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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22228
ASTORIA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 11-3170868
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Astoria Federal Plaza, Lake Success, New York 11042
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(Address of principal executive offices)
(516) 327-3000
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(Registrant's telephone number, including area code)
(Securities registered pursuant to Section 12(b) of the Act):
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York
$.01 per share, and related Stock Exchange
preferred share purchase rights
(Securities registered pursuant to Section 12(g) of the Act): None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
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The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 30, 2003, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.17 billion. The number of shares of the registrant's Common
Stock outstanding as of March 1, 2004 was 78,677,248 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the
Annual Meeting of Stockholders to be held on May 19, 2004 and any adjournment
thereof, which will be filed with the Securities and Exchange Commission within
120 days from December 31, 2003, are incorporated by reference into Part III.
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ASTORIA FINANCIAL CORPORATION
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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Part I
Item 1. Business...........................................................2
Item 2. Properties........................................................29
Item 3. Legal Proceedings.................................................30
Item 4. Submission of Matters to a Vote of Security Holders...............30
Part II
Item 5. Market for Astoria Financial Corporation's Common
Equity and Related Stockholder Matters.........................30
Item 6. Selected Financial Data...........................................32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........66
Item 8. Financial Statements and Supplementary Data.......................69
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................69
Item 9A. Controls and Procedures...........................................69
Part III
Item 10. Directors and Executive Officers of Astoria Financial
Corporation....................................................70
Item 11. Executive Compensation............................................70
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................70
Item 13. Certain Relationships and Related Transactions....................71
Item 14. Principal Accounting Fees and Services............................71
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................71
SIGNATURES...................................................................73
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These statements may be identified by the use of
the words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "outlook," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate under the circumstances. These statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause our
financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, including Astoria Federal Savings
and Loan Association and its subsidiaries, Astoria Capital Trust I and AF
Insurance Agency, Inc.
ITEM 1. BUSINESS
General
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and
coordinating the business activities of Astoria Federal, we invest primarily in
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. We have acquired, and may continue to acquire or organize
either directly or indirectly through Astoria Federal, other operating
subsidiaries and financial institutions. We continue to evaluate merger and
acquisition activity as part of our strategic objective for long term growth.
Astoria Federal's primary business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, principal repayments on loans and securities and borrowed funds,
primarily in one-to-four family mortgage loans, mortgage-backed securities,
multi-family mortgage loans and commercial real estate loans. To a smaller
degree, we also invest in construction loans and consumer and other loans. In
addition, Astoria Federal invests in U.S. Government and federal agency
securities and other investments permitted by federal laws and regulations.
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. Non-interest income
includes customer service fees; other loan fees; net gain on sales of
securities; mortgage banking income, net; income from bank owned life insurance,
or BOLI; and other non-interest income. 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 consisted of extinguishment of debt in 2002 and,
prior to January 1, 2002, amortization of goodwill. Our earnings are
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, Astoria Financial Corporation has two other
wholly-owned subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust
I. AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. provides insurance products
primarily to the customers of Astoria Federal. Astoria Capital Trust I was
formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation
amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities,
which are prepayable at our option on or after November 1, 2009.
2
Available Information
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at www.sec.gov.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2003, our loan portfolio totaled $12.69 billion, or 56.5% of total assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Mortgage loan originations
and purchases totaled $7.29 billion, including originations of loans
held-for-sale totaling $613.3 million, for the year ended December 31, 2003 and
$5.59 billion, including originations of loans held-for-sale totaling $484.3
million, for the year ended December 31, 2002. Our retail loan origination
program accounted for $3.14 billion of originations during 2003 and $2.22
billion of originations during 2002. We also have an extensive broker network in
nineteen states: New York, New Jersey, Connecticut, Pennsylvania, Massachusetts,
Delaware, Maryland, Ohio, Virginia, North Carolina, South Carolina, Georgia,
Illinois, California, Florida, Michigan, New Hampshire, Rhode Island and
Missouri. Our broker loan origination program consists of relationships with
mortgage brokers and accounted for $2.61 billion of originations during 2003 and
$1.84 billion of originations during 2002. Our third party loan origination
program includes relationships with other financial institutions and mortgage
bankers in forty-four states and accounted for $1.54 billion of originations
during 2003 and $1.53 billion of originations during 2002. See the "Loan
Portfolio Composition" table on page 7 and the "Loan Maturity, Repricing and
Activity" tables on pages 7 and 8.
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment by
the borrower. We also originate a limited number of second mortgage loans which
are underwritten according to the same standards as first mortgage loans.
At December 31, 2003, $8.97 billion, or 71.1%, of our total loan portfolio
consisted of one-to-four family loans, of which $8.14 billion, or 90.7%, were
adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists
primarily of hybrid ARM loans. We currently offer ARM loans which initially have
a fixed rate for one, three, five, seven or ten years and convert into one year
ARM loans at the end of the initial fixed rate period. The one, three, five and
seven year ARM loans have terms of up to forty years and the ten year ARM loans
have terms of up to thirty years. We also offer interest only ARM loans,
generally with thirty year terms, which have an initial fixed rate for three,
five or seven years and convert into one year interest only ARM loans at the end
of the initial fixed rate period. The interest only ARM loans require the
borrower to pay interest only during the first ten years of the loan term. After
the tenth anniversary of the loan, principal and interest payments are required
to amortize the loan over the remaining loan term.
3
All ARM loans we offer have annual and lifetime interest rate ceilings and
floors. Generally, ARM loans pose credit risks somewhat greater than the risks
posed by fixed rate loans primarily because, as interest rates rise, the
underlying payments of the borrower rise, increasing the potential for default.
ARM loans may carry, for a period of time, an initial interest rate which is
less than the fully indexed rate for the loan at the time of origination. We
determine the initial discounted rate in accordance with market and competitive
factors. However, in the current low interest rate environment, we generally
have not been offering our ARM loans at interest rates below the fully indexed
rate. To recognize the credit risks associated with ARM loans initially offered
below their fully-indexed rates, we generally underwrite our one-year ARM loans
assuming a rate equal to 200 basis points over the initial discounted rate, but
not less than 7.00%. For ARM loans with longer adjustment periods, and therefore
less credit risk due to the longer period for the borrower's income to adjust to
anticipated higher future payments, we underwrite the loans using the initial
rate, which may be a discounted rate. We use the same underwriting standards for
our retail, broker and third party mortgage loan originations.
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors with either servicing retained or released. Generally, the sale of
such loans is arranged through a master commitment either on a mandatory
delivery or best efforts basis. At December 31, 2003, loans serviced for others
totaled $1.90 billion.
One-to-four family loan originations and purchases, including originations of
loans held-for-sale, increased $1.04 billion to $5.57 billion in 2003, from
$4.53 billion in 2002. This increase was primarily the result of the significant
increase in mortgage refinance activity due to the continued decline in interest
rates in 2002 and the first half of 2003.
Multi-Family and Commercial Real Estate Lending
While we continue to primarily be a one-to-four family mortgage lender, over the
last several years we have increased our emphasis on multi-family and commercial
real estate loan originations. As of December 31, 2003, our total loan portfolio
contained $2.23 billion, or 17.7%, of multi-family loans and $880.3 million, or
7.0%, of commercial real estate loans. During 2003, we originated $1.65 billion
of multi-family, commercial real estate and mixed use loans compared to $1.01
billion in 2002. Mixed use loans are secured by properties which are intended
for both residential and business use and are classified as multi-family or
commercial real estate based on the greater number of residential versus
commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans generally are
provided as five to fifteen year term balloon loans amortized over fifteen to
thirty years. Our policy generally has been to originate multi-family and
commercial real estate loans in the New York metropolitan area, although, to a
much smaller degree, we also originate loans throughout New York state and in
New Jersey, Connecticut and Pennsylvania. Additionally, our board of directors
has recently authorized us to further expand the areas in which we originate
multi-family loans. In making such loans, we primarily consider the ability of
the net operating income generated by the real estate to support the debt
service, the financial resources, income level and managerial expertise of the
borrower, the marketability of the property and our lending experience
4
with the borrower. Our current practice is to require a minimum debt service
coverage ratio of 1.20 times for multi-family and commercial real estate loans.
Additionally, on multi-familyloans, our current practice is to finance up to 80%
of the lesser of the purchase price or appraised value of the property securing
the loan on purchases or 80% of the appraised value on refinances. On commercial
real estate loans, our current practice is to finance up to 75% of the lesser of
the purchase price or appraised value of the property securing the loans on
purchases or 75% of the appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
forty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2003, our single largest multi-family loan
had an outstanding balance of $10.0 million and was current and secured by a
275-unit apartment complex located in Staten Island, New York. At December 31,
2003, the average balance of loans in our multi-family portfolio was
approximately $700,000.
Commercial real estate loans are typically secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2003, our single largest commercial real estate loan had an
outstanding principal balance of $8.3 million and was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2003, the
average balance of loans in our commercial real estate portfolio was
approximately $1.1 million.
Multi-family and commercial real estate loans generally involve a greater degree
of credit risk than one-to-four family loans because they typically have larger
balances and are more affected by adverse conditions in the economy. As such,
these loans require more ongoing evaluation and monitoring. Because payments on
loans secured by multi-family properties and commercial real estate often depend
upon the successful operation and management of the properties and the
businesses which operate from within them, repayment of such loans may be
affected by factors outside the borrower's control, such as adverse conditions
in the real estate market or the economy or changes in government regulation.
Construction Loans
As of December 31, 2003, $99.0 million, or 0.8%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Generally, we offer
construction loans up to a maximum of $10.0 million. As of December 31, 2003,
our average construction loan commitment was approximately $2.7 million and the
average balance of loans in our construction loan portfolio was approximately
$1.5 million.
Construction lending generally involves additional credit risks to the lender as
compared with other types of mortgage lending. These credit risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Construction loans are funded monthly, based on the work completed,
and are generally monitored by a professional construction engineer and our
commercial real estate lending department. To a lesser extent, qualified bank
appraisers and certified home inspectors are utilized to monitor less complex
projects.
Consumer and Other Loans
At December 31, 2003, $430.1 million, or 3.4%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity and commercial lines of credit, are offered primarily on a fixed
rate, short-term basis. The underwriting standards we employ for consumer and
other loans include a
5
determination of the borrower's payment history on other debts and an assessment
of the borrower's ability to make payments on the proposed loan and other
indebtedness. In addition to the credit worthiness of the borrower, the
underwriting process also includes a review of the value of the collateral, if
any, in relation to the proposed loan amount. Our consumer and other loans tend
to have higher interest rates, shorter maturities and are considered to entail a
greater risk of default than one-to-four family mortgage loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 90% of the appraised value
of the property. Such lines of credit are underwritten based on our evaluation
of the borrower's ability to repay the debt. Home equity lines of credit are
adjustable rate loans which are indexed to the prime rate and generally reset
monthly.
Included in consumer and other loans were $21.9 million of commercial business
loans at December 31, 2003. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for loans in excess of $15.0 million or when the overall lending
relationship exceeds $60.0 million, mortgage loan approval authority has been
delegated by the Board of Directors to our underwriters and Loan Committee,
which consists of certain members of executive management and other Astoria
Federal officers.
For mortgage loans secured by one-to-four family properties, upon receipt of a
completed application from a prospective borrower, we generally order a credit
report, verify income and other information and, if necessary, obtain additional
financial or credit related information. For mortgage loans secured by
multi-family properties and commercial real estate, we obtain financial
information concerning the operation of the property. Personal guarantees are
generally not obtained with respect to such loans. An appraisal of the real
estate used as collateral for mortgage loans is also obtained as part of the
underwriting process. All appraisals are performed by licensed or certified
appraisers, the majority of which are licensed independent third party
appraisers. We have an internal appraisal review process to monitor third party
appraisals. The Board of Directors annually reviews and approves our appraisal
policy.
6
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31,
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2003 2002 2001
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Percent Percent Percent
of of of
(Dollars in Thousands) Amount Total Amount Total Amount Total
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Mortgage loans (gross):
One-to-four family $ 8,971,048 71.13% $ 9,209,360 76.86% $10,105,063 83.59%
Multi-family 2,230,414 17.69 1,599,985 13.35 1,094,312 9.05
Commercial real estate 880,296 6.98 744,623 6.21 598,334 4.95
Construction 99,046 0.79 56,475 0.47 50,739 0.42
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Total mortgage loans 12,180,804 96.59 11,610,443 96.89 11,848,448 98.01
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Consumer and other loans (gross):
Home equity 386,846 3.07 323,494 2.70 189,259 1.57
Commercial 21,937 0.17 22,569 0.19 18,124 0.15
Lines of Credit, Overdraft 12,963 0.10 15,475 0.13 18,046 0.15
Passbook 6,995 0.06 7,502 0.06 9,012 0.07
Other 1,405 0.01 3,598 0.03 5,753 0.05
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Total consumer and other loans 430,146 3.41 372,638 3.11 240,194 1.99
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Total loans (gross) 12,610,950 100.00% 11,983,081 100.00% 12,088,642 100.00%
Net unamortized premiums
and deferred loan costs 76,037 76,280 78,619
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Total loans 12,686,987 12,059,361 12,167,261
Allowance for loan losses (83,121) (83,546) (82,285)
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Total loans, net $12,603,866 $11,975,815 $12,084,976
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At December 31,
---------------------------------------------
2000 1999
---------------------------------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
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Mortgage loans (gross):
One-to-four family $ 9,850,390 86.79% $ 9,006,894 88.07%
Multi-family 801,917 7.07 615,438 6.02
Commercial real estate 480,211 4.23 398,198 3.89
Construction 34,599 0.30 34,837 0.34
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Total mortgage loans 11,167,117 98.39 10,055,367 98.32
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Consumer and other loans (gross):
Home equity 133,748 1.18 116,726 1.14
Commercial 8,822 0.08 4,531 0.04
Lines of Credit, Overdraft 20,603 0.18 23,186 0.23
Passbook 8,710 0.08 7,481 0.07
Other 10,673 0.09 20,200 0.20
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Total consumer and other loans 182,556 1.61 172,124 1.68
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Total loans (gross) 11,349,673 100.00% 10,227,491 100.00%
Net unamortized premiums
and deferred loan costs 72,622 58,803
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Total loans 11,422,295 10,286,294
Allowance for loan losses (79,931) (76,578)
- ---------------------------------------------------------------------------------
Total loans, net $11,342,364 $10,209,716
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Loan Maturity, Repricing and Activity
The following table shows the contractual maturities of our loans receivable at
December 31, 2003 and does not reflect the effect of prepayments or scheduled
principal amortization.
At December 31, 2003
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One-to Consumer
-Four Multi- Commercial and Total Loans
(In Thousands) Family Family Real Estate Construction Other Receivable
- ---------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 5,784 $ 1,548 $ 3,978 $61,794 $ 18,072 $ 91,176
After one year:
One to three years 11,947 4,364 5,310 32,112 17,587 71,320
Three to five years 43,211 30,643 27,347 -- 9,727 110,928
Five to ten years 458,812 867,403 429,150 5,140 11,969 1,772,474
Ten to twenty years 549,836 1,039,538 399,337 -- 26,469 2,015,180
Over twenty years 7,901,458 286,918 15,174 -- 346,322 8,549,872
- ---------------------------------------------------------------------------------------------------------
Total due after one year 8,965,264 2,228,866 876,318 37,252 412,074 12,519,774
- ---------------------------------------------------------------------------------------------------------
Total amount due $8,971,048 $2,230,414 $880,296 $99,046 $430,146 12,610,950
Net unamortized premiums and deferred loan costs 76,037
Allowance for loan losses (83,121)
- ---------------------------------------------------------------------------------------------------------
Loans receivable, net $12,603,866
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7
The following table sets forth at December 31, 2003, the dollar amount of our
loans receivable contractually maturing after December 31, 2004, and whether
such loans have fixed interest rates or adjustable interest rates. Our hybrid
ARM loans are classified as adjustable rate loans.
Maturing After December 31, 2004
--------------------------------------
(In Thousands) Fixed Adjustable Total
- --------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 825,292 $ 8,139,972 $ 8,965,264
Multi-family 420,727 1,808,139 2,228,866
Commercial real estate 134,752 741,566 876,318
Construction -- 37,252 37,252
Consumer and other loans 20,470 391,604 412,074
- --------------------------------------------------------------------------------
Total $1,401,241 $11,118,533 $12,519,774
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The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31,
---------------------------------------
(In Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------
Mortgage loans (gross) (1):
At beginning of year $11,671,567 $11,889,940 $11,180,662
Mortgage loans originated:
One-to-four family 4,036,573 2,992,746 2,510,227
Multi-family 1,231,944 750,196 413,518
Commercial real estate 418,107 259,986 178,246
Construction 64,300 50,942 29,187
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Total mortgage loans originated 5,750,924 4,053,870 3,131,178
- --------------------------------------------------------------------------------------
Purchases of mortgage loans (2) 1,536,139 1,534,999 1,427,099
Sales of mortgage loans (645,908) (463,984) (379,929)
Transfer of loans to real estate owned (2,028) (1,900) (5,420)
Principal repayments (6,108,400) (5,341,016) (3,462,677)
Net loans charged off (63) (342) (973)
- --------------------------------------------------------------------------------------
At end of year $12,202,231 $11,671,567 $11,889,940
======================================================================================
Consumer and other loans (gross) (3):
At beginning of year $ 374,183 $ 242,092 $ 184,710
Consumer and other loans originated 286,238 279,905 178,682
Sales of consumer and other loans (3,154) (3,518) (4,061)
Principal repayments (225,113) (143,592) (115,685)
Net loans charged off (362) (704) (1,554)
- --------------------------------------------------------------------------------------
At end of year $ 431,792 $ 374,183 $ 242,092
======================================================================================
(1) Includes loans classified as held-for-sale totaling $21.4 million, $61.2
million and $41.5 million at December 31, 2003, 2002 and 2001,
respectively.
(2) Purchases of mortgage loans represent third party loan originations and are
predominantly secured by one-to-four family properties.
(3) Includes loans classified as held-for-sale totaling $1.6 million, $1.5
million and $1.9 million at December 31, 2003, 2002 and 2001, respectively.
8
Asset Quality
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, the maintenance of sound credit standards for new loan originations and
a strong real estate market have resulted in our maintaining a very low level of
non-performing assets in relation to both the size of our loan portfolio and
relative to our peers. Through a variety of strategies, including, but not
limited to, aggressive collection efforts and marketing of foreclosed
properties, we have been proactive in addressing problem and non-performing
assets which, in turn, has helped to strengthen our financial condition.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent,
in the case of one-to-four family mortgage loans and consumer loans, primarily
on employment and other sources of income, and in the case of multi-family and
commercial real estate loans, on the cash flow generated by the property, which
in turn is impacted by general economic conditions. Other factors, such as
unanticipated expenditures or changes in the financial markets may also impact a
borrower's ability to pay. Collateral values, particularly real estate values,
are also impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
Non-performing Assets
Non-performing assets include non-accrual loans, loans delinquent 90 days or
more and still accruing interest and real estate owned, or REO. Total
non-performing assets decreased to $31.3 million at December 31, 2003, from
$35.6 million at December 31, 2002. Non-performing loans, the most significant
component of non-performing assets, decreased $4.8 million to $29.7 million at
December 31, 2003, from $34.5 million at December 31, 2002. The ratio of
non-performing loans to total loans decreased to 0.23% at December 31, 2003,
from 0.29% at December 31, 2002. Our ratio of non-performing assets to total
assets was 0.14% at December 31, 2003, compared to 0.16% at December 31, 2002.
The allowance for loan losses as a percentage of total non-performing loans was
280.10% at December 31, 2003, compared to 242.04% at December 31, 2002. For a
further discussion of the allowance for loan losses and non-performing assets
and loans, see Item 7, "Management's Discussion and Analysis," or "MD&A."
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in most instances the borrower has only missed
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. In some
circumstances, we continue to accrue interest on loans delinquent 90 days or
more as to their maturity date, but not their interest due. In general, 90 days
prior to a loan's maturity, the borrower is reminded of the maturity date. Where
the borrower has continued to make monthly payments to us and where we do not
have a reason to believe that any loss will be incurred on the loan, we have
treated these loans as current and have continued to accrue interest. Such loans
consist primarily of one-to-four family mortgage loans and totaled $563,000 at
December 31, 2003 and $1.0 million at December 31, 2002.
Real Estate Owned
The net carrying value of our REO totaled $1.6 million at December 31, 2003 and
consisted of one-to-four family properties. The REO balance increased $544,000,
from $1.1 million at December 31, 2002. REO is carried net of all allowances for
losses at the lower of cost or fair value less estimated selling costs. See the
table on page 62 for further detail on our REO.
9
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our classified assets.
Federal regulations and our policy require the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as special mention, substandard, doubtful or loss. An asset classified as
special mention has potential weaknesses, which, if uncorrected, may result in
the deterioration of the repayment prospects or in our credit position at some
future date. An asset classified as substandard is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full satisfaction of the
loan amount, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. Assets classified as loss are those
considered uncollectible and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Those assets classified as substandard, doubtful or loss are considered
adversely classified. See the table on page 62 for additional information on our
classified assets.
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the estimated fair value.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2003, net of
their related allowance for loan losses of $1.4 million, totaled $10.2 million.
Interest income recognized on impaired loans amounted to $597,000 for the year
ended December 31, 2003. For further detail on our impaired loans, see Note 4 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies" in Item 7, "MD&A."
In addition to the requirements of accounting principles generally accepted in
the United States of America, or GAAP, related to loss contingencies, a
federally chartered savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other
federal banking agencies, provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking
10
agency examiners to use in determining the adequacy of valuation allowances. It
is required that all institutions have effective systems and controls to
identify, monitor and address asset quality problems, analyze all significant
factors that affect the collectibility of the portfolio in a reasonable manner
and establish acceptable allowance evaluation processes that meet the objectives
of the federal regulatory agencies. While we believe that the allowance for loan
losses has been established and maintained at adequate levels, future
adjustments may be necessary if economic or other conditions differ
substantially from the conditions used in making the initial determinations. In
addition, there can be no assurance that the OTS or other regulators, as a
result of reviewing our loan portfolio and/or allowance, will not request that
we alter our allowance for loan losses, thereby affecting our financial
condition and earnings.
Investment Activities
General
Our investment policy is designed to complement our lending activities, generate
a favorable return without incurring undue interest rate and credit risk, enable
us to manage the interest rate sensitivity of our overall assets and liabilities
and provide and maintain liquidity, primarily through cash flow. In establishing
our investment strategies, we consider our business and growth plans, the
economic environment, our interest rate sensitivity position, the types of
securities held and other factors. At December 31, 2003, our portfolio of
mortgage-backed and other securities totaled $8.45 billion, or 37.6% of total
assets.
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, including collateralized mortgage
obligations, or CMOs, and real estate mortgage investment conduits, or REMICs,
certain certificates of deposit of insured banks and federally chartered savings
associations, certain bankers acceptances and, subject to certain limits,
corporate securities, commercial paper and mutual funds. Our investment policy
also permits us to invest in certain derivative financial instruments. We do not
use derivatives for trading purposes. See Note 1 and Note 11 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data," for further discussion of such derivative financial
instruments.
Securities
Our securities portfolio is comprised primarily of mortgage-backed securities.
At December 31, 2003, our mortgage-backed securities totaled $8.24 billion, or
97.6% of total securities, of which $8.06 billion, or 95.5% of total securities,
were REMIC and CMO mortgage-backed securities, substantially all of which had
fixed rates. During the year ended December 31, 2003, we purchased $9.30 billion
of REMIC and CMO mortgage-backed securities as a result of our redeployment of
our cash flows in excess of our mortgage and other loan fundings. These
securities provide liquidity, collateral for borrowings and minimal credit risk
while providing appropriate returns and are an attractive alternative to other
investments due to the wide variety of maturity and repayment options available.
Of the REMIC and CMO mortgage-backed securities portfolio, $7.19 billion, or
89.1%, are insured or guaranteed, either directly or indirectly, by Fannie Mae,
or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, or the Government
National Mortgage Association, or GNMA, as issuer. The balance of this portfolio
is comprised of privately issued securities, substantially all of which have a
credit rating of AAA. In addition to our REMIC and CMO mortgage-backed
securities, at December 31, 2003, we had $181.1 million or 2.1% of total
securities, in mortgage-backed pass-through certificates insured or guaranteed
by either FNMA, FHLMC or GNMA.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, our mortgage-backed securities are weighted at no more
than 20% for
11
OTS risk-based capital purposes, compared to the 50% risk weighting assigned to
most non-securitized one-to-four family mortgage loans. While mortgage-backed
securities carry a reduced credit risk as compared to whole loans, they, along
with whole loans, remain subject to the risk of a fluctuating interest rate
environment. Changes in interest rates affect both the prepayment rate and
estimated fair value of mortgage-backed securities and mortgage loans.
The other securities portfolio totaled $203.7 million, or 2.4% of total
securities, and consisted of FNMA and FHLMC preferred stock, obligations of the
U.S. Government and agencies, obligations of states and political subdivisions
and corporate debt and other securities. Included in the other securities
portfolio are various securities, which, by their terms, may be called by the
issuer, typically after the passage of a fixed period of time. As of December
31, 2003, the amortized cost of such callable securities totaled $161.9 million.
Securities called during the year ended December 31, 2003 totaled $198.1
million.
At December 31, 2003, our securities available-for-sale totaled $2.65 billion
and our securities held-to-maturity totaled $5.79 billion. For a further
discussion of our securities portfolio, see the tables on pages 13 and 14, Item
7, "MD&A" and Note 1 and Note 3 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY,
Astoria Federal is required to maintain a specified investment in the capital
stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank
System."
Federal Funds Sold and Repurchase Agreements
We invest in various money market instruments, including overnight and term
federal funds and repurchase agreements (securities purchased under agreements
to resell). Money market instruments are used to invest our available funds
resulting from cash flow and to help satisfy liquidity needs. For a further
discussion of our federal funds sold and repurchase agreements, see Item 7,
"MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
12
Securities Portfolio
The following table sets forth the composition of our available-for-sale and
held-to-maturity securities portfolios at their respective carrying values in
dollar amounts and in percentages of the portfolios at the dates indicated.
At December 31,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
Percent Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 166,724 6.28% $ 249,459 8.93% $ 462,748 13.04%
REMICs and CMOs:
Agency issuance (1) 2,227,851 83.90 616,552 22.08 1,402,093 39.50
Non-agency issuance 103,740 3.91 1,587,622 56.86 1,150,122 32.41
Obligations of the U.S. Government
and agencies 1,767 0.07 133,448 4.78 359,561 10.13
FNMA and FHLMC preferred stock 131,361 4.95 136,682 4.89 111,276 3.14
Corporate debt and other securities 23,549 0.89 68,818 2.46 63,383 1.78
- ------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,654,992 100.00% $2,792,581 100.00% $3,549,183 100.00%
==================================================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 14,345 0.25% $ 24,534 0.49% $ 36,620 0.82%
REMICs and CMOs:
Agency issuance (1) 4,958,633 85.60 3,595,244 71.31 2,979,357 66.74
Non-agency issuance 772,728 13.34 1,306,113 25.91 1,043,110 23.37
Obligations of the U.S. Government
and agencies -- -- 65,776 1.30 362,034 8.11
Obligations of states and
political subdivisions 37,038 0.64 39,611 0.79 42,807 0.96
Corporate debt securities 9,983 0.17 9,979 0.20 -- --
- ------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,792,727 100.00% $5,041,257 100.00% $4,463,928 100.00%
==================================================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
During the quarter ended June 30, 2001, we transferred agency REMIC and CMO
securities with an amortized cost of $2.90 billion and a fair value of $2.88
billion from available-for-sale to held-to-maturity. The net unrealized loss,
which was being amortized over the life of the securities transferred, was $22.6
million at the date of the transfer and was included, net of taxes, in
accumulated other comprehensive income. The balance of the net unrealized loss
was fully amortized as of December 31, 2003 and totaled $1.3 million at December
31, 2002 and $15.7 million at December 31, 2001.
13
The table below sets forth certain information regarding the amortized costs,
estimated fair values, weighted average yields and contractual maturities of our
federal funds sold and repurchase agreements, FHLB-NY stock and mortgage-backed
and other securities available-for-sale and held-to-maturity portfolios at
December 31, 2003.
Within One to Five to
One Year Five Years Ten Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield
- ------------------------------------------------------------------------------------------------------------
Federal funds sold and
repurchase agreements $65,926 0.96% $ -- --% $ -- --%
===========================================================================================================
FHLB-NY stock (1)(2) $ -- --% $ -- --% $ -- --%
===========================================================================================================
Mortgage-backed and other
securities available-for-sale:
Agency pass-through certificates (3) $ -- --% $ 1,409 5.87% $4,532 7.73%
REMICs and CMOs:
Agency issuance (3) -- -- 173 6.55 -- --
Non-agency issuance -- -- 4 8.00 585 6.40
Obligations of the U.S.
Government and agencies 500 3.21 738 4.04 500 3.00
FNMA and FHLMC preferred stock (1) -- -- -- -- -- --
Corporate debt and other securities -- -- 1,000 6.80 -- --
- -----------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 500 3.21% $ 3,324 5.78% $5,617 7.17%
===========================================================================================================
Mortgage-backed and other
securities held-to-maturity:
Agency pass-through certificates (3) $ 1 7.76% $ 2,171 7.98% $4,839 7.06%
REMICs and CMOs:
Agency issuance (3) -- -- -- -- 275 10.07
Non-agency issuance -- -- -- -- -- --
Obligations of states and
political subdivisions -- -- -- -- 754 6.50
Corporate debt securities -- -- 9,983 5.80 -- --
- -----------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 1 7.76% $12,154 6.19% $5,868 7.13%
===========================================================================================================
Over
Ten Years Total Securities
--------------------- ----------------------------------
Weighted Estimated Weighted
Amortized Average Amortized Fair Average
(Dollars in Thousands) Cost Yield Cost Value Yield
- ----------------------------------------------------------------------------------------------------
Federal funds sold and
repurchase agreements $ -- --% $ 65,926 $ 65,926 0.96%
===================================================================================================
FHLB-NY stock (1)(2) $ 213,450 1.45% $ 213,450 $ 213,450 1.45%
===================================================================================================
Mortgage-backed and other
securities available-for-sale:
Agency pass-through certificates (3) $ 155,258 4.49% $ 161,199 $ 166,724 4.59%
REMICs and CMOs:
Agency issuance (3) 2,297,711 3.92 2,297,884 2,227,851 3.92
Non-agency issuance 109,080 3.40 109,669 103,740 3.42
Obligations of the U.S.
Government and agencies -- -- 1,738 1,767 3.50
FNMA and FHLMC preferred stock (1) 140,015 5.03 140,015 131,361 5.03
Corporate debt and other securities 20,991 7.92 21,991 23,549 7.87
- ---------------------------------------------------------------------------------------------------
Total securities available-for-sale $2,723,055 4.02% $2,732,496 $2,654,992 4.03%
===================================================================================================
Mortgage-backed and other
securities held-to-maturity:
Agency pass-through certificates (3) $ 7,334 8.20% $ 14,345 $ 15,329 7.78%
REMICs and CMOs:
Agency issuance (3) 4,958,358 4.36 4,958,633 4,974,316 4.36
Non-agency issuance 772,728 4.29 772,728 772,021 4.29
Obligations of states and
political subdivisions 36,284 6.70 37,038 37,038 6.70
Corporate debt securities -- -- 9,983 10,413 5.80
- ---------------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,774,704 4.37% $5,792,727 $5,809,117 4.38%
===================================================================================================
(1) As equity securities have no maturities, they are classified in the over
ten years category.
(2) The carrying amount of FHLB-NY stock equals cost.
(3) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
14
Sources of Funds
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, NOW accounts, money
market accounts, demand deposit accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on our sales and marketing efforts, including our PEAK Process, new
products, quality service, competitive rates and long-standing customer
relationships to attract and retain these deposits. Brokered deposits are used
occasionally to supplement retail customer deposits in raising funds for
financing and liquidity purposes. At December 31, 2003, our deposits totaled
$11.19 billion. Of the total deposit balance, $1.45 billion, or 13.0%, represent
Individual Retirement Accounts. We held no brokered deposits at December 31,
2003.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. Although we have experienced continued intense
competition for deposits, particularly money market and checking accounts, we
have not increased the rates we offer on these types of accounts as we do not
consider it a cost effective strategy in the current low interest rate
environment. Nevertheless, we have maintained a strong level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 50.8% of total deposits at December 31, 2003 and 53.4% of total
deposits at December 31, 2002.
For a further discussion of our deposits, see the tables below and on page 16,
Item 7, "MD&A" and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
The following table presents our deposit activity for the years indicated.
For the Year Ended December 31,
----------------------------------------
(Dollars in Thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Opening balance $11,067,196 $10,903,693 $10,071,687
Net (withdrawals) deposits (105,853) (124,497) 432,017
Interest credited 225,251 288,000 399,989
- --------------------------------------------------------------------------------
Ending balance $11,186,594 $11,067,196 $10,903,693
================================================================================
Net increase $ 119,398 $ 163,503 $ 832,006
================================================================================
Percentage increase 1.08% 1.50% 8.26%
================================================================================
The following table sets forth the maturity periods of our certificates of
deposit in amounts of $100,000 or more at December 31, 2003.
(In Thousands) Amount
- ----------------------------------------
Within three months $ 225,230
Three to six months 116,667
Six to twelve months 164,222
Over twelve months 556,160
- ----------------------------------------
Total $1,062,279
========================================
15
The following table sets forth the distribution of our average deposit balances
for the periods indicated and the weighted average nominal interest rates for
each category of deposit presented.
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Average Percent Nominal Average Percent Nominal Average Percent Nominal
(Dollars in Thousands) Balance of Total Rate Balance of Total Rate Balance of Total Rate
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 2,907,541 25.96% 0.45% $ 2,754,000 24.80% 1.05% $ 2,495,532 23.70% 1.83%
Money market 1,403,363 12.53 0.71 1,876,107 16.90 1.72 1,734,232 16.47 3.71
NOW 851,723 7.60 0.18 732,905 6.60 0.43 599,919 5.70 0.85
Non-interest bearing NOW
and demand deposit 618,082 5.52 -- 536,961 4.84 -- 475,605 4.52 --
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,780,709 51.61 0.43 5,899,973 53.14 1.09 5,305,288 50.39 2.17
- -------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit (1):
Within one year 1,424,825 12.72 1.55 1,493,726 13.45 2.31 1,698,436 16.13 4.23
One to three years 1,688,220 15.07 3.51 1,790,529 16.12 4.48 1,769,563 16.81 5.61
Three to five years 2,071,864 18.51 5.22 1,658,333 14.94 5.67 1,410,231 13.39 6.08
Over five years 86,749 0.77 4.95 79,177 0.71 5.53 94,409 0.90 6.61
Jumbo 148,067 1.32 1.74 181,845 1.64 2.75 250,524 2.38 5.01
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,419,725 48.39 3.62 5,203,610 46.86 4.19 5,223,163 49.61 5.28
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $11,200,434 100.00% 1.97% $11,103,583 100.00% 2.54% $10,528,451 100.00% 3.71%
===============================================================================================================================
(1) Terms indicated are original, not term remaining to maturity.
The following table presents, by rate categories, the remaining periods to
maturity of our certificates of deposit outstanding at December 31, 2003 and the
balances of our certificates of deposit outstanding at December 31, 2003, 2002
and 2001.
Period to maturity from December 31, 2003 At December 31,
--------------------------------------------------- ------------------------------------
Within One to two Two to three Over three
(In Thousands) one year years years years 2003 2002 2001
- ------------------------------------------------------------------------------ ------------------------------------
Certificates of deposit:
1.99% or less $1,300,602 $128,521 $ 17,014 $ -- $1,446,137 $ 919,465 $ 516,841
2.00% to 2.99% 373,621 249,806 161,222 12,857 797,506 1,003,774 329,506
3.00% to 3.99% 490,179 16,135 357,825 403,978 1,268,117 625,858 493,062
4.00% to 4.99% 218,371 86,469 160,363 146,772 611,975 775,861 1,037,154
5.00% to 5.99% 89,624 928 231,500 356,504 678,556 955,627 947,565
6.00% and over 238,039 416,716 44,051 301 699,107 872,453 1,836,170
- ---------------------------------------------------------------------------------------------------------------------
Total $2,710,436 $898,575 $971,975 $920,412 $5,501,398 $5,153,038 $5,160,298
=====================================================================================================================
Borrowings
Borrowings are used as a complement to deposit generation as a funding source
for asset growth and are an integral part of our interest rate risk management
strategy. We enter into reverse repurchase agreements (securities sold under
agreements to repurchase) with nationally recognized primary securities dealers
and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings
and are secured by the securities sold under the agreements. We also obtain
advances from the FHLB-NY which are generally secured by a blanket lien against,
among other things, our one-to-four family mortgage loan portfolio and our
investment in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will
advance, for purposes other than for meeting withdrawals, fluctuates from time
to time in accordance with the policies of the FHLB-NY. See "Regulation and
Supervision - Federal Home Loan Bank System." Occasionally, we will obtain funds
through the issuance of unsecured debt obligations. These obligations are
classified as other borrowings in our statement of financial condition. At
December 31, 2003, borrowings totaled $9.63 billion.
16
In addition, at December 31, 2003, we had available a 12-month commitment for
overnight and one month lines of credit with the FHLB-NY totaling $100.0
million. Both lines of credit are generally priced at the federal funds rate
plus 10.0 basis points and reprice daily.
Included in our borrowings are various obligations which, by their terms, may be
called by the securities dealers and the FHLB-NY. At December 31, 2003, we had
$2.59 billion of borrowings which are callable within one year and at various
times thereafter and have contractual maturities of up to five years.
For further information regarding our borrowings, including our borrowings
outstanding, average borrowings, maximum borrowings and weighted average
interest rates at and for each of the years ended December 31, 2003, 2002 and
2001, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and
growing our mutual fund, deferred annuities and insurance sales. Our mutual
fund, deferred annuities and insurance sales occur through our wholly-owned
subsidiaries. See "Subsidiary Activities."
Market Area and Competition
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our retail banking network includes
multiple delivery channels including full service banking offices, automated
teller machines, or ATMs, and telephone and internet banking capabilities. We
consider our strong retail banking network, together with our reputation for
financial strength and customer service, as our major strengths in attracting
and retaining customers in our market areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. Astoria Federal ranked third in deposit market share, with an
8.3% market share, in the Long Island market, which includes the counties of
Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance
Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30,
2003.
Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network in nineteen states and through a third party loan origination
program in forty-four states. Our broker and third party loan origination
programs provide efficient and diverse delivery channels for deployment of our
cash flows. Additionally, they provide geographic diversification, reducing our
exposure to concentrations of credit risk. At December 31, 2003, $6.49 billion,
or 53.3%, of our total mortgage loan portfolio was secured by properties located
in 46 states other than New York. Excluding New York, we have a concentration of
mortgage lending of greater than 5.0% in four states: Connecticut, which
comprises 10.0% of our total mortgage loan portfolio; New Jersey, which
comprises 9.9% of our total mortgage loan portfolio; Illinois, which comprises
6.0% of our total mortgage loan portfolio; and Massachusetts, which comprises
5.7% of our total mortgage loan portfolio.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past several years, various large
out-of-state financial institutions have entered the New York metropolitan area
market. All are our competitors to varying degrees. Our competition for loans,
both locally and in the aggregate, comes principally from mortgage banking
companies, commercial banks, savings
17
banks and savings and loan associations. We also have experienced continued
intense competition for deposits, particularly money market and checking
accounts, from certain local competitors, as well as recent entrants into the
local market, who have offered these accounts at well above market rates. Our
most direct competition for deposits comes from commercial banks, savings banks,
savings and loan associations and credit unions. We also face intense
competition for deposits from money market mutual funds and other corporate and
government securities funds as well as from other financial intermediaries such
as brokerage firms and insurance companies.
During 2003, the nation continued its recovery from the recession. The national
and local real estate markets have remained strong and continue to support new
and existing home sales. While the recovering economy and strength of the real
estate markets has helped us maintain our strong credit quality and purchase
mortgage activity, the continued decline in interest rates during the first half
of 2003 resulted in an extraordinary increase in refinance and prepayment
activity during most of 2003. As a result, we, along with other mortgage
originators and investors, were faced with the increased challenge of
redeployment of funds in a lower interest rate environment. The rise in interest
rates during the second half of 2003 has resulted in a decrease in refinance
activity and cash flows. Interest rates, however, remain at historical lows. To
date, other than the additional challenges resulting from the low interest rate
environment, our banking and lending operations have not been negatively
affected by the national and local economies. However, we cannot guarantee that
our operations will not be affected in the future should current economic
conditions worsen.
Subsidiary Activities
We have three direct wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., which are reported on a consolidated
basis at December 31, 2003.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million of Capital Securities. Effective January 1, 2004, we adopted revised
Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN
46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51," which requires us to deconsolidate Astoria Capital Trust I for
financial reporting purposes. The impact of this deconsolidation is immaterial
to our financial condition and results of operations. See Note 8 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data" for further discussion of the Capital Securities and the
deconsolidation of Astoria Capital Trust I upon adoption of FIN 46(R) effective
January 1, 2004.
AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. provides insurance products
primarily to the customers of Astoria Federal.
At December 31, 2003, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety
of mutual funds through its licensed agents and stock brokerage services through
an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses
and administrative services it provides to AF Agency, Inc. Fees generated by AF
Agency, Inc. totaled $9.3 million for the year ended December 31, 2003, which
represented 7.7% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. The initial premium paid was $250.0 million. An additional
$100.0 million premium was paid in the first quarter of 2002 to purchase
additional BOLI.
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Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999, to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, which qualifies as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. APFC
mortgage loans totaled $5.47 billion at December 31, 2003.
Suffco Service Corporation serves as document custodian in connection with
mortgage loans being serviced for FNMA and certain other investors.
Infoserve Corporation provides research information services for Astoria Federal
and other financial institutions. The research generally relates to check
clearing and processing as well as check and money order issuances.
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has four subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
Astoria Federal has five additional subsidiaries, one of which is a single
purpose entity that has an interest in a real estate investment, which is not
material to our financial condition; one of which had an interest in a real
estate investment which was sold in December 2003; and two of which have no
assets or operations but may be used to acquire interests in real estate in the
future. The fifth such subsidiary serves as a holding company for one of the
other four.
Astoria Federal has two additional subsidiaries which are inactive, one of which
Astoria Federal intends to dissolve.
Personnel
As of December 31, 2003, we had 1,824 full-time employees and 294 part-time
employees, or 1,971 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
Regulation and Supervision
General
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its
deposit accounts are insured up to applicable limits by the FDIC under the
Savings Association Insurance Fund, or SAIF, except for those deposits acquired
from The Greater New York Savings Bank, which are insured by the FDIC under the
Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the
OTS concerning our activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other financial institutions. The OTS
periodically performs safety and soundness examinations of Astoria Federal and
us and tests our compliance with various regulatory requirements. The FDIC
reserves the right to do so as well. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the
19
OTS that enforcement action be taken with respect to a particular federally
chartered savings association and, if action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.
This regulation and supervision establish a comprehensive framework to regulate
and control the activities in which we can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OTS, FDIC or Congress, could have a material adverse
impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
Federally Chartered Savings Association Regulation
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations, Astoria Federal may invest in mortgage loans secured
by residential and non-residential real estate, commercial and consumer loans,
certain types of debt securities and certain other assets. Astoria Federal may
also establish service corporations that may engage in activities not otherwise
permissible for Astoria Federal, including certain real estate equity
investments and securities and insurance brokerage activities. These investment
powers are subject to various limitations, including (1) a prohibition against
the acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (2) a limit of 400% of an association's capital
on the aggregate amount of loans secured by non-residential real estate
property, (3) a limit of 20% of an association's assets on commercial loans,
with the amount of commercial loans in excess of 10% of assets being limited to
small business loans, (4) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt securities,
(5) a limit of 5% of assets on non-conforming loans (loans in excess of the
specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or
an association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core capital) ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2003, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 7.37%, leverage capital ratio of 7.37% and total risk-based
capital ratio of 15.39%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS regulations do not include a specific IRR
component of the risk-
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based capital requirement. However, the OTS monitors the IRR of individual
institutions through a variety of means, including an analysis of the change in
net portfolio value, or NPV. NPV is defined as the net present value of the
expected future cash flows of an entity's assets and liabilities and, therefore,
hypothetically represents the value of an institution's net worth. The OTS has
also used this NPV analysis as part of its evaluation of certain applications or
notices submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a
provides guidance on the management of IRR and the responsibility of boards of
directors in that area. The OTS, through its general oversight of the safety and
soundness of savings associations, retains the right to impose minimum capital
requirements on individual institutions to the extent the institution is not in
compliance with certain written guidelines established by the OTS regarding NPV
analysis. The OTS has not imposed any such requirements on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to take other, supervisory actions
against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized," the severity of which depends upon the
institution's degree of capitalization. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2003, Astoria Federal was considered
"well capitalized" by the OTS.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2003 for
the assessment for the FICO payments was $1.9 million.
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Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are secured by readily-marketable collateral. Astoria
Federal is in compliance with applicable loans to one borrower limitations. At
December 31, 2003, Astoria Federal's largest aggregate amount of loans to one
borrower totaled $57.8 million. All of the loans for the largest borrower were
performing in accordance with their terms and the borrower had no affiliation
with Astoria Federal.
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, credit card loans, student loans, and small business loans) on a
monthly basis during at least 9 out of every 12 months. As of December 31, 2003,
Astoria Federal maintained in excess of 93% of its portfolio assets in qualified
thrift investments and had more than 65% of its portfolio assets in qualified
thrift investments for each of the 12 months ended December 31, 2003. Therefore,
Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Our ability to pay dividends, service our debt obligations and repurchase our
common stock is dependent primarily upon receipt of dividend payments from
Astoria Federal. Astoria Federal may not pay dividends to us if, after paying
those dividends, it would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified Astoria Federal that it was in need of
more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA,
an insured depository institution such as Astoria Federal is prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institution would become "undercapitalized" (as
such term is used in the FDIA).
22
Payment of dividends by Astoria Federal also may be restricted at any time at
the discretion of the appropriate regulator if it deems the payment to
constitute an unsafe and unsound banking practice.
In addition, Astoria Federal may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below the amounts required for the
liquidation accounts which were established as a result of Astoria Federal's
conversion from mutual to stock form of ownership and the acquisitions of
Fidelity New York, FSB, The Greater New York Savings Bank and Long Island
Bancorp, Inc. For further discussion on the liquidation accounts, see Note 9 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
results in an additional assessment based on a percentage of the basic
assessment for any savings association that managed over $1.00 billion in trust
assets, serviced for others loans aggregating more than $1.00 billion, or had
certain off-balance sheet assets aggregating more than $1.00 billion. For the
year ended December 31, 2003, we paid $2.8 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with its examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans in its designated assessment
areas; (2) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs benefiting
low or moderate income individuals and businesses; and (3) a service test, to
evaluate the institution's delivery of banking services throughout its CRA
assessment area. The CRA also requires all institutions to make public
disclosure of their CRA ratings. Astoria Federal has been rated as "outstanding"
over its last four CRA examinations. Regulations require that we publicly
disclose certain agreements that are in fulfillment of CRA. We have no such
agreements in place at this time.
23
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
as well as additional limitations as may be adopted by the Director of the OTS.
These provisions, among other things, prohibit, limit or place restrictions upon
a savings institution extending credit to, or entering into certain transactions
with, its affiliates (which for Astoria Federal would include us and our
non-federally chartered savings association subsidiaries, if any), principal
stockholders, directors and executive officers.
Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its
interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. Regulation W made various changes to certain
interpretations regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
The OTS issued a final rule, effective as of October 6, 2003, which conforms the
OTS's regulations on transactions with affiliates to Regulation W. In addition,
the rule implements additional restrictions imposed on savings associations
under Section 11 of HOLA, including provisions prohibiting a savings association
from making a loan to an affiliate that is engaged in non-bank holding company
activities and provisions prohibiting a savings association from purchasing or
investing in securities issued by an affiliate that is not a subsidiary. The
final rule also includes certain specific exemptions from these prohibitions.
The FRB and the OTS expect each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure compliance
with Regulation W and the final OTS rule. We do not expect that the changes made
by Regulation W and the final OTS rule will have a material adverse effect on
our business.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Astoria
Federal, that is subject to the insider lending restrictions of Section 22(h) of
the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, or Community Development
Act, the OTS, together with the other federal bank regulatory agencies, adopted
guidelines establishing general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS adopted regulations
pursuant to FDICIA to require a savings association that is given notice by the
OTS that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the OTS. If, after being so notified, a savings
association fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing corrective actions and may issue an order directing other
actions of the types to which a significantly undercapitalized institution is
subject under the "prompt corrective action" provisions of FDICIA. If a savings
association fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties. For further
discussion, see "Regulation and Supervision - Federally Chartered Savings
Association Regulation - Prompt Corrective Regulatory Action."
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Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
Privacy Protection
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the ability
to "opt-out" of having Astoria Federal share their nonpublic personal
information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.
Anti-Money Laundering and Customer Identification
Astoria Federal is subject to OTS regulations implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act
gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Title III of the USA PATRIOT Act and the related OTS regulations impose the
following requirements with respect to financial institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable
period of time.
o Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks and
compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
25
The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and
adopted final rules implementing the customer identification requirements on May
9, 2003. The final rule became effective June 9, 2003, however, financial
institutions had until October 1, 2003 to come into compliance with such final
rule. Compliance with the regulations adopted under the USA PATRIOT Act did not
have a material adverse impact on our financial condition or results of
operations.
Federal Home Loan Bank System
Astoria Federal is a member of the FHLB System which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year or 5% of its
outstanding borrowings from the FHLB-NY, whichever is greater. Astoria Federal
was in compliance with this requirement with an investment in FHLB-NY stock at
December 31, 2003, of $213.5 million. Dividends from the FHLB-NY to Astoria
Federal amounted to $10.6 million for the year ended December 31, 2003,
$10.7 million for the year ended December 31, 2002 and $17.5 million for the
year ended December 31, 2001. The FHLB-NY did not pay a quarterly dividend to
stockholders in October 2003, but did pay a quarterly dividend to stockholders
in January 2004.
Pursuant to regulations promulgated by the Federal Housing Finance Board, as
required by Gramm-Leach, the FHLB-NY has adopted a capital plan that will change
the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the
new capital plan, each member of the FHLB-NY will have to maintain a minimum
investment in FHLB-NY capital stock in an amount equal to the sum of (1) the
greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50%
of the dollar amount of any outstanding advances under such member's Advances,
Collateral Pledge and Security Agreement with the FHLB-NY. The FHLB-NY, however,
has postponed the implementation of the new capital plan, and the new
implementation date has not yet been determined.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $6.6 million and $45.4 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $45.4 million. The first $6.6 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
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