elimination of
goodwill amortization effective January 1, 2002 upon adoption of SFAS No. 142.
Goodwill amortization totaled $4.8 million for the quarter ended March 31, 2001.
General and administrative expense increased $3.2 million to $47.9 million for
the three months ended March 31, 2002, from $44.7 million for the three months
ended March 31, 2001, primarily due to increases in compensation and benefits
expense, partially offset by a decrease in advertising expense.
Compensation and benefits increased $3.0 million to $26.1 million for the three
months ended March 31, 2002, from $23.1 million for the three months ended March
31, 2001. The increase is primarily attributable to normal performance increases
in salaries and an increase in net employee benefit plan expense. Also included
in this increase was a $795,000 increase in ESOP expense for the three months
ended March 31, 2002 compared to the three months ended March 31, 2001. The
increase in ESOP expense is primarily due to the effect of the higher average
market value of our common stock during the first quarter of 2002 compared to
the first quarter of 2001.
Occupancy, equipment and systems expense increased $194,000 to $13.2 million for
the three months ended March 31, 2002, from $13.0 million for the three months
ended March 31, 2001. Federal deposit insurance premiums increased slightly to
$505,000 for the three months ended March 31, 2002, from $497,000 for the three
months ended March 31, 2001. Advertising expense decreased $827,000 to $1.0
million for the three months ended March 31, 2002, from $1.9 million for the
three months ended March 31, 2001, primarily due to our continued focus in the
first quarter of 2002 on our sales and service efforts and limited print
advertising. Other expenses increased $855,000 to $7.1 million for the three
months ended March 31, 2002, from $6.2 million for the three months ended March
31, 2001, primarily due to amortization of purchase premiums and market value
adjustments on our interest rate cap agreements.
22
For the three months ended March 31, 2002, net amortization of mortgage
servicing rights decreased by $1.7 million to $1.4 million, from $3.1 million
for the three months ended March 31, 2001. Net amortization of mortgage
servicing rights, as reported in the consolidated statements of income, includes
valuation allowance adjustments for the impairment of mortgage servicing rights.
The decrease in the net amortization of mortgage servicing rights is due to
changes in the provision for the valuation allowance of mortgage servicing
rights, slightly offset by a $63,000 increase in the amortization of mortgage
servicing rights. For the three months ended March 31, 2002, we recorded a
recovery of $799,000 compared to a $1.0 million provision recorded for the three
months ended March 31, 2001. The recovery in the valuation allowance of mortgage
servicing rights is the result of both a decrease in prepayment speeds and a
decrease in the balance of mortgage servicing assets from March 31, 2001 to
March 31, 2002.
Goodwill litigation expense decreased $742,000 to $279,000 for the three months
ended March 31, 2002, from $1.0 million for the three months ended March 31,
2001, reflecting the completion of fact-based discovery regarding our claims.
Our percentage of general and administrative expense to average assets was 0.85%
for the three months ended March 31, 2002, compared to 0.80% for the three
months ended March 31, 2001. The efficiency ratio was 32.79% for the three
months ended March 31, 2002, compared to 30.57% for the three months ended March
31, 2001. The increases in these ratios are attributable to the increase in
general and administrative expense for the quarter ended March 31, 2002 compared
to the quarter ended March 31, 2001 discussed previously.
INCOME TAX EXPENSE
For the three months ended March 31, 2002, income tax expense was $31.5 million,
representing an effective tax rate of 34.0%, compared to $31.7 million,
representing an effective tax rate of 35.8%, for the three months ended March
31, 2001. The reduction in the effective tax rate for the three months ended
March 31, 2002 was primarily due to the adoption of SFAS No. 142, which
eliminated the amortization of goodwill which was not deductible for tax
purposes.
ASSET QUALITY
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Through a variety of strategies, including, but not
limited to, borrower workout arrangements and aggressive marketing of foreclosed
properties, we have been proactive in addressing problem and non-performing
assets which, in turn, has helped to build the strength of our financial
condition. Such strategies, as well as our concentration on one-to-four family
mortgage lending, the maintenance of sound credit standards for new loan
originations, and a strong real estate market, have resulted in our maintaining
a very low level of non-performing assets in relation to both the size of our
loan portfolio and relative to our peers. Non-performing assets decreased to
$35.7 million at March 31, 2002, from $40.1 million at December 31, 2001. The
ratio of non-performing loans to total loans decreased to 0.27% at March 31,
2002, from 0.31% at December 31, 2001. The ratio of non-performing assets to
total assets was 0.16% at March 31, 2002 and 0.18% at December 31, 2001.
23
DELINQUENT LOANS
The following table shows a comparison of delinquent loans at March 31, 2002 and
December 31, 2001.
AT MARCH 31, 2002 AT DECEMBER 31, 2001
---------------------------------------------- --------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- -------------------- --------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
(Dollars in Thousands) LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
- ----------------------------------------------------------------------------------------------------------------------------
One-to-four family 16 $ 942 204 $29,362 20 $1,269 222 $31,991
Multi-family 1 5 4 1,539 1 84 5 1,860
Commercial real estate 4 760 3 1,049 5 1,395 4 1,752
Construction -- -- 1 522 -- -- 1 522
Consumer and other loans 72 388 83 707 102 491 104 991
- ----------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 93 $2,095 295 $33,179 128 $3,239 336 $37,116
============================================================================================================================
Delinquent loans to total
loans 0.02% 0.27% 0.03% 0.31%
NON-PERFORMING ASSETS
The following table sets forth information regarding non-performing assets at
March 31, 2002 and December 31, 2001. In addition to the non-performing loans,
we had approximately $2.1 million of potential problem loans at March 31, 2002
compared to $3.2 million at December 31, 2001. Such loans are 60-89 days
delinquent as shown above.
AT MARCH 31, AT DECEMBER 31,
(Dollars in Thousands) 2002 2001
- ---------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $31,182 $34,848
Non-accrual delinquent consumer and other loans 707 991
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 1,290 1,277
- ---------------------------------------------------------------------------------------
Total non-performing loans 33,179 37,116
- ---------------------------------------------------------------------------------------
Real estate owned, net (3) 2,549 2,987
- ---------------------------------------------------------------------------------------
Total non-performing assets $35,728 $40,103
=======================================================================================
Allowance for loan losses to non-performing loans 250.00% 221.70%
Allowance for loan losses to total loans 0.67% 0.68%
(1) Consists primarily of loans secured by one-to-four family properties.
(2) Loans delinquent 90 days or more and still accruing interest consist solely
of loans delinquent 90 days or more as to their maturity date but not their
interest due, and are primarily secured by one-to-four family
properties.
(3) Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is recorded at the lower of cost or fair value, less estimated
selling costs.
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of March 31, 2002, $8.4 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to
24
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
$658,000 for the three months ended March 31, 2002 and $2.3 million for the year
ended December 31, 2001. This compares to actual payments recorded as interest
income, with respect to such loans, of $243,000 for the three months ended March
31, 2002, and $1.8 million for the year ended December 31, 2001.
Excluded from non-performing assets are restructured loans that have complied
with the terms of their restructure agreement for a satisfactory period and
have, therefore, been returned to performing status. Restructured loans that are
in compliance with their restructured terms totaled $5.5 million at March 31,
2002 and $5.4 million at December 31, 2001.
ALLOWANCE FOR LOSSES
The following table sets forth the change in our allowance for loan losses for
the three months ended March 31, 2002.
(In Thousands)
Balance at December 31, 2001 $82,285
Provision charged to operations 1,004
Charge-offs:
One-to-four family (120)
Multi-family (83)
Consumer and other (538)
------------------------------------------------------------------------------------
Total charge-offs (741)
------------------------------------------------------------------------------------
Recoveries:
One-to-four family 80
Commercial 201
Consumer and other 118
------------------------------------------------------------------------------------
Total recoveries 399
------------------------------------------------------------------------------------
Net charge-offs (342)
------------------------------------------------------------------------------------
Balance at March 31, 2002 $82,947
====================================================================================
CASH EARNINGS
The following information is not a required disclosure but is being presented
because we consider it relevant to our operating results and related returns.
The information represents pro forma calculations which are not in conformity
with GAAP. Different companies may present this information differently, if at
all. Readers are cautioned against using this information to compare our cash
earnings and related returns to that of another company which may not calculate
this information in a similar manner. For a reconciliation of GAAP earnings and
cash earnings, see "Consolidated Schedules of Cash Earnings" on page 26.
Tangible stockholders' equity (stockholders' equity less goodwill) is a critical
measure of a company's ability to repurchase shares, pay dividends and continue
to grow. Astoria Federal is subject to various capital requirements which affect
its classification for safety and soundness purposes, as well as for deposit
insurance assessment purposes. These requirements utilize, subject to further
adjustments, tangible stockholders' equity as a base component, not
stockholders' equity as defined by GAAP. Although reported earnings and return
on stockholders' equity are traditional measures of a company's performance, we
believe that the
25
change in tangible stockholders' equity, or "cash earnings," and related returns
are also important measures of a company's performance. Cash earnings exclude
the effects of various non-cash expenses, such as the ESOP amortization expense
and related tax benefit, as well as the amortization of goodwill, prior to
January 1, 2002. In the case of tangible stockholders' equity, these items have
either been previously charged to stockholders' equity, as in the case of ESOP
amortization expense, through contra-equity accounts, or do not affect tangible
stockholders' equity, such as the market appreciation of allocated ESOP shares,
for which the operating charge is offset by a credit to additional paid-in
capital, and goodwill amortization for which the related intangible asset has
already been deducted in the calculation of tangible stockholders' equity.
Tangible stockholders' equity totaled $1.37 billion at March 31, 2002, compared
to $1.36 billion at December 31, 2001. For the three months ended March 31,
2002, cash earnings totaled $63.6 million, or $2.4 million more than net income,
representing a cash return on average tangible stockholders' equity of 18.55%.
For the three months ended March 31, 2001, cash earnings totaled $60.8 million,
or $6.4 million more than net income, representing a cash return on average
tangible stockholders' equity of 17.82%. Diluted cash earnings per common share
increased to $0.71 per share for the three months ended March 31, 2002, from
$0.62 per share for the three months ended March 31, 2001. Cash return on
average assets was 1.13% for the three months ended March 31, 2002 and 1.09% for
the three months ended March 31, 2001. Additionally, the cash general and
administrative expense (general and administrative expense, excluding non-cash
amortization expense relating to the ESOP) to average assets ratio was 0.81% for
the three months ended March 31, 2002, compared to 0.77% for the three months
ended March 31, 2001. The cash efficiency ratio was 31.12% for the three months
ended March 31, 2002 and 29.48% for the three months ended March 31, 2001.
As previously discussed, as a result of the implementation of SFAS No. 142,
effective January 1, 2002, we ceased recording goodwill amortization amounting
to approximately $19.1 million annually, or approximately $0.21 per diluted
common share. Consequently, reported earnings and related returns as defined by
GAAP do not differ as significantly as they have in the past from cash
earnings and related cash returns.
CONSOLIDATED SCHEDULES OF CASH EARNINGS (1)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------------
(In Thousands, Except Per Share Data) 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net income $61,218 $54,416
ESOP amortization expense and related tax benefit 2,397 1,602
Amortization of goodwill -- 4,811
- ------------------------------------------------------------------------------------------------------------
Cash earnings 63,615 60,829
Preferred dividends declared (1,500) (1,500)
- ------------------------------------------------------------------------------------------------------------
Cash earnings available to common shareholders $62,115 $59,329
============================================================================================================
Basic cash earnings per common share $ 0.73 $ 0.63
============================================================================================================
Diluted cash earnings per common share $ 0.71 $ 0.62
============================================================================================================
(1) The consolidated schedules of cash earnings are pro forma calculations
which are not in accordance with GAAP.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is interest
rate risk, or IRR. Net interest income is the primary component of our net
income. Net interest income is the difference between the interest earned on our
loans, securities and other interest-earning assets and the interest expense
incurred on our deposits and borrowings. The yields, costs, and volumes of
loans, securities, deposits and borrowings are directly affected by the levels
of and changes in market interest rates. Additionally, changes in interest rates
also affect the related cash flows of our assets and liabilities as the option
to prepay assets or withdraw liabilities remains with our customers, in most
cases without penalty. The objective of our IRR management policy is to maintain
an appropriate mix and level of assets, liabilities and off-balance sheet items
to enable us to meet our growth and/or earnings objectives, while maintaining
specified minimum capital levels as required by the Office of Thrift
Supervision, or OTS, in the case of Astoria Federal, and as established by our
Board of Directors. We use a variety of analyses to monitor, control and adjust
our asset and liability positions, primarily interest rate sensitivity gap
analysis, or gap analysis, and Net Interest Income Sensitivity, or NII
Sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in
conformity with OTS requirements. In conjunction with performing these analyses
we also consider related factors including, but not limited to, our overall
credit profile, non-interest income and non-interest expense. We do not enter
into financial transactions or hold financial instruments for trading purposes.
GAP ANALYSIS
Gap analysis measures the difference between the amount of interest-earning
assets anticipated to mature or reprice within specific time periods and the
amount of interest-bearing liabilities anticipated to mature or reprice within
the same time periods. The table on page 28, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at March 31, 2002 that we anticipate will reprice or mature in each
of the future time periods shown using certain assumptions based on our
historical experience and other market-based data available to us. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. The major factors affecting
mortgage prepayment rates are prevailing interest rates and related mortgage
refinancing opportunities. Prepayment rates will also vary due to a number of
other factors, including the regional economy in the area where the underlying
collateral is located, seasonal factors and demographic variables. The Gap Table
does not indicate the impact of general interest rate movements on our net
interest income because the actual repricing dates of various assets and
liabilities will differ from our estimates and it does not give consideration to
the yields and costs of the assets and liabilities or the projected yields and
costs to replace or retain those assets and liabilities. Callable features of
certain assets and liabilities, in addition to the foregoing, may also cause
actual experience to vary from that indicated. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when they may be exercised. Among the factors considered in our estimates are
current trends and historical repricing experience with respect to similar
products. As a result, different assumptions may be used at different points in
time.
27
The Gap Table includes $5.94 billion of callable borrowings classified according
to their maturity dates, primarily in the one to three years category, which are
callable within one year and at various times thereafter. As indicated in the
Gap Table, our one-year cumulative gap was 0.14%. This compares to a one-year
cumulative gap of negative 0.34% at December 31, 2001.
AT MARCH 31, 2002
----------------------------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR THREE YEARS
ONE YEAR TO TO MORE THAN
(Dollars in Thousands) OR LESS THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans (1) $2,908,336 $ 3,576,437 $3,418,825 $2,157,956 $12,061,554
Consumer and other loans (1) 229,536 31,817 -- -- 261,353
Federal funds sold and
repurchase agreements 681,890 -- -- -- 681,890
Mortgage-backed and other
securities available-for-sale and
FHLB stock 1,027,564 606,250 342,280 1,191,016 3,167,110
Mortgage-backed and other securities
held-to-maturity 1,219,999 1,407,278 791,091 1,369,916 4,788,284
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,067,325 5,621,782 4,552,196 4,718,888 20,960,191
Net unamortized purchase premiums
and deferred costs (2) 23,023 26,485 24,013 16,894 90,415
- ------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 6,090,348 5,648,267 4,576,209 4,735,782 21,050,606
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 148,115 296,227 296,227 1,950,162 2,690,731
Money market 1,786,297 18,567 18,567 139,253 1,962,684
NOW 32,896 65,788 65,788 1,068,510 1,232,982
Certificates of deposit 2,691,670 1,726,730 718,885 73,123 5,210,408
Borrowed funds 1,400,693 4,965,000 304,000 2,279,134 8,948,827
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,059,671 7,072,312 1,403,467 5,510,182 20,045,632
- ------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 30,677 (1,424,045) 3,172,742 (774,400) $ 1,004,974
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ 30,677 $(1,393,368) $1,779,374 $1,004,974
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity
gap as a percentage of total assets 0.14% (6.30)% 8.05% 4.55%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 100.51% 89.39 % 112.24% 105.01%
(1) Mortgage loans and consumer and other loans include loans held-for-sale and
exclude non-performing loans and the allowance for loan losses.
(2) Net unamortized purchase premiums and deferred costs are prorated.
NII SENSITIVITY ANALYSIS
In managing IRR, we also use an internal income simulation model for our NII
Sensitivity analyses. These analyses measure changes in projected net interest
income over various time periods resulting from hypothetical changes in interest
rates. The interest rate scenarios most commonly analyzed reflect gradual and
reasonable changes over a specified time period, which is typically one year.
The base net interest income projection utilizes similar assumptions as those
reflected in the Gap Table, assumes that cash flows are reinvested in similar
assets and
28
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 April 1, 2002 would increase by approximately 0.80% from the base
projection. At December 31, 2001, in the up 200 basis point scenario, our
projected net interest income for the twelve month period beginning January 1,
2002 would have increased by approximately 0.85% from the base projection. The
current low interest rate environment prevents us from performing an income
simulation for a decline in interest rates of the same magnitude and timing as
our rising interest rate simulation, since certain asset yields, liability
costs, and related indexes are below 2.00%. However, assuming the entire yield
curve was to decrease 100 basis points, through quarterly parallel decrements of
25 basis points, and remain at that level thereafter, our projected net interest
income for the twelve month period beginning April 1, 2002 would increase by
approximately 0.10% from the base projection. At December 31, 2001, in the down
100 basis point scenario, our projected net interest income for the twelve month
period beginning January 1, 2002 would have decreased by approximately 0.10%
from the base projection.
Various shortcomings are inherent in both the Gap Table and NII Sensitivity
analyses. Certain assumptions may not reflect the manner in which actual yields
and costs respond to market changes. Similarly, prepayment estimates and similar
assumptions are subjective in nature, involve uncertainties and, therefore,
cannot be determined with precision. Changes in interest rates may also affect
our operating environment and operating strategies as well as those of our
competitors. In addition, certain adjustable rate assets have limitations on the
magnitude of rate changes over specified periods of time. Accordingly, although
our NII Sensitivity analyses may provide an indication of our IRR exposure, such
analyses are not intended to and do not provide a precise forecast of the effect
of changes in market interest rates on our net interest income and our actual
results will differ. Additionally, certain assets, liabilities and items of
income and expense which may be affected by changes in interest rates, albeit to
a much lesser degree, and which do not affect net interest income, are excluded
from this analysis. These include, but are not limited to, BOLI, mortgage
servicing rights, defined benefit pension costs and the mark to market
adjustments on certain derivative instruments, specifically our interest rate
caps.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about March 25, 2002, James J. Conway, Jr. the former Chairman and Chief
Executive Officer of Long Island Savings Bank FSB, or LISB, commenced an action
entitled James J. Conway, Jr. v. Astoria Financial Corporation in the Court of
Chancery of the State of Delaware. The action seeks $4.5 million in damages for
indemnification plus attorneys' fees. The claim for indemnification arises from
attorneys' fees and costs incurred in connection with four legal proceedings,
including the lawsuit entitled Ronnie Weil also known as Ronnie Moore, for
Herself and on behalf of All Other Persons Who Obtained Mortgage Loans from The
Long Island Savings Bank, FSB during the period January 1, 1983 through
December 31,
29
1992 vs. The Long Island Savings Bank, FSB, et al., or the Weil Litigation,
which arise from the circumstances underlying the Weil Litigation. Astoria
Federal's Board of Directors determined that Mr. Conway had not met the criteria
for permissive indemnification under the applicable OTS regulation and,
therefore, denied his indemnification request. For a discussion of the Weil
Litigation, see our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, Item 3, Legal Proceedings.
On April 22, 2002, we filed an answer denying the substantive allegations of the
complaint and moved for summary judgment.
Management believes that the suit by Mr. Conway is without merit and will not
have a material adverse effect on our financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Regarding Computation of Per Share Earnings
(b) Reports on Form 8-K
1. Report on Form 8-K dated February 1, 2002 which includes a written
presentation of financial results and trends through the year ended
December 31, 2001 and a press release dated January 8, 2002 which
provides information to access a live audio-webcast of our
presentation at a conference on January 30, 2002.
2. Report on Form 8-K dated February 5, 2002 which includes a revised
bar graph chart incorporated in our written presentation of
financial results and trends through the year ended December 31,
2001.
30
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: May 15, 2002 By: /s/ Monte N. Redman
--------------- -------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
31
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11 Statement Regarding Computation of Per Share Earnings
32