UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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, July 31, 2002
- ----------------------- -------------------------------------------
.01 Par Value 88,654,038
------------- ----------
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at June 30, 2002 2
and December 31, 2001
Consolidated Statements of Income for the Three and Six Months 3
Ended June 30, 2002 and June 30, 2001
Consolidated Statement of Changes in Stockholders' Equity for the 4
Six Months Ended June 30, 2002
Consolidated Statements of Cash Flows for the Six Months Ended 5
June 30, 2002 and June 30, 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AT AT
JUNE 30, DECEMBER 31,
(In Thousands, Except Share Data) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 176,241 $ 144,694
Federal funds sold and repurchase agreements 603,819 1,309,164
Available-for-sale securities:
Encumbered 2,245,197 3,176,977
Unencumbered 359,361 372,206
- -----------------------------------------------------------------------------------------------------------------
2,604,558 3,549,183
Held-to-maturity securities, fair value of $5,008,153 and $4,468,200,
respectively:
Encumbered 4,725,552 4,201,503
Unencumbered 220,846 262,425
- -----------------------------------------------------------------------------------------------------------------
4,946,398 4,463,928
Federal Home Loan Bank of New York stock, at cost 225,473 250,450
Loans held-for-sale 18,917 43,390
Loans receivable:
Mortgage loans, net 12,221,223 11,924,134
Consumer and other loans, net 298,870 243,127
- -----------------------------------------------------------------------------------------------------------------
12,520,093 12,167,261
Allowance for loan losses (83,605) (82,285)
- -----------------------------------------------------------------------------------------------------------------
Total loans receivable, net 12,436,488 12,084,976
Mortgage servicing rights, net 33,261 35,295
Accrued interest receivable 95,505 96,273
Premises and equipment, net 152,418 149,753
Goodwill 185,151 185,151
Bank owned life insurance 352,995 242,751
Other assets 147,061 112,698
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 21,978,285 $ 22,667,706
=================================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,791,019 $ 2,588,143
Money market 1,919,402 1,955,286
NOW 1,261,824 1,199,966
Certificates of deposit 5,265,157 5,160,298
- -----------------------------------------------------------------------------------------------------------------
Total deposits 11,237,402 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 99,168 399,587
Mortgage escrow funds 133,477 116,395
Accrued expenses and other liabilities 249,493 281,445
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 20,268,990 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 88,766,247 and 90,766,744 shares
outstanding, respectively) 1,110 1,110
Additional paid-in capital 830,755 822,652
Retained earnings 1,289,560 1,207,742
Treasury stock (22,230,345 and 20,229,848 shares, at cost, respectively) (528,857) (459,471)
Accumulated other comprehensive income (loss):
Net unrealized gain (loss) on securities, net of taxes 18,426 (1,967)
Unallocated common stock held by ESOP (28,699) (29,480)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,584,295 1,542,586
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 21,978,285 $ 22,667,706
=================================================================================================================
See accompanying notes to consolidated financial statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
(In Thousands, Except Share Data) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans $ 202,230 $ 203,692 $ 405,028 $ 406,883
Consumer and other loans 4,117 4,470 7,919 9,349
Mortgage-backed securities 97,225 117,729 197,721 245,445
Other securities 19,449 28,498 39,105 60,587
Federal funds sold and repurchase agreements 3,254 8,600 7,392 13,278
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 326,275 362,989 657,165 735,542
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 75,543 104,580 153,770 210,144
Borrowed funds 125,258 140,296 259,890 283,924
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 200,801 244,876 413,660 494,068
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 125,474 118,113 243,505 241,474
Provision for loan losses 1,002 1,023 2,006 2,025
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 124,472 117,090 241,499 239,449
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 15,347 12,988 29,278 24,562
Other loan fees 1,558 1,541 3,680 3,034
Loan servicing fees 3,070 4,020 6,303 8,000
Net gain on sales of loans 1,297 1,392 2,846 1,725
Income from bank owned life insurance 5,982 4,304 10,244 8,486
Other 841 1,377 4,058 2,527
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 28,095 25,622 56,409 48,334
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 26,289 22,471 52,357 45,578
Occupancy, equipment and systems 13,052 12,971 26,227 25,952
Federal deposit insurance premiums 499 493 1,004 990
Advertising 1,531 1,675 2,558 3,529
Other 8,623 6,826 15,698 13,046
- -----------------------------------------------------------------------------------------------------------------------------------
Total general and administrative 49,994 44,436 97,844 89,095
Net amortization of mortgage servicing rights 3,767 1,836 5,121 4,951
Goodwill litigation 281 852 560 1,873
Capital trust securities 3,105 3,104 6,209 6,208
Amortization of goodwill -- 4,810 -- 9,621
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 57,147 55,038 109,734 111,748
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect
of accounting change 95,420 87,674 188,174 176,035
Income tax expense 31,489 30,489 63,025 62,140
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 63,931 57,185 125,149 113,895
Cumulative effect of accounting change, net of tax -- -- -- (2,294)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 63,931 57,185 125,149 111,601
Preferred dividends declared (1,500) (1,500) (3,000) (3,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 62,431 $ 55,685 $ 122,149 $ 108,601
===================================================================================================================================
Basic earnings per common share:
Income before accounting change $ 0.74 $ 0.61 $ 1.44 $ 1.20
Cumulative effect of accounting change, net of tax -- -- -- (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net basic earnings per common share $ 0.74 $ 0.61 $ 1.44 $ 1.17
===================================================================================================================================
Diluted earnings per common share:
Income before accounting change $ 0.73 $ 0.59 $ 1.41 $ 1.18
Cumulative effect of accounting change, net of tax -- -- -- (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Net diluted earnings per common share $ 0.73 $ 0.59 $ 1.41 $ 1.15
===================================================================================================================================
Dividends per common share $ 0.20 $ 0.16 $ 0.37 $ 0.29
===================================================================================================================================
Basic weighted average common shares 84,216,057 91,960,376 84,843,610 92,730,590
Diluted weighted average common and common equivalent shares 85,946,408 93,757,020 86,490,683 94,572,576
See accompanying notes to consolidated financial statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
(In Thousands, Except Share Data) TOTAL STOCK STOCK CAPITAL EARNINGS STOCK
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 1,542,586 $2,000 $1,110 $ 822,652 $ 1,207,742 $(459,471)
Comprehensive income:
Net income 125,149 -- -- -- 125,149 --
Other comprehensive income, net of tax:
Net unrealized gain on securities 16,901 -- -- -- -- --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 3,492 -- -- -- -- --
-----------
Comprehensive income 145,542
-----------
Common stock repurchased
(2,665,400 shares) (84,587) -- -- -- -- (84,587)
Dividends on common and preferred
stock and amortization of purchase
premium (34,373) -- -- (652) (33,721) --
Exercise of stock options and
related tax benefit
(664,903 shares issued) 10,738 -- -- 5,147 (9,610) 15,201
Amortization relating to allocation
of ESOP stock 4,389 -- -- 3,608 -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 1,584,295 $2,000 $1,110 $ 830,755 $ 1,289,560 $(528,857)
===================================================================================================================
ACCUMULATED UNALLOCATED
OTHER COMMON
COMPREHENSIVE STOCK
(LOSS) HELD
(In Thousands, Except Share Data) INCOME BY ESOP
- -----------------------------------------------------------------------
Balance at December 31, 2001 $ (1,967) $(29,480)
Comprehensive income:
Net income -- --
Other comprehensive income, net of tax:
Net unrealized gain on securities 16,901 --
Amortization of unrealized loss
on securities transferred to
held-to-maturity 3,492 --
Comprehensive income
Common stock repurchased
(2,665,400 shares) -- --
Dividends on common and preferred
stock and amortization of purchase
premium -- --
Exercise of stock options and
related tax benefit
(664,903 shares issued) -- --
Amortization relating to allocation
of ESOP stock -- 781
- -----------------------------------------------------------------------
Balance at June 30, 2002 $ 18,426 $(28,699)
=======================================================================
See accompanying notes to consolidated financial statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
(In Thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 125,149 $ 111,601
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Net accretion of discounts, premiums and deferred loan costs (3,083) (20,604)
Net provision for loan and real estate losses 2,006 1,961
Depreciation and amortization 5,462 6,434
Net gain on sales of loans (2,846) (1,725)
Proceeds from sales of loans held-for-sale, net of originations 27,319 (20,174)
Amortization of goodwill -- 9,621
Cumulative effect of accounting change, net of tax -- 2,294
Amortization of allocated ESOP stock 4,389 3,310
Decrease in accrued interest receivable 768 5,917
Mortgage servicing rights amortization and valuation
allowance, net of capitalized amounts 2,034 2,970
Income from bank owned life insurance, net of insurance
proceeds received (10,244) (4,178)
Increase in other assets (52,650) (7,376)
Decrease in accrued expenses and other liabilities (26,805) (95,613)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 71,499 (5,562)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Origination of loans held-for-investment (1,891,187) (1,174,839)
Loan purchases through third parties (752,523) (588,867)
Principal payments on loans held-for-investment 2,269,757 1,512,278
Principal payments on mortgage-backed securities held-to-maturity 1,340,028 470,828
Principal payments on mortgage-backed securities available-for-sale 986,294 555,676
Purchases of mortgage-backed securities held-to-maturity (1,912,575) (97,884)
Purchases of mortgage-backed securities available-for-sale -- (174,098)
Purchases of other securities available-for-sale (502) (2,005)
Proceeds from maturities of other securities available-for-sale 675 28,165
Proceeds from maturities of other securities held-to-maturity 107,158 383,975
Redemption of FHLB stock 24,977 --
Proceeds from sales of real estate owned, net 2,856 1,844
Purchases of premises and equipment, net of proceeds from sales (8,127) (4,087)
Purchase of bank owned life insurance (100,000) --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 66,831 910,986
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 333,709 562,325
Net decrease in reverse repurchase agreements (500,000) (300,000)
Net (decrease) increase in FHLB of New York advances (249,550) 54,000
Net decrease in other borrowings (300,000) (203,122)
Increase in mortgage escrow funds 17,082 18,064
Cost to repurchase common stock (84,587) (118,375)
Cash dividends paid to stockholders (34,373) (31,164)
Cash received for options exercised 5,591 15,518
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (812,128) (2,754)
- ---------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (673,798) 902,670
Cash and cash equivalents at beginning of period 1,453,858 307,251
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 780,060 $ 1,209,921
===============================================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 424,130 $ 501,102
===============================================================================================================
Income taxes $ 57,246 $ 47,122
===============================================================================================================
Additions to real estate owned $ 1,068 $ 3,450
===============================================================================================================
Securities transferred from available-for-sale to
held-to-maturity $ -- $ 2,878,767
===============================================================================================================
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
June 30, 2002 and December 31, 2001, our results of operations for the three and
six months ended June 30, 2002 and 2001, changes in our stockholders' equity for
the six months ended June 30, 2002 and our cash flows for the six months ended
June 30, 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 for the consolidated statements of financial condition
as of June 30, 2002 and December 31, 2001, and amounts of revenues and expenses
in the consolidated statements of income for the three and six months ended June
30, 2002 and 2001. The results of operations for the three and six months ended
June 30, 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 period amounts to conform to the current period 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 JUNE 30,
------------------------------------------------------------------
2002 2001
------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (1)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 63,931 $ 63,931 $57,185 $57,185
Preferred dividends declared (1,500) (1,500) (1,500) (1,500)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 62,431 $ 62,431 $55,685 $55,685
- ---------------------------------------------------------------------------------------------------------------------
Total weighted average basic
common shares outstanding 84,216 84,216 91,960 91,960
Effect of dilutive securities:
Options - 1,730 - 1,797
- ---------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 84,216 85,946 91,960 93,757
- ---------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 0.74 $ 0.73 $ 0.61 $ 0.59
- ---------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
2002 2001
-----------------------------------------------------------------
BASIC DILUTED BASIC DILUTED
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (1)
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $ 125,149 $ 125,149 $ 113,895 $ 113,895
Preferred dividends declared (3,000) (3,000) (3,000) (3,000)
- --------------------------------------------------------------------------------------------------------------------
122,149 122,149 110,895 110,895
Cumulative effect of accounting
change, net of tax -- -- (2,294) (2,294)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 122,149 $ 122,149 $ 108,601 $ 108,601
====================================================================================================================
Total weighted average basic
common shares outstanding 84,844 84,844 92,731 92,731
Effect of dilutive securities:
Options -- 1,647 -- 1,842
- --------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 84,844 86,491 92,731 94,573
- --------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Income before cumulative effect
of accounting change $ 1.44 $ 1.41 $ 1.20 $ 1.18
Cumulative effect of accounting
change, net of tax -- -- (0.03) (0.03)
- --------------------------------------------------------------------------------------------------------------------
Net earnings per common share $ 1.44 $ 1.41 $ 1.17 $ 1.15
====================================================================================================================
(1) Options to purchase 514,304 shares of common stock at prices between
$28.31 per share and $29.88 per share were outstanding as of June 30,
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 and six months ended June 30, 2001.
7
3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." 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.
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, there
was no indication of goodwill impairment.
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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------------------------------
(In Thousands, Except Per Share Data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Net income:
Reported net income $ 63,931 $ 57,185 $ 125,149 $ 111,601
Add back: goodwill amortization -- 4,810 -- 9,621
- ---------------------------------------------------------------------------------------------------------------
Adjusted net income $ 63,931 $ 61,995 $ 125,149 $ 121,222
===============================================================================================================
Basic earnings per common share:
Reported net income $ 0.74 $ 0.61 $ 1.44 $ 1.17
Goodwill amortization -- 0.05 -- 0.10
- ---------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.74 $ 0.66 $ 1.44 $ 1.27
===============================================================================================================
Diluted earnings per common share:
Reported net income $ 0.73 $ 0.59 $ 1.41 $ 1.15
Goodwill amortization -- 0.05 -- 0.10
- ---------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.73 $ 0.64 $ 1.41 $ 1.25
===============================================================================================================
In addition to the changes in the accounting and disclosure requirements for
goodwill, SFAS No. 142 also requires additional disclosures related to other
intangible assets, including mortgage servicing rights, or MSR. MSR, net totaled
$33.3 million at June 30, 2002 and $35.3 million at December 31, 2001. MSR
amortization totaled $1.9 million for the three months ended June 30, 2002 and
$4.0 million for the six months ended June 30, 2002. As of June 30, 2002,
estimated future MSR amortization through 2007 is as follows: $4.1 million for
the remainder of 2002, $7.5 million for 2003, $5.9 million for 2004, $4.6
million for 2005, $3.6 million for 2006 and $2.8 million for 2007. Actual
results may vary depending upon the level of repayments on the loans currently
serviced.
8
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaced SFAS 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 were effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, were to be
applied prospectively. The adoption of SFAS No. 144 did not have a material
impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board, or APB, Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification of gains
and losses resulting from the extinguishment of debt. Upon adoption, companies
must reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. All other provisions of SFAS No.
145 are effective for transactions occurring and/or financial statements issued
on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which
were effective May 15, 2002, did not have a material impact on our financial
condition or results of operations. The implementation of the remaining
provisions is not expected to have a material impact on our financial condition
or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, 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," "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;
9
- 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.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year ended
December 31, 2001 included in our Annual Report on Form 10-K for the year ended
December 31, 2001, as supplemented by our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 and this report, contains a summary of our
significant accounting policies. We believe our policies with respect to the
methodology for our determination of the allowance for loan losses, the
valuation of mortgage servicing rights and asset impairment judgments, including
the recoverability of goodwill and other than temporary declines in the value of
our securities, involve a higher degree of complexity and require management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could cause reported results to differ materially.
These critical policies and their application are periodically reviewed with the
Audit Committee and our Board of Directors.
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.
10
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 $4.70 billion for the six months ended June 30, 2002 and $2.95 billion
for the six months ended June 30, 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, resulting in a lower
interest rate environment during the first half of 2002 compared to the same
period in 2001. The increase in loan and security repayments was primarily the
result of the increase in mortgage loan refinance activity caused by this lower
interest rate environment. Net cash provided by operating activities totaled
$71.5 million during the six months ended June 30, 2002. During the six months
ended June 30, 2001, net cash used in operating activities totaled $5.6 million.
During the six months ended June 30, 2002, net borrowings decreased $1.05
billion, while net deposits increased $333.7 million. During the six months
ended June 30, 2001, net borrowings decreased $447.4 million, while net deposits
increased $562.3 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, consisting of savings, money market and NOW accounts. The net
increases in deposits for the six months ended June 30, 2002 and 2001 reflect
our continued emphasis on attracting customer deposits through competitive
rates, extensive product offerings and quality service. Despite increased local
competition for checking accounts, we have been successful in increasing the
number of NOW accounts opened in 2002 due in large part to a carefully
integrated checking account promotion initiated in the second quarter of 2002
and our "PEAK Process," an interactive, disciplined sales and service approach,
which we introduced in the first quarter of 2002.
11
Our primary use of funds is for the origination and purchase of mortgage loans.
During the six months ended June 30, 2002, our gross originations and purchases
of mortgage loans totaled $2.71 billion, compared to $1.85 billion during the
six months ended June 30, 2001. This increase was primarily attributable to the
lower interest rate environment during the first half of 2002 compared to the
first half of 2001, which resulted in an increase in mortgage refinance
activity. Our loan originations and purchases have outpaced the increased level
of repayments during the six months ended June 30, 2002, resulting in an overall
increase in our loan portfolio from December 31, 2001 to June 30, 2002. For the
first half of 2002, cash flow in excess of mortgage and other loan fundings and
excess liquidity at December 31, 2001 were primarily utilized for the purchase
of mortgage-backed securities and the repayment of borrowings. Purchases of
mortgage-backed securities totaled $1.91 billion and purchases of other
securities totaled $502,000 during the six months ended June 30, 2002. In
addition, we paid off $1.05 billion of borrowings during the same period. During
the six months ended June 30, 2001 purchases of mortgage-backed securities
totaled $272.0 million, purchases of other securities totaled $2.0 million, and
net borrowings decreased by $447.4 million.
The rapid decline in interest rates in 2001 resulted in a significant increase
in loan and mortgage-backed securities repayments which has continued during the
first half 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
will continue to purchase mortgage-backed securities and consider a further
reduction in our borrowings outstanding, as we have done in the latter half of
2001 and through the first half of 2002. If repayment activity declines in the
future, we will likely reduce our purchases of mortgage-backed securities and/or
reduce the repayment of borrowings. This activity is consistent with our
strategy of repositioning the balance sheet with an emphasis on mortgage lending
and utilization of core deposits to fund our investing activities.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, our most liquid
assets, totaled $780.1 million at June 30, 2002, compared to $1.45 billion at
December 31, 2001. The decrease in our liquidity was primarily the result of the
repayment of $1.05 billion of borrowings, with a weighted average rate of 7.01%,
which matured during the six months ended June 30, 2002. Borrowings maturing in
the second half of 2002 total $750.5 million with a weighted average rate of
6.53%. We have the flexibility to either repay or rollover such borrowings as
they mature. In addition, we have $1.46 billion in certificates of deposit with
a weighted average rate of 3.11% maturing in the second half of 2002. We expect
to retain a significant portion of such deposits based on our competitive
pricing and historical experience. Retained deposits and refinanced borrowings
during the remainder of 2002 should carry lower weighted average rates than
those they replace, assuming that interest rates remain at or 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 generally 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
12
mortgage market, the origination of such products for sale does not
significantly reduce our liquidity.
Stockholders' equity increased to $1.58 billion at June 30, 2002 from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $125.1 million, net unrealized gains on securities, net
of tax, of $20.4 million, the effect of stock options exercised and related tax
benefit of $10.7 million and the amortization of the allocated portion of shares
held by the employee stock ownership plan, or ESOP, of $4.4 million. These
increases were partially offset by repurchases of our common stock of $84.6
million and dividends declared of $34.4 million.
On June 3, 2002, we paid a quarterly cash dividend of $0.20 per share on shares
of our common stock outstanding as of the close of business on May 15, 2002,
totaling $16.8 million. During the three months ended June 30, 2002, we declared
a cash dividend on our Series B Preferred Stock aggregating $1.5 million. On
July 17, 2002, we declared a quarterly cash dividend of $0.20 per share on
shares of our common stock payable on September 3, 2002 to stockholders of
record as of the close of business on August 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 six months ended June 30, 2002, we repurchased 2,665,400 shares of
our common stock at an aggregate cost of $84.6 million. In total, 5,700,000
shares have been purchased under the eighth stock repurchase plan.
At June 30, 2002, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.70%, leverage
capital ratio of 6.70% and risk-based capital ratio of 14.74%. The minimum
regulatory requirements are a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and risk-based capital ratio of 8.00%.
13
LOAN PORTFOLIO
The following table sets forth the composition of our loans receivable and loans
held-for-sale portfolios at June 30, 2002 and December 31, 2001.
AT JUNE 30, 2002 AT DECEMBER 31, 2001
---------------------------------------------------------
PERCENT PERCENT
(Dollars in Thousands) AMOUNT OF TOTAL AMOUNT OF TOTAL
- -----------------------------------------------------------------------------------------------------------
MORTGAGE LOANS (1):
One-to-four family $10,102,597 81.09% $ 10,146,555 83.63%
Multi-family 1,331,009 10.68 1,094,312 9.02
Commercial real estate 676,108 5.43 598,334 4.93
Construction 53,593 0.43 50,739 0.42
- -----------------------------------------------------------------------------------------------------------
Total mortgage loans 12,163,307 97.63 11,889,940 98.00
- -----------------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (2):
Home equity 246,622 1.98 189,259 1.56
Passbook 8,635 0.07 9,012 0.07
Other 39,566 0.32 43,821 0.37
- -----------------------------------------------------------------------------------------------------------
Total consumer and other loans 294,823 2.37 242,092 2.00
- -----------------------------------------------------------------------------------------------------------
TOTAL LOANS 12,458,130 100.00% 12,132,032 100.00%
Net unamortized premiums and
deferred loan costs 80,880 78,619
Allowance for loan losses (83,605) (82,285)
- -----------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $12,455,405 $ 12,128,366
===========================================================================================================
(1) Includes loans classified as held-for-sale totaling $18.0 million at June
30, 2002 and $41.5 million at December 31, 2001.
(2) Includes loans classified as held-for-sale totaling $940,000 at June 30,
2002 and $1.9 million at December 31, 2001.
14
SECURITIES PORTFOLIO
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed securities and other securities available-for-sale and
held-to-maturity at June 30, 2002 and December 31, 2001.
AT JUNE 30, 2002 AT 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 $ 367,812 $ 380,460 $ 450,742 $ 462,748
REMICs and CMOs:
Agency issuance 827,768 839,972 1,402,241 1,402,093
Non-agency issuance 803,991 822,315 1,132,384 1,150,122
- ------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 1,999,571 2,042,747 2,985,367 3,014,963
- ------------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 375,701 381,208 362,888 359,561
FNMA and FHLMC preferred stock 120,015 113,992 120,015 111,276
Corporate debt and other securities 68,054 66,611 68,292 63,383
- ------------------------------------------------------------------------------------------------------------------
Total other securities 563,770 561,811 551,195 534,220
- ------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,563,341 $2,604,558 $3,536,562 $3,549,183
- ------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY:
Mortgage-backed securities:
Agency pass-through certificates $ 30,026 $ 31,614 $ 36,620 $ 37,543
REMICs and CMOs:
Agency issuance 2,803,657 2,844,277 2,979,357 2,975,780
Non-agency issuance 1,802,655 1,819,477 1,043,110 1,049,426
- ------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,636,338 4,695,368 4,059,087 4,062,749
- ------------------------------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 267,887 270,609 362,034 362,628
Obligations of states and
political subdivisions 42,173 42,176 42,807 42,823
- ------------------------------------------------------------------------------------------------------------------
Total other securities 310,060 312,785 404,841 405,451
- ------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $4,946,398 $5,008,153 $4,463,928 $4,468,200
==================================================================================================================
15
COMPARISON OF FINANCIAL CONDITION AS OF
JUNE 30, 2002 AND DECEMBER 31, 2001
AND OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
FINANCIAL CONDITION
Total assets decreased $689.4 million to $21.98 billion at June 30, 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 six
months ended June 30, 2002.
Mortgage loans, net, including mortgage loans held-for-sale, increased $273.6
million to $12.24 billion at June 30, 2002, from $11.97 billion at December 31,
2001. Gross mortgage loans originated and purchased during the six months ended
June 30, 2002 totaled $2.71 billion, of which $1.96 billion were originations
and $746.7 million were purchases. This compares to $1.27 billion of
originations and $576.5 million of purchases for a total of $1.85 billion during
the six months ended June 30, 2001. The increase in mortgage loan originations
and purchases was primarily a result of the lower interest rate environment
during the first six months of 2002 compared to the first six months of 2001,
which has increased the level of mortgage refinance activity. The increase in
originations and purchases was partially offset by an increase in mortgage loan
repayments to $2.19 billion for the six months ended June 30, 2002, from $1.45
billion for the six months ended June 30, 2001, which was also primarily a
result of the lower interest rates in the first half of 2002 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 81.1% of our total loan
portfolio at June 30, 2002, decreased $44.0 million to $10.10 billion at June
30, 2002, from $10.15 billion at December 31, 2001. This decrease was due
primarily to the high level of loan repayments as a result of refinance activity
in the prevailing interest rate environment, despite strong loan originations.
Our multi-family mortgage loans, which tend to be less susceptible to
prepayment, increased $236.7 million to $1.33 billion at June 30, 2002, from
$1.09 billion at December 31, 2001. Similarly, our commercial real estate loans
increased $77.8 million to $676.1 million at June 30, 2002, from $598.3 million
at December 31, 2001. While we continue to be primarily a one-to-four family
mortgage lender, we have increased our emphasis on multi-family and commercial
real estate loan originations. Our new multi-family and commercial real estate
loan originations continue to be similar in size and type to the loans currently
in our portfolio and we have not changed our underwriting standards with respect
to such loans.
Mortgage-backed securities decreased $395.0 million to $6.68 billion at June 30,
2002, from $7.07 billion at December 31, 2001. This decrease was primarily the
result of principal payments received of $2.33 billion, partially offset by
purchases of $1.91 billion of REMICs and CMOs classified as held-to-maturity and
an increase of $13.6 million in the net unrealized gain on securities
available-for-sale.
16
In addition to the changes noted above in the mortgage loan and mortgage-backed
securities portfolios, other securities decreased $67.2 million to $871.9
million at June 30, 2002, from $939.1 million at December 31, 2001, primarily
due to $107.8 million in securities which were called or matured, partially
offset by the net accretion of discounts of $25.1 million and a decrease of
$15.0 million in the net unrealized loss on securities available-for-sale. The
improvement in the market values of our available-for-sale portfolios was
related to the decrease in medium term market interest rates that occurred from
December 31, 2001 to June 30, 2002.
Federal funds sold and repurchase agreements decreased $705.3 million to $603.8
million at June 30, 2002, from $1.31 billion at December 31, 2001. This decrease
was primarily attributable to the repayment of $1.05 billion of borrowings which
matured during the six months ended June 30, 2002. In addition, Bank Owned Life
Insurance, or BOLI, was increased $110.2 million to $353.0 million at June 30,
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 $333.7 million to
$11.24 billion at June 30, 2002, from $10.90 billion at December 31, 2001. The
increase in deposits was primarily due to an increase of $228.9 million in core
deposits to $5.97 billion at June 30, 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. Our
certificates of deposit also increased $104.9 million to $5.27 billion at June
30, 2002, from $5.16 billion at December 31, 2001. This increase is reflective
of our desire to extend the maturities of our liabilities, which we have been
successfully achieving through various product promotions. Reverse repurchase
agreements decreased $500.0 million to $6.89 billion at June 30, 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 June 30, 2002, from $1.91 billion
at December 31, 2001. Other borrowings, net, decreased $300.4 million to $99.2
million at June 30, 2002, from $399.6 million at December 31, 2001. The
decreases in borrowings reflect management's decision to utilize excess cash
flows to repay various borrowings which matured during the six months ended June
30, 2002.
Stockholders' equity increased to $1.58 billion at June 30, 2002, from $1.54
billion at December 31, 2001. The increase in stockholders' equity was the
result of net income of $125.1 million, net unrealized gains on securities, net
of tax, of $20.4 million, the effect of stock options exercised and related tax
benefit of $10.7 million and the amortization of the allocated portion of shares
held by the ESOP of $4.4 million. These increases were partially offset by
repurchases of our common stock of $84.6 million and dividends declared of $34.4
million.
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended June 30, 2002 increased $6.7 million to
$63.9 million, from $57.2 million for the three months ended June 30, 2001. For
the three months ended June 30, 2002, diluted earnings per common share
increased to $0.73 per share, as compared to
17
$0.59 per share for the three months ended June 30, 2001. Return on average
assets increased to 1.16% for the three months ended June 30, 2002, from 1.02%
for the three months ended June 30, 2001. Return on average stockholders' equity
increased to 16.32% for the three months ended June 30, 2002, from 14.33% for
the three months ended June 30, 2001. Return on average tangible stockholders'
equity increased to 18.50% for the three months ended June 30, 2002, from 16.36%
for the three months ended June 30, 2001.
Net income for the six months ended June 30, 2002 increased $13.5 million to
$125.1 million, from $111.6 million for the six months ended June 30, 2001. For
the six months ended June 30, 2002, diluted earnings per common share increased
to $1.41 per share, as compared to $1.15 per share for the six months ended June
30, 2001. Return on average assets increased to 1.12% for the six months ended
June 30, 2002, from 1.00% for the six months ended June 30, 2001. Return on
average stockholders' equity increased to 16.01% for the six months ended June
30, 2002, from 14.14% for the six months ended June 30, 2001. Return on average
tangible stockholders' equity increased to 18.16% for the six months ended June
30, 2002, from 16.19% for the six months ended June 30, 2001.
The results of operations for the three and six month periods ended June 30,
2002 include the benefit derived from the adoption of SFAS No. 142. SFAS No. 142
eliminated goodwill amortization, which totaled $4.8 million, or $0.05 per
diluted common share, for the three months ended June 30, 2001 and $9.6 million,
or $0.10 per diluted common share, for the six months ended June 30, 2001. The
results of operations for the six months ended June 30, 2001 also include a $2.3
million, after tax, charge for the cumulative effect of accounting change
related to the adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133," 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 can be significantly impacted by changes in interest rates and
market yield curves. See Item 3, "Quantitative and Qualitative Disclosures About
Market Risk," for further discussion of the potential impact of changes in
interest rates on our results of operations.
For the three months ended June 30, 2002, net interest income increased $7.4
million to $125.5 million, from $118.1 million for the three months ended June
30, 2001. This increase was primarily attributable to an increase in the net
interest margin to 2.40% for the three months ended June 30, 2002, from 2.21%
for the three months ended June 30, 2001, partially offset by a decrease of
$207.7 million in the average balance of net interest-earning assets to $882.2
million for the three months ended June 30, 2002, from $1.09 billion for the
three months ended June 30, 2001. The increase in the net interest margin is
primarily due to the decrease in the cost of funds due to the downward repricing
of deposits as a result of the lower interest rate environment which has
persisted since June of 2001, along with the repayment of various higher cost
borrowings. The decrease in the average balance of net interest-earning assets
was the result of a $407.8 million decrease in the average balance of total
interest-earning assets to $20.94 billion for the three months ended June 30,
2002, from $21.34 billion
18
for the three months ended June 30, 2001, partially offset by a $200.1 million
decrease in the average balance of total interest-bearing liabilities to $20.05
billion for the three months ended June 30, 2002, from $20.25 billion for the
three months ended June 30, 2001. The net interest rate spread increased to
2.22% for the three months ended June 30, 2002, from 1.96% for the three months
ended June 30, 2001. The change in the net interest rate spread was the result
of a decrease in the average cost of interest-bearing liabilities to 4.01% for
the three months ended June 30, 2002, from 4.84% for the three months ended June
30, 2001, partially offset by a decrease in the average yield on
interest-earning assets to 6.23% for the three months ended June 30, 2002, from
6.80% for the three months ended June 30, 2001.
For the six months ended June 30, 2002, net interest income increased $2.0
million to $243.5 million, from $241.5 million for the six months ended June 30,
2001. This increase was primarily the result of an increase in the net interest
margin to 2.31% for the six months ended June 30, 2002, from 2.25% for the six
months ended June 30, 2001, partially offset by a decrease of $288.2 million in
the average balance of net interest-earning assets to $865.3 million for the six
months ended June 30, 2002, from $1.15 billion for the six months ended June 30,
2001. The increase in the net interest margin is primarily due to the decrease
in the cost of funds, as previously discussed. The decrease in the average
balance of net interest-earning assets was the result of a $316.2 million
decrease in the average balance of total interest-earning assets to $21.10
billion for the six months ended June 30, 2002, from $21.42 billion for the six
months ended June 30, 2001, partially offset by a $28.0 million decrease in the
average balance of total interest-bearing liabilities to $20.24 billion for the
six months ended June 30, 2002, from $20.27 billion for the six months ended
June 30, 2001. The net interest rate spread increased to 2.14% for the six
months ended June 30, 2002, from 1.99% for the six months ended June 30, 2001.
The change in the net interest rate spread was the result of a decrease in the
average cost of interest-bearing liabilities to 4.09% for the six months ended
June 30, 2002, from 4.88% for the six months ended June 30, 2001, partially
offset by a decrease in the average yield on interest-earning assets to 6.23%
for the six months ended June 30, 2002, from 6.87% for the six months ended June
30, 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 tables set forth certain information about the average balances of
our assets and liabilities and the related yields and costs for the three and
six month periods ended June 30, 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 primarily from
average daily balances. The average balance of loans receivable includes loans
on which we have discontinued accruing interest. The yields and costs include
amortization of fees, costs, premiums and discounts which are considered
adjustments to interest rates.
19
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST BALANCE INTEREST COST
- ------------------------------------------------------------------------------------------------------------------------------------
(ANNUALIZED) (ANNUALIZED)
ASSETS:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 10,259,961 $ 163,449 6.37% $ 9,976,888 $ 174,172 6.98%
Multi-family, commercial
and construction 1,967,805 38,781 7.88 1,407,856 29,520 8.39
Consumer and other loans (1) 282,510 4,117 5.83 195,510 4,470 9.15
------------- --------- ------------- ----------
Total loans 12,510,276 206,347 6.60 11,580,254 208,162 7.19
Mortgage-backed securities (2) 6,508,577 97,225 5.98 7,337,926 117,729 6.42
Other securities (2)(3) 1,163,408 19,449 6.69 1,618,634 28,498 7.04
Federal funds sold and
repurchase agreements 753,410 3,254 1.73 806,686 8,600 4.26
------------- --------- ------------- ----------
Total interest-earning assets 20,935,671 326,275 6.23 21,343,500 362,989 6.80
--------- ----------
Non-interest-earning assets 1,192,272 1,021,255
------------- -------------
Total assets $ 22,127,943 $ 22,364,755
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,751,167 8,566 1.25 $ 2,477,134 12,471 2.01
Certificates of deposit 5,224,909 56,588 4.33 5,232,180 72,708 5.56
NOW 1,252,742 894 0.29 1,080,284 1,462 0.54
Money market 1,935,305 9,495 1.96 1,667,494 17,939 4.30
------------- --------- ------------- ----------
Total deposits 11,164,123 75,543 2.71 10,457,092 104,580 4.00
Borrowed funds 8,889,386 125,258 5.64 9,796,500 140,296 5.73
------------- --------- ------------- ----------
Total interest-bearing liabilities 20,053,509 200,801 4.01 20,253,592 244,876 4.84
--------- ---------
Non-interest-bearing liabilities 507,314 515,376
------------- -------------
Total liabilities 20,560,823 20,768,968
Stockholders' equity 1,567,120 1,595,787
------------- -------------
Total liabilities and stockholders'
equity $ 22,127,943 $ 22,364,755
============= =============
Net interest income/net interest
rate spread $ 125,474 2.22% $ 118,113 1.96%
========= ==== ========== ====
Net interest-earning assets/net
interest margin $ 882,162 2.40% $ 1,089,908 2.21%
============= ==== ============= ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.04x 1.05x
============= =============
- ----------
(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.
20
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------------
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 $ 10,328,441 $ 329,958 6.39% $ 9,981,678 $ 349,692 7.01%
Multi-family, commercial
and construction 1,889,347 75,070 7.95 1,370,319 57,191 8.35
Consumer and other loans (1) 268,858 7,919 5.89 192,087 9,349 9.73
------------- --------- ------------- ----------
Total loans 12,486,646 412,947 6.61 11,544,084 416,232 7.21
Mortgage-backed securities (2) 6,567,934 197,721 6.02 7,591,708 245,445 6.47
Other securities (2)(3) 1,175,753 39,105 6.65 1,706,803 60,587 7.10
Federal funds sold and
repurchase agreements 872,582 7,392 1.69 576,572 13,278 4.61
------------- --------- ------------- ----------
Total interest-earning assets 21,102,915 657,165 6.23 21,419,167 735,542 6.87
--------- ----------
Non-interest-earning assets 1,200,294 947,877
------------- -------------
Total assets $ 22,303,209 $ 22,367,044
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings $ 2,692,454 16,669 1.24 $ 2,457,518 24,632 2.00
Certificates of deposit 5,187,287 115,527 4.45 5,197,593 146,395 5.63
NOW 1,222,915 1,719 0.28 1,041,815 2,855 0.55
Money market 1,945,914 19,855 2.04 1,594,515 36,262 4.55
------------- --------- ------------- ----------
Total deposits 11,048,570 153,770 2.78 10,291,441 210,144 4.08
Borrowed funds 9,189,090 259,890 5.66 9,974,227 283,924 5.69
------------- --------- ------------- ----------
Total interest-bearing liabilities 20,237,660 413,660 4.09 20,265,668 494,068 4.88
--------- ----------
Non-interest-bearing liabilities 502,326 522,356
------------- -------------
Total liabilities 20,739,986 20,788,024
Stockholders' equity 1,563,223 1,579,020
------------- -------------
Total liabilities and stockholders'
equity $ 22,303,209 $ 22,367,044
============= =============
Net interest income/net interest
rate spread $ 243,505 2.14% $ 241,474 1.99%
========= ==== ========== ====
Net interest-earning assets/net
interest margin $ 865,255 2.31% $ 1,153,499 2.25%
========== ==== ============ ====
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.
21
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (1)
the changes attributable to changes in volume (changes in volume multiplied by
prior rate), (2) the changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
THREE MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2002
COMPARED TO COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
INCREASE (DECREASE) INCREASE (DECREASE)
(In Thousands) VOLUME RATE NET VOLUME RATE NET
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
One-to-four family loans $ 4,830 $(15,553) $(10,723) $ 11,887 $(31,621) $(19,734)
Multi-family, commercial and
construction loans 11,147 (1,886) 9,261 20,738 (2,859) 17,879
Consumer and other loans 1,593 (1,946) (353) 2,992 (4,422) (1,430)
Mortgage-backed securities (12,764) (7,740) (20,504) (31,485) (16,239) (47,724)
Other securities (7,690) (1,359) (9,049) (17,847) (3,635) (21,482)
Federal funds sold and repurchase
agreements (535) (4,811) (5,346) 4,902 (10,788) (5,886)
- ------------------------------------------------------------------------------------------------------------------------------------
Total (3,419) (33,295) (36,714) (8,813) (69,564) (78,377)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 1,247 (5,152) (3,905) 2,153 (10,116) (7,963)
Certificates of deposit (101) (16,019) (16,120) (289) (30,579) (30,868)
NOW 201 (769) (568) 438 (1,574) (1,136)
Money market 2,522 (10,966) (8,444) 6,741 (23,148) (16,407)
Borrowed funds (12,857) (2,181) (15,038) (22,525) (1,509) (24,034)
- ------------------------------------------------------------------------------------------------------------------------------------
Total (8,988) (35,087) (44,075) (13,482) (66,926) (80,408)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 5,569 $ 1,792 $ 7,361 $ 4,669 $ (2,638) $ 2,031
====================================================================================================================================
INTEREST INCOME
Interest income for the three months ended June 30, 2002 decreased $36.7 million
to $326.3 million, from $363.0 million for the three months ended June 30, 2001.
This decrease was the result of a decrease in the average yield on
interest-earning assets to 6.23% for the three months ended June 30, 2002, from
6.80% for the three months ended June 30, 2001, coupled with a decrease of
$407.8 million in the average balance of interest-earning assets to $20.94
billion for the three months ended June 30, 2002, from $21.34 billion for the
three months ended June 30, 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
second quarter of 2002 compared to the second 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 and other securities, resulting from
principal repayments, maturities and calls, partially offset by increases in the
average balances of mortgage loans. Also contributing to the decrease in the
average balance of interest-earning assets was the
22
purchase of an additional $100.0 million of BOLI in the first quarter of 2002.
The shift in the average balances 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 $10.8 million to
$163.4 million for the three months ended June 30, 2002, from $174.2 million for
the three months ended June 30, 2001, which was primarily the result of a
decrease in the average yield to 6.37% for the three months ended June 30, 2002,
from 6.98% for the three months ended June 30, 2001, partially offset by a
$283.1 million increase in the average balance of such loans. The increase in
the average balance of one-to-four family mortgage loans reflects the strong
level of originations and purchases, offset in part by the increased level of
repayment activity due to refinancings in the prevailing interest rate
environment. Interest income on multi-family, commercial real estate and
construction loans increased $9.3 million to $38.8 million for the three months
ended June 30, 2002, from $29.5 million for the three months ended June 30,
2001, which was primarily the result of a $559.9 million increase in the average
balance of such loans, partially offset by a decrease in the average yield to
7.88% for the three months ended June 30, 2002, from 8.39% for the three months
ended June 30, 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 second quarter of
2002 as compared to the second quarter of 2001 as higher rate loans are prepaid
and replaced with lower yielding new originations and purchases.
Interest income on consumer and other loans decreased $353,000 for the three
months ended June 30, 2002 compared to the three months ended June 30, 2001
resulting from a decrease in the average yield to 5.83% for the three months
ended June 30, 2002, from 9.15% for the three months ended June 30, 2001,
partially offset by an increase of $87.0 million in the average balance of this
portfolio. The decrease in the average yield on consumer and other loans was
primarily the result of a decrease in the average yield on our home equity
loans, which represent 83.7% of our consumer and other loan portfolio at June
30, 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 $20.5 million to $97.2
million for the three months ended June 30, 2002, from $117.7 million for the
three months ended June 30, 2001. This decrease was the result of a $829.3
million decrease in the average balance of this portfolio, coupled with a
decrease in the average yield to 5.98% for the three months ended June 30, 2002,
from 6.42% for the three months ended June 30, 2001. The decrease in the average
balance of mortgage-backed securities is a result of both our strategy of
repositioning the balance sheet and increased levels of principal repayments due
to the lower interest rate environment which has existed since June 2001.
Interest income on other securities decreased $9.0 million, resulting from a
decrease of $455.2 million in the average balance of this portfolio, primarily
due to higher yielding securities being called throughout 2001 and 2002 as a
result of the declining interest rate environment. As a result of the decrease
in the balance of higher yielding securities, the average yield on other
securities decreased to 6.69% for the three months ended June 30, 2002, from
7.04% for the three months ended June 30, 2001.
23
Interest income on federal funds sold and repurchase agreements decreased $5.3
million as a result of a decrease in the average yield to 1.73% for the three
months ended June 30, 2002, from 4.26% for the three months ended June 30, 2001,
coupled with a decrease of $53.3 million in the average balance of the
portfolio.
Interest income for the six months ended June 30, 2002 decreased $78.3 million
to $657.2 million, from $735.5 million for the six months ended June 30, 2001.
This decrease was the result of a decrease in the average yield on
interest-earning assets to 6.23% for the six months ended June 30, 2002, from
6.87% for the six months ended June 30, 2001, coupled with a decrease of $316.2
million in the average balance of interest-earning assets to $21.10 billion for
the six months ended June 30, 2002, from $21.42 billion for the six months ended
June 30, 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. 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. Also contributing to the decrease in the average balance of
interest-earning assets was the purchase of an additional $100.0 million of BOLI
during the first quarter of 2002. The shift in the average balances of
interest-earning assets reflects our decision over the past several years to
reposition the balance sheet by emphasizing mortgage lending.
Interest income on one-to-four family mortgage loans decreased $19.7 million to
$330.0 million for the six months ended June 30, 2002, from $349.7 million for
the six months ended June 30, 2001, which was primarily the result of a decrease
in the average yield to 6.39% for the six months ended June 30, 2002, from 7.01%
for the six months ended June 30, 2001, partially offset by a $346.8 million
increase in the average balance of such loans. Interest income on multi-family,
commercial real estate and construction loans increased $17.9 million to $75.1
million for the six months ended June 30, 2002, from $57.2 million for the six
months ended June 30, 2001, which was primarily the result of a $519.0 million
increase in the average balance of such loans, partially offset by a decrease in
the average yield to 7.95% for the six months ended June 30, 2002, from 8.35%
for the six months ended June 30, 2001. As previously discussed, the increases
in the average balances of our mortgage loans and the decreases in the average
yields for the six months ended June 30, 2002 as compared to the six months
ended June 30, 2001 reflect our continued emphasis on mortgage lending and the
lower interest rate environment.
Interest income on consumer and other loans decreased $1.4 million during the
six months ended June 30, 2002 as compared to the six months ended June 30, 2001
resulting from a decrease in the average yield to 5.89% for the six months ended
June 30, 2002, from 9.73% for the six months ended June 30, 2001, partially
offset by an increase of $76.8 million in the average balance of this portfolio.
The decrease in the average yield on consumer and other loans was primarily the
result of a decrease in the average yield on our home equity loans, which are
adjustable rate loans indexed to the prime rate, as previously discussed.
Interest income on mortgage-backed securities decreased $47.7 million to $197.7
million for the six months ended June 30, 2002, from $245.4 million for the six
months ended June 30, 2001. This decrease was the result of a $1.02 billion
decrease in the average balance of the portfolio, due to principal repayments as
previously discussed, coupled with a decrease in the average yield to 6.02% for
the six months ended June 30, 2002, from 6.47% for the six
24
months ended June 30, 2001. Interest income on other securities decreased $21.5
million, resulting from a decrease of $531.1 million in the average balance of
this portfolio, primarily due to higher yielding securities being called
throughout 2001 and 2002 as a result of the declining interest rate environment.
As a result of the decrease in the balance of higher yielding securities, the
average yield on other securities decreased to 6.65% for the six months ended
June 30, 2002, from 7.10% for the six months ended June 30, 2001. Interest
income on federal funds sold and repurchase agreements decreased $5.9 million as
a result of a decrease in the average yield to 1.69% for the six months ended
June 30, 2002, from 4.61% for the six months ended June 30, 2001, partially
offset by an increase of $296.0 million in the average balance of the portfolio.
Despite strong loan originations and purchases, and the reduction of borrowings,
our cash flows from operations, loan and securities repayments and deposit
growth exceeded loan originations and purchases and other investment purchases,
resulting in the increase in the average balance of federal funds sold and
repurchase agreements for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2002 decreased $44.1
million to $200.8 million, from $244.9 million for the three months ended June
30, 2001. This decrease was primarily the result of a decrease in the average
cost of interest-bearing liabilities to 4.01% for the three months ended June
30, 2002, from 4.84% for the three months ended June 30, 2001, coupled with a
$200.1 million decrease in the average balance of interest-bearing liabilities.
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 decrease in the average balance of
interest-bearing liabilities was attributable to a decrease in borrowings, due
to the repayment of matured borrowings, partially offset by an increase in
deposits, which is consistent with our strategy of repositioning the balance
sheet.
Interest expense on deposits decreased $29.1 million, to $75.5 million for the
three months ended June 30, 2002, from $104.6 million for the three months ended
June 30, 2001, reflecting a decrease in the average cost of deposits to 2.71%
for the three months ended June 30, 2002, from 4.00% for the three months ended
June 30, 2001, partially offset by an increase of $707.0 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 increases in the average balances of savings and
money market accounts.
Interest expense on certificates of deposit decreased $16.1 million resulting
from a decrease in the average cost to 4.33% for the three months ended June 30,
2002, from 5.56% for the three months ended June 30, 2001, coupled with a
decrease of $7.3 million in the average balance. The decrease in the average
cost of certificates of deposit was due to the effect of the lower interest rate
environment which has prevailed since 2001.
Interest expense on money market accounts decreased $8.4 million reflecting a
decrease in the average cost to 1.96% for the three months ended June 30, 2002,
from 4.30% for the three months ended June 30, 2001, partially offset by an
increase of $267.8 million in the average balance of such accounts. Interest
paid on money market accounts is on a tiered basis with 89.17% of the balance at
June 30, 2002 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-
25
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 second quarter of 2002 compared to the
second quarter of 2001.
Interest expense on savings accounts decreased $3.9 million which was
attributable to a decrease in the average cost to 1.25% for the three months
ended June 30, 2002, from 2.01% for the three months ended June 30, 2001,
partially offset by an increase of $274.0 million in the average balance.
Interest expense on NOW accounts decreased $568,000 as a result of a decrease in
the average cost to 0.29% for the three months ended June 30, 2002, from 0.54%
for the three months ended June 30, 2001, partially offset by an increase of
$172.5 million in the average balance.
Interest expense on borrowed funds for the three months ended June 30, 2002
decreased $15.0 million to $125.3 million, from $140.3 million for three months
ended June 30, 2001, resulting from a decrease of $907.1 million in the average
balance, coupled with a decrease in the average cost of borrowings to 5.64% for
the three months ended June 30, 2002, from 5.73% for the three months ended June
30, 2001. During the six months ended June 30, 2002, $1.05 billion in borrowings
with an average rate of 7.01% were repaid.
Interest expense for the six months ended June 30, 2002 decreased $80.4 million
to $413.7 million, from $494.1 million for the six months ended June 30, 2001.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 4.09% for the six months ended June 30, 2002,
from 4.88% for the six months ended June 30, 2001, coupled with a $28.0 million
decrease in the average balance of interest-bearing liabilities. 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 decrease in the average balance of interest-bearing
liabilities was attributable to a decrease in borrowings, partially offset by an
increase in deposits, which is consistent with our strategy of repositioning the
balance sheet.
Interest expense on deposits decreased $56.3 million, to $153.8 million for the
six months ended June 30, 2002, from $210.1 million for the six months ended
June 30, 2001, reflecting a decrease in the average cost of deposits to 2.78%
for the six months ended June 30, 2002, from 4.08% for the six months ended June
30, 2001, partially offset by an increase of $757.1 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,
money market and savings 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 increases in the average balances
of money market and savings accounts.
Interest expense on certificates of deposit decreased $30.9 million resulting
from a decrease in the average cost to 4.45% for the six months ended June 30,
2002, from 5.63% for the six months ended June 30, 2001, coupled with a decrease
of $10.3 million in the average balance. The decrease in the average cost of
certificates of deposit was due to the effect of the lower interest rate
environment which has prevailed since 2001.
Interest expense on money market accounts decreased $16.4 million reflecting a
decrease in the average cost to 2.04% for the six months ended June 30, 2002,
from 4.55% for the six months ended June 30, 2001, partially offset by an
increase of $351.4 million in the average balance of such accounts. The decrease
in the average cost of these deposits is reflective of the lower
26
market interest rates in the first half of 2002 compared to the first half of
2001 as previously discussed.
Interest expense on savings accounts decreased $8.0 million which was
attributable to a decrease in the average cost to 1.24% for the six months ended
June 30, 2002, from 2.00% for the six months ended June 30, 2001, partially
offset by an increase of $234.9 million in the average balance. Interest expense
on NOW accounts decreased $1.1 million as a result of a decrease in the average
cost to 0.28% for the six months ended June 30, 2002, from 0.55% for the six
months ended June 30, 2001, partially offset by an increase of $181.1 million in
the average balance.
Interest expense on borrowed funds for the six months ended June 30, 2002
decreased $24.0 million to $259.9 million, from $283.9 million for six months
ended June 30, 2001, resulting from a decrease of $785.1 million in the average
balance, coupled with a slight decrease in the average cost of borrowings to
5.66% for the six months ended June 30, 2002, from 5.69% for the six months
ended June 30, 2001.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $1.0 million for the three months ended June
30, 2002 and 2001. For the six months ended June 30, 2002 and 2001, provision
for loan losses totaled $2.0 million. The allowance for loan losses increased to
$83.6 million at June 30, 2002, from $82.3 million at December 31, 2001. The
increase in the allowance for loan losses and the resultant provision for loan
losses for 2002 reflect the overall increase in our loan portfolio, particularly
increases in our multi-family and commercial real estate loan portfolios, which
generally involve greater credit risk than one-to-four family mortgage loans.
Net loan charge-offs totaled $344,000 for the three months ended June 30, 2002
compared to $281,000 for the three months ended June 30, 2001. For the six
months ended June 30, 2002, net loan charge-offs totaled $686,000 compared to
$580,000 for the six months ended June 30, 2001. Non-performing loans decreased
$4.7 million to $32.4 million at June 30, 2002, from $37.1 million at December
31, 2001. The allowance for loan losses as a percentage of non-performing loans
increased to 258.09% at June 30, 2002, from 221.70% at December 31, 2001
primarily due to the decrease in non-performing loans from December 31, 2001 to
June 30, 2002. The allowance for loan losses as a percentage of total loans
decreased slightly to 0.67% at June 30, 2002, from 0.68% at December 31, 2001
due to the increase in the loan portfolio. 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 June 30, 2002 increased $2.5
million, or 9.7%, to $28.1 million, from $25.6 million for the three months
ended June 30, 2001 and increased $8.1 million, or 16.7%, to $56.4 million for
the six months ended June 30, 2002, from $48.3 million for the six months ended
June 30, 2001. These increases in non-interest income were primarily due to
increases in customer service fees and income from BOLI, partially offset by
decreases in loan servicing fees.
Customer service fees increased $2.3 million to $15.3 million for the three
months ended June 30, 2002, from $13.0 million for the three months ended June
30, 2001 and increased $4.7 million to $29.3 million for the six months ended
June 30, 2002, from $24.6 for the six months ended June 30, 2001. The increase
in customer service fees was primarily attributable
27
to an increase in the number of NOW accounts, which was due primarily to an
integrated checking account promotion initiated in the second quarter of 2002
and continued focus on our retail sales initiatives, including the introduction
of our "PEAK Process" in the first quarter of 2002.
Income from BOLI increased $1.7 million to $6.0 million for the three months
ended June 30, 2002, from $4.3 million for the three months ended June 30, 2001
and increased $1.7 million to $10.2 million for the six months ended June 30,
2002, from $8.5 million for the six months ended June 30, 2001. As discussed
previously, during the first quarter of 2002 we purchased an additional $100.0
million of BOLI. Increases in the cash surrender value of BOLI are recorded as
income.
Loan servicing fees decreased $950,000 to $3.1 million for the three months
ended June 30, 2002, from $4.0 million for the three months ended June 30, 2001
and decreased $1.7 million to $6.3 million for the six months ended June 30,
2002, from $8.0 million for the six months ended June 30, 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 $3.10 billion at June 30, 2002, from $3.62 billion
at June 30, 2001. The decrease in the balance of loans serviced for others was
the result of runoff in that portfolio, due to repayments exceeding the level of
new servicing volume from loan sales.
Net gain on sales of loans decreased $95,000 to $1.3 million for the three
months ended June 30, 2002, from $1.4 million for the three months ended June
30, 2001 and increased $1.1 million to $2.8 million for the six months ended
June 30, 2002, from $1.7 million for the six months ended June 30, 2001. The
increase in the net gain on sales of loans for the six months ended June 30,
2002 was primarily due to an increase in the volume of fixed rate loans
originated and sold into the secondary market during the quarter ended March 31,
2002. Other loan fees increased during the three months ended June 30, 2002 to
$1.6 million compared to $1.5 million for the three months ended June 30, 2001
and increased to $3.7 million for the six months ended June 30, 2002 compared to
$3.0 million for the six months ended June 30, 2001.
Other non-interest income decreased $536,000 to $841,000 for the three months
ended June 30, 2002, compared to $1.4 million for the three months ended June
30, 2001. For the six months ended June 30, 2002, other non-interest income
increased $1.6 million to $4.1 million, from $2.5 million for the six months
ended June 30, 2001. The increase for the six months ended June 30, 2002 was
primarily due to income in the first quarter of 2002 related to the sale of
Prudential Financial, Inc. stock, which was received as a result of the
conversion of 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 June 30, 2002 was $57.1 million,
an increase of $2.1 million from $55.0 million for the three months ended June
30, 2001. This increase was primarily due to increases in general and
administrative expense and net amortization of MSR, partially offset by the
elimination of goodwill amortization, which totaled $4.8 million for the three
months ended June 30, 2001, effective January 1, 2002 upon adoption of SFAS No.
142. For the six months ended June 30, 2002, non-interest expense decreased $2.0
million to $109.7 million, from $111.7 million for the six months ended June 30,
2001. This
28
decrease was primarily due to the elimination of goodwill amortization, which
totaled $9.6 million for the six months ended June 30, 2001, and a decrease in
goodwill litigation expense, partially offset by an increase in general and
administrative expense.
General and administrative expense increased $5.6 million to $50.0 million for
the three months ended June 30, 2002, from $44.4 million for the three months
ended June 30, 2001. For the six months ended June 30, 2002, general and
administrative expense increased $8.7 million to $97.8 million, from $89.1
million for the comparable 2001 period. These increases in general and
administrative expense were primarily due to increases in compensation and
benefits expense and other expense, partially offset by decreases in advertising
expense.
Compensation and benefits expense increased $3.8 million to $26.3 million for
the three months ended June 30, 2002, from $22.5 million for the three months
ended June 30, 2001. For the six months ended June 30, 2002, compensation and
benefits expense increased $6.8 million to $52.4 million, from $45.6 million for
the six months ended June 30, 2001. The increase was attributable to staff
additions, primarily in our retail banking network, and normal performance
increases in salaries, coupled with an increase in net employee benefit plan
expense of $1.0 million for the three months ended June 30, 2002 and $1.8
million for the six months ended June 30, 2002 over the comparable 2001 periods.
Also included was an increase in ESOP expense of $353,000 for the three months
ended June 30, 2002 and $1.1 million for the six months ended June 30, 2002 over
the comparable 2001 periods, which was due to the effect of the higher average
market value of our common stock during the first half of 2002 compared to the
first half of 2001, coupled with the increase in compensation.
Advertising expense decreased $144,000 to $1.5 million for the three months
ended June 30, 2002, from $1.7 million for the three months ended June 30, 2001,
and decreased $971,000 to $2.6 million for the six months ended June 30, 2002,
from $3.5 million for the six months ended June 30, 2001, primarily due to our
continued focus in 2002 on our sales and service efforts and limited print
advertising during the first quarter of 2002.
Other expense increased $1.8 million to $8.6 million for the three months ended
June 30, 2002, from $6.8 million for the three months ended June 30, 2001, and
increased $2.7 million to $15.7 million for the six months ended June 30, 2002,
from $13.0 million for the six months ended June 30, 2001, primarily due to
amortization of purchase premiums and market value adjustments on $300.0 million
notional amount of interest rate cap agreements. The interest rate cap
agreements were purchased primarily in the second half of 2001 as protection
against interest rate increases during the next several years as part of
management's interest rate risk strategy.
Occupancy, equipment and systems expense increased to $13.1 million for the
three months ended June 30, 2002, from $13.0 million for the three months ended
June 30, 2001. For the six months ended June 30, 2002 occupancy, equipment and
systems expense increased to $26.2 million, from $26.0 million for the
comparable 2001 period. Federal deposit insurance premiums increased slightly to
$499,000 for the three months ended June 30, 2002, from $493,000 for the three
months ended June 30, 2001. For the six months ended June 30, 2002, federal
deposit insurance premiums increased slightly to $1.0 million, from $990,000 for
the six months ended June 30, 2001.
For the three months ended June 30, 2002, net amortization of mortgage servicing
rights increased $2.0 million to $3.8 million, from $1.8 million for the three
months ended June 30,
29
2001. For the six months ended June 30, 2002, net amortization of mortgage
servicing rights increased $170,000 to $5.1 million, from $5.0 million for the
comparable 2001 period. 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. These increases in
the net amortization of mortgage servicing rights were due to changes in the
provision for the valuation allowance of mortgage servicing rights, slightly
offset by decreases in the amortization of mortgage servicing rights. For the
three months ended June 30, 2002, we recorded a provision of $1.9 million
compared to a $370,000 recovery recorded for the three months ended June 30,
2001. This increase in the provision was partially offset by a $352,000 decrease
in amortization expense to $1.9 million for the three months ended June 30,
2002, from $2.2 million for the three months ended June 30, 2001. For the six
months ended June 30, 2002, we recorded a provision of $1.1 million compared to
a provision of $655,000 for the six months ended June 30, 2001. This increase in
the provision was partially offset by a decrease of $289,000 in amortization
expense to $4.0 million for the six months ended June 30, 2002, from $4.3
million for the six months ended June 30, 2001. The provision for the valuation
allowance of mortgage servicing rights was primarily the result of an increase
in prepayment speed assumptions due to the current and forecasted lower interest
rate environment.
Goodwill litigation expense decreased $571,000 to $281,000 for the three months
ended June 30, 2002, from $852,000 for the three months ended June 30, 2001 and
decreased $1.3 million to $560,000 for the six months ended June 30, 2002, from
$1.9 million for the six months ended June 30, 2001, reflecting the completion
of discovery regarding our claims.
Our percentage of general and administrative expense to average assets was 0.90%
for the three months ended June 30, 2002 and 0.88% for the six months ended June
30, 2002, compared to 0.79% for the three months ended June 30, 2001 and 0.80%
for the six months ended June 30, 2001. The efficiency ratio was 32.56% for the
three months ended June 30, 2002 and 32.67% for the six months ended June 30,
2002, compared to 30.92% for the three months ended June 30, 2001 and 30.74% for
the six months ended June 30, 2001. The increases in these ratios were
attributable to the increase in general and administrative expense for the three
and six month periods ended June 30, 2002 compared to the same periods in 2001
discussed previously.
INCOME TAX EXPENSE
For the three months ended June 30, 2002, income tax expense was $31.5 million,
representing an effective tax rate of 33.0%, compared to $30.5 million,
representing an effective tax rate of 34.8%, for the three months ended June 30,
2001. For the six months ended June 30, 2002, income tax expense was $63.0
million, representing an effective tax rate of 33.5%, as compared to $62.1
million, representing an effective tax rate of 35.3%, for the six months ended
June 30, 2001. The reduction in the effective tax rate for the three and six
month periods ended June 30, 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
30
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 $33.4 million at June 30, 2002, from $40.1
million at December 31, 2001. The ratio of non-performing loans to total loans
decreased to 0.26% at June 30, 2002, from 0.31% at December 31, 2001. The ratio
of non-performing assets to total assets decreased to 0.15% at June 30, 2002,
from 0.18% at December 31, 2001.
DELINQUENT LOANS
The following table shows a comparison of delinquent loans at June 30, 2002 and
December 31, 2001.
AT JUNE 30, 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
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family 5 $ 207 188 $27,505 20 $1,269 222 $31,991
Multi-family 2 311 4 2,302 1 84 5 1,860
Commercial real estate 5 1,278 2 1,914 5 1,395 4 1,752
Construction -- -- -- -- -- -- 1 522
Consumer and other loans 96 378 91 673 102 491 104 991
- -----------------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 108 $2,174 285 $32,394 128 $3,239 336 $37,116
===================================================================================================================================
Delinquent loans to total
loans 0.02% 0.26% 0.03% 0.31%
NON-PERFORMING ASSETS
The following table sets forth information regarding non-performing assets at
June 30, 2002 and December 31, 2001. In addition to the non-performing loans, we
had approximately $2.2 million of potential problem loans at June 30, 2002
compared to $3.2 million at December 31, 2001. Such loans are 60-89 days
delinquent as shown above.
AT JUNE 30, AT DECEMBER 31,
(Dollars in Thousands) 2002 2001
- ----------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $30,327 $34,848
Non-accrual delinquent consumer and other loans 673 991
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 1,394 1,277
- ----------------------------------------------------------------------------------------
Total non-performing loans 32,394 37,116
Real estate owned, net (3) 1,036 2,987
- ----------------------------------------------------------------------------------------
Total non-performing assets $33,430 $40,103
========================================================================================
Allowance for loan losses to non-performing loans 258.09% 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.
31
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in some instances the borrower has only missed
two payments. As of June 30, 2002, $6.8 million of loans classified as
non-performing had missed only two payments. In addition, we reverse all
previously accrued and uncollected interest through a charge to interest income.
While loans are in non-accrual status, interest due is monitored and income is
recognized only to the extent cash is received until a return to accrual status
is warranted.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$1.2 million for the six months ended June 30, 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 $634,000 for the six months
ended June 30, 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 $4.9 million at June 30,
2002 and $5.4 million at December 31, 2001.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the change in our allowance for loan losses for
the six months ended June 30, 2002.
(In Thousands)
Balance at December 31, 2001 $ 82,285
Provision charged to operations 2,006
Charge-offs:
One-to-four family (224)
Multi-family (83)
Construction (266)
Consumer and other (777)
-------------------------------------------------------------------------------------
Total charge-offs (1,350)
-------------------------------------------------------------------------------------
Recoveries:
One-to-four family 168
Commercial 251
Consumer and other 245
-------------------------------------------------------------------------------------
Total recoveries 664
-------------------------------------------------------------------------------------
Net charge-offs (686)
-------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 83,605
-------------------------------------------------------------------------------------
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
32
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 34, referred to as the Gap Table, sets
forth the amount of interest-earning assets and interest-bearing liabilities
outstanding at June 30, 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.
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. In addition, the Gap
Table includes callable securities with an amortized cost of $824.0 million
classified according to their maturity dates, primarily in the more than five
years category, $643.0 million of which are callable within one year and at
various times thereafter. As indicated in the Gap Table, our one-year cumulative
gap at June 30, 2002 was 4.36%. This compares to a one-year cumulative gap of
negative 0.34% at December 31, 2001. The increase in our one-year cumulative gap
is primarily attributable to an extension of certificate of deposit maturities,
coupled with a reduction in borrowings from December 31, 2001 to June 30, 2002.
33
AT JUNE 30, 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) $3,336,943 $ 3,753,959 $3,322,771 $ 1,717,913 $12,131,586
Consumer and other loans (1) 263,633 30,517 -- -- 294,150
Federal funds sold and
repurchase agreements 603,819 -- -- -- 603,819
Mortgage-backed and other
securities available-for-sale and
FHLB stock 892,476 511,468 288,421 1,137,666 2,830,031
Mortgage-backed and other securities
held-to-maturity 1,590,932 1,420,143 723,311 1,191,270 4,925,656
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,687,803 5,716,087 4,334,503 4,046,849 20,785,242
Net unamortized purchase premiums
and deferred costs (2) 30,137 30,613 24,674 16,198 101,622
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 6,717,940 5,746,700 4,359,177 4,063,047 20,886,864
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 153,634 307,268 307,268 2,022,849 2,791,019
Money market 1,748,728 17,966 17,966 134,742 1,919,402
NOW 34,441 68,886 68,886 1,089,611 1,261,824
Certificates of deposit 2,421,656 1,954,248 808,833 80,420 5,265,157
Borrowed funds 1,400,450 4,865,000 104,000 2,279,168 8,648,618
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,758,909 7,213,368 1,306,953 5,606,790 19,886,020
- ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 959,031 (1,466,668) 3,052,224 (1,543,743) $ 1,000,844
====================================================================================================================================
Cumulative interest sensitivity gap $ 959,031 $ (507,637) $2,544,587 $ 1,000,844
====================================================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets 4.36% (2.31)% 11.58% 4.55%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 116.65% 96.09% 117.82% 105.03%
- ----------
(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 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
34
income for the twelve month period beginning July 1, 2002 would increase by
approximately 0.75% 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 July 1, 2002
would decrease by approximately 0.19% 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, MSR, 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
For a discussion of Legal Proceedings, see our Annual Report on Form 10-K for
the year ended December 31, 2001, Item 3, Legal Proceedings, and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, Part II, Item 1, Legal
Proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of shareholders was held May 15, 2002, referred to as the
Annual Meeting. At the Annual Meeting, our shareholders re-elected George L.
Engelke, Jr., Robert J. Conway, Peter C. Haeffner, Jr., Ralph F. Palleschi and
Leo J. Waters as directors, each to serve for a three year term and, in any
case, until the election and qualification of their respective successors. The
shareholders also ratified our appointment of KPMG LLP as our independent
auditors for our 2002 fiscal year.
The number of votes cast as to each matter acted upon at the Annual Meeting was
as follows:
(a) Election of Directors:
For Withheld
--- --------
George L. Engelke, Jr. 82,452,356 694,886
Robert J. Conway 82,162,326 984,916
Peter C. Haeffner, Jr. 82,210,818 936,424
Ralph F. Palleschi 82,219,766 927,476
Leo J. Waters 82,183,581 963,661
There were no broker held non-voted shares represented at the meeting with
respect to this proposal.
(b) Ratification of the appointment of KPMG LLP as independent auditors of
Astoria Financial Corporation for the 2002 fiscal year:
For: 80,395,022
Against: 2,590,648
Abstained: 161,572
There were no broker held non-voted shares represented at the meeting
with respect to this proposal.
ITEM 5. OTHER INFORMATION
On May 17, 2002, our common stock began trading on the New York Stock Exchange
under the symbol "AF." Previously, our common stock traded on The Nasdaq Stock
Market under the symbol "ASFC."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Astoria Federal Savings and Loan Association
Amended and Restated Severance Compensation Plan.
11 Statement Regarding Computation of Per Share
Earnings.
36
99.1 Written Statement of Chief Executive Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
99.2 Written Statement of Chief Financial Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
(b) Reports on Form 8-K
1. Report on Form 8-K dated April 18, 2002 which includes a press
release dated April 18, 2002 announcing plans for Astoria Financial
Corporation to list its common stock on the New York Stock Exchange
under the new symbol "AF." This report has been furnished but not
filed pursuant to Regulation FD.
2. Report on Form 8-K dated May 28, 2002 which includes a written
presentation of financial results and trends through the period
ended March 31, 2002. This report has been furnished but not filed
pursuant to Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Astoria Financial Corporation
Dated: August 9, 2002 By: /s/ Monte N. Redman
---------------------- -------------------------------
Monte N. Redman
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
37
Exhibit Index
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.1 Astoria Federal Savings and Loan Association
Amended and Restated Severance Compensation Plan.
This exhibit is a management contract or
compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-Q pursuant to
Item 6(a) of this report.
11 Statement Regarding Computation of Per Share
Earnings.
99.1 Written Statement of Chief Executive Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
99.2 Written Statement of Chief Financial Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
38