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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22228
ASTORIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Astoria Federal Plaza, Lake Success, New York 11042-1085
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 327-3000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Number of Shares Outstanding, July 31, 2004
----------------------- -------------------------------------------
.01 Par Value 76,500,059
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at June 30, 2004
and December 31, 2003 2
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2004 and June 30, 2003 3
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months Ended June 30, 2004 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and June 30, 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
Item 4. Controls and Procedures 43
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 44
Item 3. Defaults Upon Senior Securities 45
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 5. Other Information 45
Item 6. Exhibits and Reports on Form 8-K 46
Signatures 47
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
At At
(In Thousands, Except Share Data) June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 142,830 $ 173,828
Federal funds sold and repurchase agreements 136,299 65,926
Available-for-sale securities:
Encumbered 2,218,604 1,997,953
Unencumbered 369,037 657,039
- --------------------------------------------------------------------------------------------------------------------
2,587,641 2,654,992
Held-to-maturity securities, fair value of $5,710,018 and $5,809,117,
respectively:
Encumbered 4,899,915 5,508,864
Unencumbered 887,097 283,863
- --------------------------------------------------------------------------------------------------------------------
5,787,012 5,792,727
Federal Home Loan Bank of New York stock, at cost 153,700 213,450
Loans held-for-sale, net 31,562 23,023
Loans receivable:
Mortgage loans, net 12,151,394 12,248,772
Consumer and other loans, net 473,389 438,215
- --------------------------------------------------------------------------------------------------------------------
12,624,783 12,686,987
Allowance for loan losses (82,818) (83,121)
- --------------------------------------------------------------------------------------------------------------------
Loans receivable, net 12,541,965 12,603,866
Mortgage servicing rights, net 20,037 17,952
Accrued interest receivable 78,750 77,956
Premises and equipment, net 158,085 160,089
Goodwill 185,151 185,151
Bank owned life insurance 374,738 370,310
Other assets 136,525 122,324
- --------------------------------------------------------------------------------------------------------------------
Total assets $22,334,295 $22,461,594
====================================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,998,458 $ 2,959,015
Money market 1,093,992 1,232,771
NOW and demand deposit 1,541,178 1,493,410
Certificates of deposit 6,262,086 5,501,398
- --------------------------------------------------------------------------------------------------------------------
Total deposits 11,895,714 11,186,594
Reverse repurchase agreements 6,785,000 7,235,000
Federal Home Loan Bank of New York advances 1,549,000 1,924,000
Other borrowings, net 469,773 473,037
Mortgage escrow funds 120,655 108,635
Accrued expenses and other liabilities 142,035 137,797
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 20,962,177 21,065,063
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,225,000 shares authorized and -0- shares issued and outstanding) -- --
Series B (2,000,000 shares authorized and -0- shares issued and outstanding) -- --
Common stock, $.01 par value; (200,000,000 shares authorized; 110,996,592 shares
issued; and 76,823,659 and 78,670,254 shares outstanding, respectively) 1,110 1,110
Additional paid-in capital 807,435 798,583
Retained earnings 1,551,222 1,481,546
Treasury stock (34,172,933 and 32,326,338 shares, at cost, respectively) (889,533) (811,993)
Accumulated other comprehensive loss (72,670) (46,489)
Unallocated common stock held by ESOP (4,630,059 and 4,760,054 shares,
respectively) (25,446) (26,226)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,372,118 1,396,531
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,334,295 $22,461,594
====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
2
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
(In Thousands, Except Share Data) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 104,205 $ 117,866 $ 215,555 $ 244,795
Multifamily, commercial real estate and construction 54,634 49,449 108,265 95,665
Consumer and other loans 4,798 4,960 9,688 9,732
Mortgage-backed securities 84,880 88,213 171,753 182,261
Other securities 3,824 8,280 8,020 18,129
Federal funds sold and repurchase agreements 222 465 376 1,217
- --------------------------------------------------------------------------------------------------------------------
Total interest income 252,563 269,233 513,657 551,799
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 56,902 57,189 111,132 115,430
Borrowed funds 82,345 115,793 174,696 231,110
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 139,247 172,982 285,828 346,540
- --------------------------------------------------------------------------------------------------------------------
Net interest income 113,316 96,251 227,829 205,259
Provision for loan losses -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 113,316 96,251 227,829 205,259
- --------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 14,554 15,759 28,303 30,592
Other loan fees 1,188 2,041 2,450 3,867
Net gain on sales of securities -- 8,029 2,372 10,165
Mortgage banking income (loss), net 6,251 (376) 5,133 60
Income from bank owned life insurance 4,228 5,049 8,678 10,248
Other 1,645 1,041 3,069 2,506
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 27,866 31,543 50,005 57,438
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 29,582 27,604 61,046 56,368
Occupancy, equipment and systems 15,774 15,159 32,491 29,774
Federal deposit insurance premiums 441 468 890 960
Advertising 1,701 1,744 3,410 3,242
Other 7,862 6,865 14,566 13,462
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 55,360 51,840 112,403 103,806
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense 85,822 75,954 165,431 158,891
Income tax expense 28,321 25,065 54,517 51,605
- --------------------------------------------------------------------------------------------------------------------
Net income 57,501 50,889 110,914 107,286
Preferred dividends declared -- (1,500) -- (3,000)
- --------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 57,501 $ 49,389 $ 110,914 $ 104,286
====================================================================================================================
Basic earnings per common share $ 0.79 $ 0.64 $ 1.51 $ 1.34
====================================================================================================================
Diluted earnings per common share $ 0.78 $ 0.64 $ 1.48 $ 1.33
====================================================================================================================
Dividends per common share $ 0.25 $ 0.22 $ 0.50 $ 0.42
====================================================================================================================
Basic weighted average common shares 72,952,885 76,861,759 73,434,667 77,945,438
Diluted weighted average common and common equivalent shares 74,126,609 77,470,793 74,734,830 78,620,070
See accompanying Notes to Consolidated Financial Statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2004
Additional
Common Paid-in
(In Thousands, Except Share Data) Total Stock Capital
- ------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,396,531 $1,110 $798,583
Comprehensive income:
Net income 110,914 -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities (26,277) -- --
Reclassification of net unrealized loss
on cash flow hedge 96 -- --
----------
Comprehensive income 84,733
----------
Common stock repurchased
(2,550,000 shares) (95,347) -- --
Dividends on common stock (36,766) -- --
Exercise of stock options and
related tax benefit (703,405 shares issued) 17,763 -- 4,428
Amortization relating to allocation
of ESOP stock 5,204 -- 4,424
- ------------------------------------------------------------------------------------
Balance at June 30, 2004 $1,372,118 $1,110 $807,435
====================================================================================
Unallocated
Accumulatd Common
Other Stock
Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Earnings Stock Loss by ESOP
- --------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,481,546 $(811,993) $(46,489) $(26,226)
Comprehensive income:
Net income 110,914 -- -- --
Other comprehensive (loss) income, net of tax:
Net unrealized loss on securities -- -- (26,277) --
Reclassification of net unrealized loss
on cash flow hedge -- -- 96 --
Comprehensive income
Common stock repurchased
(2,550,000 shares) -- (95,347) -- --
Dividends on common stock (36,766) -- -- --
Exercise of stock options and
related tax benefit (703,405 shares issued) (4,472) 17,807 -- --
Amortization relating to allocation
of ESOP stock -- -- -- 780
- --------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 $1,551,222 $(889,533) $(72,670) $(25,446)
========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended
June 30,
-------------------------
(In Thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 110,914 $ 107,286
Adjustments to reconcile net income to net cash provided
by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 20,976 58,845
Net amortization (accretion) on other securities, consumer and
other loans and borrowings 1,905 (877)
Net provision for real estate losses -- 5
Depreciation and amortization 6,666 6,066
Net gain on sales of loans and securities (4,489) (16,137)
Originations of loans held-for-sale (192,494) (320,979)
Proceeds from sales and principal payments of loans held-for-sale 186,072 316,525
Amortization relating to allocation of ESOP stock 5,204 4,281
(Increase) decrease in accrued interest receivable (794) 3,102
Mortgage servicing rights amortization and valuation allowance adjustments,
net of capitalized amounts (2,085) 6,567
Income from bank owned life insurance, net of insurance proceeds received (4,428) (1,682)
Decrease in other assets 6,294 6,344
Increase (decrease) in accrued expenses and other liabilities 5,033 (16,195)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 138,774 153,151
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (1,576,826) (2,643,404)
Loan purchases through third parties (506,393) (705,724)
Principal payments on loans receivable 2,127,155 3,337,775
Purchases of mortgage-backed securities held-to-maturity (1,124,019) (3,160,014)
Purchases of mortgage-backed securities available-for-sale (398,085) (2,535,035)
Purchases of other securities available-for-sale (508) (600)
Principal payments on mortgage-backed securities held-to-maturity 1,119,400 2,476,517
Principal payments on mortgage-backed securities available-for-sale 398,875 1,147,360
Proceeds from calls and maturities of other securities held-to-maturity 3,994 67,045
Proceeds from calls and maturities of other securities available-for-sale 312 132,693
Proceeds from sales of mortgage-backed securities available-for-sale -- 829,680
Proceeds from sales of other securities available-for-sale 22,692 --
Net redemptions of FHLB-NY stock 59,750 16,350
Proceeds from sales of real estate owned, net 1,554 1,101
Purchases of premises and equipment, net of proceeds from sales (4,662) (8,225)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 123,239 (1,044,481)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 709,120 241,970
Net increase in borrowings with original terms of three months or less 85,000 115,000
Proceeds from borrowings with original terms greater than three months 2,400,000 800,000
Repayments of borrowings with original terms greater than three months (3,310,000) (550,000)
Net increase in mortgage escrow funds 12,020 16,206
Common stock repurchased (95,347) (117,987)
Cash dividends paid to stockholders (36,766) (35,732)
Cash received for stock options exercised 13,335 4,099
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (222,638) 473,556
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 39,375 (417,774)
Cash and cash equivalents at beginning of period 239,754 677,857
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 279,129 $ 260,083
=============================================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 298,637 $ 348,600
=============================================================================================================
Income taxes $ 47,121 $ 48,397
=============================================================================================================
Additions to real estate owned $ 594 $ 593
=============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal, and AF Insurance Agency, Inc. As used in this quarterly report, "we,"
"us" and "our" refer to Astoria Financial Corporation and its consolidated
subsidiaries, including Astoria Federal and AF Insurance Agency, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
In addition to Astoria Federal and AF Insurance Agency, Inc., we have another
wholly-owned subsidiary, Astoria Capital Trust I, which is not consolidated with
Astoria Financial Corporation for financial reporting purposes as a result of
our adoption of the Financial Accounting Standards Board, or FASB, revised
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," or FIN 46(R), effective January 1, 2004. Astoria
Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million
aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029,
or Capital Securities, and common securities and using the proceeds to acquire
Junior Subordinated Debentures issued by us. The Junior Subordinated Debentures
total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029
and are the sole assets of Astoria Capital Trust I. The Junior Subordinated
Debentures are prepayable, in whole or in part, at our option on or after
November 1, 2009 at declining premiums to November 1, 2019, after which the
Junior Subordinated Debentures are prepayable at par value. Astoria Financial
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Astoria Capital Trust I. See Note 6 for further
discussion of the impact of our adoption of FIN 46(R).
In our opinion, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our financial condition as of June 30, 2004 and December
31, 2003, our results of operations for the three and six months ended June 30,
2004 and 2003, changes in our stockholders' equity for the six months ended June
30, 2004 and our cash flows for the six months ended June 30, 2004 and 2003. In
preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities for the consolidated statements of financial condition as of June
30, 2004 and December 31, 2003, and amounts of revenues and expenses in the
consolidated statements of income for the three and six months ended June 30,
2004 and 2003. The results of operations for the three and six months ended June
30, 2004 are not necessarily indicative of the results of operations to be
expected for the remainder of the year. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP, have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, or SEC. Certain reclassifications have been
made to prior period amounts to conform to the current period presentation.
These consolidated financial statements should be read in conjunction with our
December 31, 2003 audited consolidated financial statements and related notes
included in our 2003 Annual Report on Form 10-K.
6
2. Earnings Per Share, or EPS
The following table is a reconciliation of basic and diluted EPS.
For the Three Months Ended June 30,
-------------------------------------
2004 2003
-------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2)
- ---------------------------------------------------------------------------------------
Net income $57,501 $57,501 $50,889 $50,889
Preferred dividends declared -- -- (1,500) (1,500)
- ---------------------------------------------------------------------------------------
Net income available to common shareholders $57,501 $57,501 $49,389 $49,389
=======================================================================================
Total weighted average basic
common shares outstanding 72,953 72,953 76,862 76,862
Effect of dilutive securities:
Options -- 1,174 -- 609
- ---------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 72,953 74,127 76,862 77,471
=======================================================================================
Net earnings per common share $ 0.79 $ 0.78 $ 0.64 $ 0.64
=======================================================================================
For the Six Months Ended June 30,
-----------------------------------------
2004 2003
-----------------------------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (3)
- ---------------------------------------------------------------------------------------
Net income $110,914 $110,914 $107,286 $107,286
Preferred dividends declared -- -- (3,000) (3,000)
- ---------------------------------------------------------------------------------------
Net income available to common shareholders $110,914 $110,914 $104,286 $104,286
=======================================================================================
Total weighted average basic
common shares outstanding 73,435 73,435 77,945 77,945
Effect of dilutive securities:
Options -- 1,300 -- 675
- ---------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 73,435 74,735 77,945 78,620
=======================================================================================
Net earnings per common share $ 1.51 $ 1.48 $ 1.34 $ 1.33
=======================================================================================
(1) Options to purchase 970,300 shares of common stock at a price of $36.60 per
share were outstanding as of June 30, 2004, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the three months
ended June 30, 2004.
(2) Options to purchase 1,946,484 shares of common stock at prices between
$25.44 per share and $29.88 per share were outstanding as of June 30, 2003,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the three months ended June 30, 2003.
(3) Options to purchase 1,926,484 shares of common stock at prices between
$26.24 per share and $29.88 per share were outstanding as of June 30, 2003,
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the six months ended June 30, 2003.
3. Mortgage Servicing Rights, or MSR
MSR are carried at amortized cost, and impairment, if any, is recognized through
a valuation allowance. MSR, at amortized cost, totaled $27.8 million at June 30,
2004 and $29.6 million at December 31, 2003. The valuation allowance totaled
$7.8 million at June 30, 2004 and $11.6 million at December 31, 2003. The cost
of MSR is amortized over the estimated remaining lives
7
of the loans serviced. MSR amortization totaled $1.8 million for the three
months ended June 30, 2004 and $3.8 million for the three months ended June 30,
2003. MSR amortization totaled $3.8 million for the six months ended June 30,
2004 and $7.6 million for the six months ended June 30, 2003. As of June 30,
2004, estimated future MSR amortization through 2009, based on the prepayment
assumptions utilized in the June 30, 2004 MSR valuation, is as follows: $2.4
million for the remainder of 2004, $4.5 million for 2005, $3.7 million for 2006,
$3.1 million for 2007, $2.5 million for 2008 and $2.1 million for 2009. Actual
results will vary depending upon the level of repayments on the loans currently
serviced.
4. Stock Option Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock option plans. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted under our stock option plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and EPS if we had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-----------------------------------------------------
(In Thousands, Except Per Share Data) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Net income:
As reported $57,501 $50,889 $110,914 $107,286
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,258 1,235 2,714 2,613
------- ------- -------- --------
Pro forma $56,243 $49,654 $108,200 $104,673
======= ======= ======== ========
Basic earnings per common share:
As reported $ 0.79 $ 0.64 $ 1.51 $ 1.34
======= ======= ======== ========
Pro forma $ 0.77 $ 0.63 $ 1.47 $ 1.30
======= ======= ======== ========
Diluted earnings per common share:
As reported $ 0.78 $ 0.64 $ 1.48 $ 1.33
======= ======= ======== ========
Pro forma $ 0.76 $ 0.62 $ 1.44 $ 1.29
======= ======= ======== ========
8
5. Pension Plans and Other Postretirement Benefits
The following table sets forth information regarding the components of net
periodic cost for our defined benefit pension plans and other postretirement
benefit plan.
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------------
For the Three Months Ended For the Three Months Ended
June 30, June 30,
-------------------------------------------------------
(In Thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Service cost $ 758 $ 590 $139 $ 97
Interest cost 2,425 2,094 300 269
Expected return on plan assets (2,918) (2,177) -- --
Amortization of prior service cost 40 35 11 11
Recognized net actuarial loss (gain) 628 736 2 (41)
Amortization of transition asset (8) (23) -- --
- ----------------------------------------------------------------------------------------------
Net periodic cost $ 925 $ 1,255 $452 $336
- ----------------------------------------------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
-------------------------------------------------------
For the Six Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------------------------------
(In Thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Service cost $ 1,597 $ 1,180 $256 $194
Interest cost 4,869 4,188 543 538
Expected return on plan assets (5,824) (4,354) -- --
Amortization of prior service cost 80 70 21 22
Recognized net actuarial loss (gain) 1,247 1,472 -- (82)
Amortization of transition asset (17) (46) -- --
- ----------------------------------------------------------------------------------------------
Net periodic cost $ 1,952 $ 2,510 $820 $672
- ----------------------------------------------------------------------------------------------
During the six months ended June 30, 2004, we contributed $324,000 to our
unfunded defined benefit pension plans and $742,000 to our other postretirement
benefit plan. During the remainder of 2004, we expect to contribute
approximately $324,000 to our unfunded defined benefit pension plans and
approximately $758,000 to our other postretirement benefit plan. Contributions
to these plans are made to cover benefit payments.
6. Impact of Accounting Standards and Interpretations
On January 12, 2004, the FASB issued Staff Position No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," which allows companies to recognize or defer
recognizing the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or Medicare Act, for annual financial statements of
fiscal years ending after December 7, 2003. The Medicare Act introduced both a
Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least "actuarially equivalent" to
the Medicare benefit.
On May 19, 2004, the FASB issued Staff Position No. 106-2 which supercedes Staff
Position No. 106-1 and is effective for the first interim or annual period
beginning after June 15, 2004, with early application encouraged. Staff Position
No. 106-2 requires employers who conclude their plans were "actuarially
equivalent" at December 8, 2003 and the law's effects are a "significant event"
to account for the federal subsidy either on a retroactive basis to January 1,
2004 or prospectively from the date of adoption of Staff Position No. 106-2. If
the law's effects are not a "significant event," they are not accounted for
until the plan's next measurement date following the adoption of Staff Position
No. 106-2. If an employer is not able to determine whether the plan is
actuarially equivalent at the date of adoption of Staff Position No. 106-2, it
9
should monitor the plan and assess actuarial equivalency as new information
becomes available. In any case, there are various new disclosure requirements
associated with the adoption of Staff Position No. 106-2. As of June 30, 2004,
we have not yet determined the impact of the Medicare Act on our financial
condition or results of operations and, therefore, we have elected to continue
to defer accounting for the effects of the Medicare Act in accordance with Staff
Position No. 106-1.
In December 2003, the FASB issued FIN 46(R). All public entities were required
to fully implement FIN 46(R) no later than the end of the first reporting period
ending after March 15, 2004. Effective January 1, 2004, we implemented FIN
46(R), which required us to deconsolidate our wholly-owned subsidiary Astoria
Capital Trust I. The impact of this deconsolidation on our financial statements
is to increase consolidated total assets by $3.9 million, reflecting our
investment in the common securities of Astoria Capital Trust I, and increase
consolidated total borrowings by $3.9 million, reflecting the difference between
the aggregate principal amount of the Junior Subordinated Debentures we issued
to Astoria Capital Trust I and the aggregate principal amount of Capital
Securities issued by Astoria Capital Trust I in the private placement completed
in 1999. Additionally, we redesignated two interest rate swap agreements as fair
value hedges of the debt Astoria Financial Corporation issued to Astoria Capital
Trust I. All prior period financial statements included herein have been
restated to reflect the deconsolidation.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. These statements may be identified by
the use of the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "outlook," "plan," "potential," "predict," "project," "should,"
"will," "would" and similar terms and phrases, including references to
assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate under the circumstances. These statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins;
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;
10
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.
Executive Summary
The following overview should be read in conjunction with our Management's
Discussion and Analysis of Financial Condition and Results of Operations, or
MD&A, in its entirety.
We are a Delaware corporation organized as the unitary savings and loan
association holding company of Astoria Federal and our primary business is the
operation of Astoria Federal. Astoria Federal's principal business is attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments on loans and
securities and borrowed funds, primarily in one-to-four family mortgage loans,
mortgage-backed securities, multi-family mortgage loans and commercial real
estate loans. Our results of operations are dependent primarily on our net
interest income, which is the difference between the interest earned on our
assets, primarily our loan and securities portfolios, and the interest paid on
our deposits and borrowings. Our earnings are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates and U.S. Treasury yield curves, government policies and actions
of regulatory authorities.
As a premier Long Island community bank, our goal is to enhance shareholder
value while building a solid banking franchise. We focus on growing our core
businesses of mortgage lending and retail banking while maintaining superior
asset quality and controlling operating expenses. Additionally, we continue to
provide returns to shareholders through dividends and stock repurchases. We have
been successful in achieving these goals over the past several years and that
trend has continued into 2004.
During the first half of 2004, the national and local real estate markets
remained strong and continued to support new and existing home sales. The
increase in interest rates during the second half of 2003 resulted in a decrease
in refinance activity and related cash flows during the fourth quarter of 2003
which continued into 2004. Medium- and long-term interest rates (maturities of
two to ten years) declined during the 2004 first quarter resulting in an
increase in refinance application activity during March and April and additional
mortgage repayment cash flow in May and June. Medium- and long-term interest
rates increased again during the 2004 second quarter and have risen above their
December 31, 2003 levels reducing the level of refinance application activity in
the latter half of the 2004 second quarter.
We continue to experience intense competition for deposits, particularly money
market and checking accounts, from certain local competitors who have offered
these accounts at well above market rates. 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. Despite this intense
competition, total deposits increased during the first half of 2004. This
11
increase was primarily attributable to an increase in certificates of deposit as
a result of the success of our marketing campaigns which have focused on
attracting medium- and long-term certificates of deposit to enable us to reduce
borrowings.
Our total loan portfolio decreased slightly during the first half of 2004. This
decrease was primarily in our one-to-four family mortgage loan portfolio where
repayments continued to outpace originations. Partially offsetting the decline
in the one-to-four family mortgage loan portfolio was an increase in our
multi-family and commercial real estate loan portfolio, which is attributable to
our increased emphasis on the origination of these loans over the past several
years. Our total non-performing assets declined from December 31, 2003 to June
30, 2004.
During the first half of 2004, due to the reduction in cash flows resulting from
the reduction in refinance activity, we significantly reduced our purchases of
mortgage-backed securities. Overall, our securities portfolio decreased slightly
from December 31, 2003. Additionally, as previously discussed, the success of
our certificate of deposit marketing campaigns during the first half of 2004
enabled us to repay a portion of borrowings which matured and as a result, our
borrowings also decreased from December 31, 2003.
Net income for the three and six months ended June 30, 2004 increased compared
to the three and six months ended June 30, 2003. The increases in net income
were primarily due to increases in net interest income, partially offset by
increases in non-interest expense and decreases in non-interest income. The
increases in net interest income were primarily attributable to decreases in
interest expense on borrowings related to the refinancing of higher cost
borrowings which matured throughout 2003 and the first quarter of 2004 at
substantially lower rates. Partially offsetting the decreases in interest
expense were decreases in interest income, primarily on our mortgage loans and
mortgage-backed securities, which were attributable to extraordinarily high
levels of repayments in 2003 and the reinvestment of the cash flows we received
in lower yielding assets due to the low interest rate environment. The negative
impact of the reinvestment in lower yielding assets was partially offset by
decreases in net premium amortization as a result of the reduction in refinance
activity in 2004, as well as the reduced amount of unamortized net premium
remaining in our mortgage-backed securities portfolio. The increases in
non-interest expense relate primarily to increases in compensation and benefits
expense and occupancy, equipment and systems expense. The decreases in
non-interest income relate primarily to decreases in net gain on sales of
securities, partially offset by increases in mortgage banking income, net.
Mortgage refinance application activity has subsided during the latter half of
the second quarter as a result of the current environment of somewhat higher
long-term interest rates. Our purchase mortgage activity remains strong which,
when coupled with the expectation of reduced cash flow from mortgage loan
prepayments, should result in the resumption of mortgage loan portfolio growth
going forward. Reduced mortgage refinance activity should also result in lower
mortgage loan and mortgage-backed securities net premium amortization which
should result in a modest expansion in the net interest margin during the
remainder of 2004. We will remain focused on building our core businesses, with
particular emphasis on growing our deposits and increasing the one-to-four
family, multi-family and commercial real estate loan portfolios.
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
12
website at http://ir.astoriafederal.com. The above reports are available on our
website immediately after they are electronically filed with or furnished to the
SEC. Such reports are also available on the SEC's website at www.sec.gov.
Critical Accounting Policies
Note 1 to our audited consolidated financial statements for the year ended
December 31, 2003 included in our 2003 Annual Report on Form 10-K, as
supplemented by our Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 and this report, contains a summary of our significant accounting
policies. Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. Our policies with respect to the methodologies used to
determine the allowance for loan losses, the valuation of MSR and judgments
regarding goodwill and securities impairment are our most critical accounting
policies because they are important to the presentation of our financial
condition and results of operations, involve a higher degree of complexity and
require management to make difficult and subjective judgments which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition. These critical
accounting policies and their application are reviewed quarterly with the Audit
Committee of our Board of Directors. The description of these policies should be
read in conjunction with the corresponding section of our 2003 Annual Report on
Form 10-K.
Allowance for Loan Losses
Our allowance for loan losses is established and maintained through a provision
for loan losses based on our evaluation of the risks inherent in our loan
portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The
allowance is comprised of both specific valuation allowances and general
valuation allowances.
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process including the procedures for
impairment recognition under Statement of Financial Accounting Standards, or
SFAS, No. 114, "Accounting by Creditors for Impairment of a Loan, an Amendment
of FASB Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB
Statement No. 114." Such evaluation, which includes a review of loans on which
full collectibility is not reasonably assured, considers the estimated fair
value of the underlying collateral, if any, current and anticipated economic and
regulatory conditions, current and historical loss experience of similar loans
and other factors that determine risk exposure to arrive at an adequate loan
loss allowance.
Individual loan loss reviews are completed quarterly for all classified loans.
Individual loan loss reviews are generally completed annually for multi-family,
commercial real estate and construction loans which exceed $2.5 million,
commercial business loans which exceed $200,000 at origination, one-to-four
family loans which exceed $1.0 million at origination and debt restructurings.
In addition, we generally review annually at least fifty percent of the
outstanding balances of multi-family, commercial real estate and construction
loans to single borrowers with concentrations in excess of $2.5 million.
The primary considerations in establishing specific valuation allowances are the
appraised value of a loan's underlying collateral and the loan's payment
pattern. Other current and anticipated economic conditions on which our specific
valuation allowance relies are the impact that national and/or local economic
and business conditions may have on borrowers, the impact that
13
local real estate markets may have on collateral values and the level and
direction of interest rates and their combined effect on real estate values and
the ability of borrowers to service debt. We also review all regulatory notices,
bulletins and memoranda with the purpose of identifying upcoming changes in
regulatory conditions which may impact our calculation of specific valuation
allowances. The Office of Thrift Supervision, or OTS, periodically reviews our
specific reserve methodology during regulatory examinations and any comments
regarding changes to reserves are considered by management in determining
specific allowances.
Pursuant to our policy, loan losses are charged-off in the period the loans, or
portions thereof, are deemed uncollectible. The determination of the loans on
which full collectibility is not reasonably assured, the estimates of the fair
value of the underlying collateral and the assessments of economic and
regulatory conditions are subject to assumptions and judgments by management.
Specific valuation allowances could differ materially as a result of changes in
these assumptions and judgments.
General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with our lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. The determination of the adequacy of the valuation
allowance takes into consideration a variety of factors. We segment our loan
portfolio into like categories by composition and size and perform analyses
against each category. These include historical loss experience and delinquency
levels and trends. We analyze our historical loan loss experience by category
(loan type) over 5, 10, and 12-year periods. Losses within each loan category
are stress tested by applying the highest level of charge-offs and the lowest
amount of recoveries as a percentage of the average portfolio balance during
those respective time horizons. The resulting allowance percentages are used as
an integral part of our judgment in developing estimated loss percentages to
apply to the portfolio. We also consider the growth in the portfolio as well as
our credit administration and asset management philosophies and procedures. In
addition, we evaluate and consider the impact that existing and projected
economic and market conditions may have on the portfolio as well as known and
inherent risks in the portfolio. We also evaluate and consider the allowance
ratios and coverage percentages of both peer group and regulatory agency data;
however, our focus is primarily on our historical loss experience and the impact
of current economic conditions. After evaluating these variables, we determine
appropriate allowance coverage percentages for each of our portfolio segments
and the appropriate level of our allowance for loan losses.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining our general valuation
allowances. Our evaluations of general valuation allowances are inherently
subjective because, even though they are based on objective data, it is
management's interpretation of that data that determines the amount of the
appropriate allowance. Therefore, we periodically review the actual performance
and charge-off history of our portfolio and compare that to our previously
determined allowance coverage percentages. In doing so, we evaluate the impact
the previously mentioned variables may have had on the portfolio to determine
which changes, if any, should be made to our assumptions and analyses.
During 2002 we performed an analysis of the actual charge-off history of our
loan portfolio compared to our previously determined allowance coverage
percentages and specific valuation allowances. Our analysis indicated that our
estimate of losses inherent in our one-to-four family, multi-family and
commercial real estate loan portfolios exceeded our actual charge-off history.
We believe that the general decline in medium- to long-term U.S. Treasury rates
beginning in 2000, coupled with the Federal Open Market Committee's series of
interest rate cuts during 2001 and 2002 substantially improved the ability of
borrowers to service debt and was the
14
predominant factor that caused our actual charge-off experience between June 1,
2000 and June 30, 2002 to be less than had been estimated. Similar to the
industry in general, our historical charge-off experience was higher prior to
the dramatic decline in market rates. The significant considerations for not
lowering coverage percentages prior to the third quarter of 2002 were: (1) the
2000-2002 economic downturn; (2) the unseasoned nature of the portfolio; and (3)
the lack of migration analysis for the loans folded into the portfolio in
connection with acquisitions closed in late 1997 and 1998. While we have not
changed our methodology for determining our general valuation allowance as a
result of the 2002 analysis, we have placed a greater emphasis on charge-off
experience in determining the way the allowance for loan losses is distributed
across the loan portfolio. As a result, in the third quarter of 2002, we
adjusted our allowance coverage percentages for our portfolio segments.
Multi-family, commercial real estate and construction 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. The change in our portfolio composition over the past several years
has not had a significant impact on our overall allowance for loan losses since
(1) the growth in our multi-family, commercial real estate and construction loan
portfolios was offset by a decline in our one-to-four family portfolio and (2)
we adjusted our allowance coverage percentages as a result of the 2002 analysis.
We will continue to evaluate our charge-off experience in our multi-family,
commercial real estate and construction loan portfolios in determining whether
any adjustments to the allowance coverage percentages are warranted.
Our loss experience in 2004 has been consistent with our experience over the
past two years and, as a result, our 2004 analysis did not result in any change
in our methodology for determining our general and specific valuation allowances
or our emphasis on the factors that we consider in establishing such allowances.
Accordingly, such analysis did not indicate that changes in our allowance
coverage percentages were required. Our allowance for loan losses to total loans
was 0.66% at June 30, 2004 and December 31, 2003. We believe our current
allowance for loan losses is adequate to reflect the risks inherent in our loan
portfolio.
As indicated above, actual results could differ from our estimate as a result of
changes in economic or market conditions. Changes in estimates could result in a
material change in the allowance for loan losses. While we believe that the
allowance for loan losses has been established and maintained at levels that
reflect the risks inherent in our loan portfolio, future adjustments may be
necessary if economic or market conditions differ substantially from the
conditions that existed at the time of the initial determinations.
For additional information regarding our allowance for loan losses, see
"Provision for Loan Losses" and "Asset Quality" in this document and Part II,
Item 7, "MD&A," in our 2003 Annual Report on Form 10-K.
Valuation of MSR
MSR are carried at cost and amortized over the estimated remaining lives of the
loans serviced. Impairment, if any, is recognized through a valuation allowance.
Impairment exists if the carrying value of MSR exceeds the estimated fair value.
The estimated fair value of MSR is obtained through independent third party
valuations.
At June 30, 2004, our MSR, net, had an estimated fair value of $20.2 million and
were valued based on expected future cash flows considering a weighted average
discount rate of 9.31%, a weighted average constant prepayment rate on mortgages
of 11.98% and a weighted average life
15
of 5.8 years. At December 31, 2003, our MSR, net, had an estimated fair value of
$18.0 million and were valued based on expected future cash flows considering a
weighted average discount rate of 9.34%, a weighted average constant prepayment
rate on mortgages of 15.82% and a weighted average life of 4.5 years. The
decrease in the weighted average constant prepayment rate from December 31, 2003
to June 30, 2004 reflects the increase in interest rates from December 31, 2003
to June 30, 2004 and the projected decrease in future prepayments as of June 30,
2004.
The fair value of MSR is highly sensitive to changes in assumptions. Changes in
prepayment speed assumptions have the most significant impact on the fair value
of our MSR. Generally, as interest rates decline, mortgage loan prepayments
accelerate due to increased refinance activity, which results in a decrease in
the fair value of MSR. As interest rates rise, mortgage loan prepayments slow
down, which results in an increase in the fair value of MSR. Assuming an
increase in interest rates of 100 basis points at June 30, 2004, the estimated
fair value of our MSR would have been $5.4 million greater. Assuming a decrease
in interest rates of 100 basis points at June 30, 2004, the estimated fair value
of our MSR would have been $7.8 million lower.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested, at least
annually, for impairment at the reporting unit level. Impairment exists when the
carrying value of goodwill exceeds its implied fair value. As of June 30, 2004,
the carrying value of our goodwill totaled $185.2 million. When performing the
impairment test, if the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is not considered impaired.
On September 30, 2003 we performed our annual goodwill impairment test. We
determined the fair value of our one reporting unit to be in excess of its
carrying value by $986.0 million, using the quoted market price of our common
stock on our impairment testing date as the basis for determining the fair
value. Accordingly, as of our annual impairment test date, there was no
indication of goodwill impairment. Goodwill would be tested for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. As of June 30, 2004, there have been no such events or changes in
circumstances since our annual impairment test date.
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value,
with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive loss/income in stockholders' equity. The fair values of our
securities, which are primarily fixed rate mortgage-backed securities at June
30, 2004, are based on published or securities dealers' market values and are
affected by changes in interest rates. We conduct a periodic review and
evaluation of the securities portfolio to determine if the decline in the fair
value of any security below its carrying value is other than temporary. We
generally view changes in fair value caused by changes in interest rates as
temporary, which is consistent with our experience. If we deem such decline to
be other than temporary, the security is written down to a new cost basis and
the resulting loss is charged to earnings. At June 30, 2004, we had 166
securities each of which had an amortized cost in excess of estimated fair
value. These securities had an estimated fair value totaling $6.61 billion and
had an unrealized loss totaling $218.2 million. Of the securities in an
unrealized loss position at June 30, 2004, $96.9 million, with an unrealized
loss of $5.3 million, have been in a continuous unrealized loss position for
more than twelve months. We determined the cause of all unrealized losses at
June 30, 2004 to be interest rate related, and, as such, have deemed the
16
unrealized losses as temporary. There were no securities write downs during the
six months ended June 30, 2004.
Liquidity and Capital Resources
Our primary source of funds is cash provided by principal and interest payments
on loans and mortgage-backed and other securities. The most significant
liquidity challenge we face is the variability in cash flows as a result of
mortgage refinance activity. Principal payments on loans and mortgage-backed
securities and proceeds from calls and maturities of other securities totaled
$3.65 billion for the six months ended June 30, 2004 and $7.16 billion for the
six months ended June 30, 2003. The decrease in loan and security repayments was
primarily the result of the decreased level of mortgage loan refinance activity
we experienced in 2004. The decreased level of mortgage loan refinance activity
is primarily the result of an increase in interest rates during the second half
of 2003 and the first half of 2004. Medium- and long-term U.S. Treasury rates
increased 70 basis points on average from June 30, 2003 to December 31, 2003;
decreased 37 basis points on average during the 2004 first quarter; and
increased 99 basis points on average during the 2004 second quarter. This
overall trend of rising interest rates has reduced the level of refinance
activity and related cash flows from what we experienced during the first half
of 2003.
In addition to cash provided by principal and interest payments on loans and
securities, our other sources of funds include cash provided by operating
activities, deposits and borrowings. Net cash provided by operating activities
totaled $138.8 million during the six months ended June 30, 2004 and $153.2
million during the six months ended June 30, 2003. Net deposits increased $709.1
million during the six months ended June 30, 2004 and $242.0 million during the
six months ended June 30, 2003. The net increases in deposits for the six months
ended June 30, 2004 and 2003 reflect our continued emphasis on attracting
customer deposits through competitive rates, extensive product offerings and
quality service. Despite continued intense local competition for checking
accounts, we have been successful in growing our NOW and demand deposit account
balances, including our business checking deposits, due in large part to our
concerted sales and marketing efforts, including our PEAK sales process. In
addition, as previously discussed, the increase in net deposits for the six
months ended June 30, 2004 is primarily attributable to an increase in
certificates of deposit as a result of the success of our marketing campaigns
which have focused on attracting medium- and long-term certificates of deposit.
Net borrowings decreased $828.3 million during the six months ended June 30,
2004 and increased $369.9 million during the six months ended June 30, 2003. The
decrease in net borrowings during the six months ended June 30, 2004 reflects
the repayment of certain high cost borrowings as they matured. During the six
months ended June 30, 2004, $3.31 billion in medium-term borrowings with a
weighted average rate of 5.10% matured, of which $2.40 billion were extended
through new medium-term borrowings with a weighted average rate of 2.71% and a
weighted average original term of 3.3 years. All other borrowings that matured
during the six months ended June 30, 2004 were either repaid or rolled over into
short-term borrowings. The increase in net borrowings during the six months
ended June 30, 2003 was primarily the result of additional medium-term
borrowings entered into during the first quarter 2003, during the low interest
rate environment, to fund asset growth in excess of deposit growth. The use of
medium-term borrowings helps protect against the impact on interest expense of
future interest rate increases.
Our primary use of funds is for the origination and purchase of mortgage loans.
Gross mortgage loans originated and purchased during the six months ended June
30, 2004 totaled $2.10 billion, including originations of loans held-for-sale
totaling $190.7 million, of which $1.60 billion were originations and $501.5
million were purchases. This compares to gross mortgage loans
17
originated and purchased during the six months ended June 30, 2003 totaling
$3.52 billion, including originations of loans held-for-sale totaling $319.1
million, of which $2.82 billion were originations and $698.4 million were
purchases. The decrease in loan originations and purchases for the six months
ended June 30, 2004 compared to the six months ended June 30, 2003 reflects the
previously discussed reduction in the level of mortgage refinance activity
during 2004. Purchases of mortgage-backed securities totaled $1.52 billion
during the six months ended June 30, 2004 and $5.70 billion during the six
months ended June 30, 2003. The decrease in mortgage-backed securities purchases
during the six months ended June 30, 2004 also reflects the decrease in cash
flows resulting from the reduction in refinance activity noted above.
We maintain liquidity levels to meet our operational needs in the normal course
of our business. The levels of our liquid assets during any given period are
dependent on our operating, investing and financing activities. Cash and due
from banks and federal funds sold and repurchase agreements, our most liquid
assets, totaled $279.1 million at June 30, 2004, compared to $239.8 million at
December 31, 2003. Borrowings maturing over the next twelve months total $2.02
billion with a weighted average rate of 2.51%, including $625.0 million of
medium-term borrowings with a weighted average rate of 5.13%. We have the
flexibility to either repay or rollover these borrowings as they mature. In
addition, we have $2.47 billion in certificates of deposit with a weighted
average rate of 3.13% maturing over the next twelve months. We expect to retain
or replace a significant portion of such deposits based on our competitive
pricing and historical experience.
The following table details our borrowing and certificate of deposit maturities
and their weighted average rates:
Borrowings Certificates of Deposit
-------------------------------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------
Contractual Maturity:
Third quarter 2004 (1) $1,395 1.33% $ -- --%
Third quarter 2004 20 7.67 652 1.98
Fourth quarter 2004 105 5.98 704 3.44
First quarter 2005 300 3.26 674 3.92
Second quarter 2005 200 7.23 438 3.15
------ ------
Total maturing in next twelve months 2,020 2.51 2,468 3.13
Thirteen to twenty-four months 1,174 2.55 1,635 3.25
Twenty-five to thirty-six months 1,720 2.85 1,129 4.23
Thirty-seven to forty-eight months (2) 1,900 4.22 657 3.90
Forty-nine to sixty months (3) 1,620 4.74 236 3.99
Over five years 370 7.11 137 5.05
------ ------
Total $8,804 3.56 $6,262 3.52
====== ======
(1) Overnight and other short-term borrowings.
(2) Includes $980.0 million of borrowings which are callable within the next
twelve months.
(3) Includes $1.20 billion of borrowings which are callable within the next
twelve months.
Additional sources of liquidity at the holding company level have included
issuances of securities into the capital markets, including private issuances of
trust preferred securities through our wholly-owned subsidiary, Astoria Capital
Trust I, and senior debt. Holding company debt obligations are included in other
borrowings. Our ability to continue to access the capital markets for additional
financing at favorable terms may be limited by, among other things, market
demand, interest rates, our capital levels, our ability to pay dividends from
Astoria Federal to Astoria Financial Corporation, our credit profile and our
business model.
18
We continue to receive periodic capital distributions from Astoria Federal,
consistent with applicable laws and regulations.
Astoria Financial Corporation's primary uses of funds include the payment of
dividends, payment of principal and interest on its debt obligations and
repurchases of common stock. Astoria Financial Corporation paid interest on its
debt obligations totaling $17.3 million during the six months ended June 30,
2004. Our payment of dividends and repurchases of our common stock totaled
$132.1 million during the six months ended June 30, 2004. Our ability to pay
dividends, service our debt obligations and repurchase common stock is dependent
primarily upon receipt of capital distributions from Astoria Federal. Since
Astoria Federal is a federally chartered savings association, there are limits
on its ability to make distributions to Astoria Financial Corporation. During
the six months ended June 30, 2004, Astoria Federal paid dividends to Astoria
Financial Corporation totaling $200.0 million.
Stockholders' equity decreased to $1.37 billion at June 30, 2004, from $1.40
billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $95.3 million, dividends declared of $36.8
million and an increase in accumulated other comprehensive loss, net of tax of
$26.2 million, which was primarily due to the decrease in the fair value of our
mortgage-backed securities available-for-sale. These decreases were partially
offset by net income of $110.9 million, the effect of stock options exercised
and related tax benefit of $17.8 million and the amortization of the allocated
portion of shares held by the employee stock ownership plan, or ESOP, of $5.2
million.
On June 1, 2004, we paid a quarterly cash dividend of $0.25 per share on shares
of our common stock outstanding as of the close of business on May 17, 2004
totaling $18.3 million. On July 21, 2004, we declared a quarterly cash dividend
of $0.25 per share on shares of our common stock payable on September 1, 2004 to
stockholders of record as of the close of business on August 16, 2004.
On October 16, 2002, our Board of Directors approved our ninth stock repurchase
plan authorizing the purchase, at management's discretion, of 10,000,000 shares,
or approximately 11% of our common stock then outstanding, over a two year
period in open-market or privately negotiated transactions. During the six
months ended June 30, 2004, we repurchased 2,550,000 shares of our common stock
at an aggregate cost of $95.3 million. In total, as of June 30, 2004, we
repurchased 9,941,800 shares of our common stock, at an aggregate cost of $299.3
million, under the ninth stock repurchase plan. On May 19, 2004, our Board of
Directors approved our tenth stock repurchase plan authorizing the purchase, at
management's discretion, of 8,000,000 shares, or approximately 10% of our common
stock then outstanding, over a two year period in open-market or privately
negotiated transactions. Stock repurchases under our tenth stock repurchase plan
commenced immediately following the completion of the ninth stock repurchase
plan on July 9, 2004. For further information on our common stock repurchases,
see Part II, Item 2, "Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities."
At June 30, 2004, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 7.11%, leverage
capital ratio of 7.11% and total risk-based capital ratio of 14.69%. The minimum
regulatory requirements are a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and total risk-based capital ratio of 8.00%.
19
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the
normal course of our business in order to meet the financing needs of our
customers and in connection with our overall interest rate risk management
strategy. These instruments involve, to varying degrees, elements of credit,
interest rate and liquidity risk. In accordance with GAAP, these instruments are
either not recorded in the consolidated financial statements or are recorded in
amounts that differ from the notional amounts. Such instruments primarily
include lending commitments and derivative instruments.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Derivative instruments may include
interest rate caps, locks and swaps which are recorded as either assets or
liabilities in the consolidated statements of financial condition at fair value.
Additionally, in connection with our mortgage banking activities, we have
commitments to fund loans held-for-sale and commitments to sell loans which are
considered derivative instruments. Commitments to sell loans totaled $67.4
million at June 30, 2004. The fair values of our mortgage banking derivative
instruments are immaterial to our financial condition and results of operations.
We also have contractual obligations related to operating lease commitments.
The following table details our contractual obligations as of June 30, 2004.
Payments due by period
----------------------------------------------------------------
Less than One to Three to More than
(In Thousands) Total One Year Three Years Five Years Five Years
- ------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Borrowings with original terms greater than three months $7,408,773 $ 625,000 $2,894,000 $3,520,000 $369,773
Commitments to originate and purchase loans (1) 600,448 600,448 -- -- --
Commitments to fund unused lines of credit (2) 373,327 373,327 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total $8,382,548 $1,598,775 $2,894,000 $3,520,000 $369,773
- ------------------------------------------------------------------------------------------------------------------------------
(1) Commitments to originate and purchase loans include commitments to
originate loans held-for-sale.
(2) Unused lines of credit relate primarily to home equity lines of credit.
In addition to the contractual obligations previously discussed, we have
contingent liabilities related to assets sold with recourse and standby letters
of credit. The principal balance of loans sold with recourse amounted to $574.5
million at June 30, 2004. The carrying amount of our liability for loans sold
with recourse totaled $276,000 at June 30, 2004. We estimate the liability for
loans sold with recourse based on an analysis of our loss experience related to
similar loans sold with recourse. We also have two collateralized repurchase
obligations due to the sale of certain long-term fixed rate municipal revenue
bonds and Federal Housing Administration project loans. The outstanding option
balance on the two agreements totaled $37.1 million at June 30, 2004.
Outstanding standby letters of credit totaled $4.6 million at June 30, 2004.
For further information regarding our off-balance sheet arrangements and
contractual obligations, see Part II, Item 7, "MD&A," in our 2003 Annual Report
on Form 10-K.
20
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at June 30, 2004 and
December 31, 2003.
At June 30, 2004 At December 31, 2003
-----------------------------------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- -----------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,674,513 69.12% $ 8,971,048 71.13%
Multi-family 2,393,943 19.07 2,230,414 17.69
Commercial real estate 913,082 7.27 880,296 6.98
Construction 105,686 0.84 99,046 0.79
- -----------------------------------------------------------------------------------
Total mortgage loans 12,087,224 96.30 12,180,804 96.59
- -----------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 423,736 3.38 386,846 3.07
Commercial 20,342 0.16 21,937 0.17
Lines of Credit, Overdraft 12,277 0.10 12,963 0.10
Other 7,952 0.06 8,400 0.07
- -----------------------------------------------------------------------------------
Total consumer and other loans 464,307 3.70 430,146 3.41
- -----------------------------------------------------------------------------------
Total loans (gross) 12,551,531 100.00% 12,610,950 100.00%
Net unamortized premiums and
deferred loan costs 73,252 76,037
- -----------------------------------------------------------------------------------
Total loans 12,624,783 12,686,987
Allowance for loan losses (82,818) (83,121)
- -----------------------------------------------------------------------------------
Total loans, net $12,541,965 $12,603,866
===================================================================================
21
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of
mortgage-backed and other securities available-for-sale and held-to-maturity at
June 30, 2004 and December 31, 2003.
At June 30, 2004 At December 31, 2003
-------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 141,345 $ 145,447 $ 161,199 $ 166,724
REMICs and CMOs:
Agency issuance (1) 2,334,907 2,228,808 2,297,884 2,227,851
Non-agency issuance 91,195 85,978 109,669 103,740
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,567,447 2,460,233 2,568,752 2,498,315
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S. Government
and agencies 1,990 1,984 1,738 1,767
FNMA and FHLMC preferred stock 140,015 123,938 140,015 131,361
Corporate debt and other securities 1,489 1,486 21,991 23,549
- ----------------------------------------------------------------------------------------------
Total other securities 143,494 127,408 163,744 156,677
- ----------------------------------------------------------------------------------------------
Total securities available-for-sale $2,710,941 $2,587,641 $2,732,496 $2,654,992
==============================================================================================
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 11,501 $ 12,222 $ 14,345 $ 15,329
REMICs and CMOs:
Agency issuance (1) 5,163,124 5,081,641 4,958,633 4,974,316
Non-agency issuance 569,358 572,660 772,728 772,021
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 5,743,983 5,666,523 5,745,706 5,761,666
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of states and political
subdivisions 33,043 33,043 37,038 37,038
Corporate debt securities 9,986 10,452 9,983 10,413
- ----------------------------------------------------------------------------------------------
Total other securities 43,029 43,495 47,021 47,451
- ----------------------------------------------------------------------------------------------
Total securities held-to-maturity $5,787,012 $5,710,018 $5,792,727 $5,809,117
==============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
22
Comparison of Financial Condition as of June 30, 2004 and December 31, 2003 and
Operating Results for the Three and Six Months Ended June 30, 2004 and 2003
Financial Condition
Total assets decreased $127.3 million to $22.33 billion at June 30, 2004, from
$22.46 billion at December 31, 2003. The primary reasons for the decrease in
total assets were the decreases in one-to-four family mortgage loans,
mortgage-backed securities and other securities, partially offset by increases
in multi-family and commercial real estate mortgage loans.
Mortgage loans decreased $97.4 million to $12.15 billion at June 30, 2004, from
$12.25 billion at December 31, 2003. This decrease was primarily due to a
decrease in our one-to-four family mortgage loan portfolio, partially offset by
increases in our multi-family and commercial real estate mortgage loan
portfolios. Gross mortgage loans originated and purchased during the six months
ended June 30, 2004 totaled $2.10 billion, including originations of loans
held-for-sale totaling $190.7 million, of which $1.60 billion were originations
and $501.5 million were purchases. This compares to gross mortgage loans
originated and purchased during the six months ended June 30, 2003 totaling
$3.52 billion, including originations of loans held-for-sale totaling $319.1
million, of which $2.82 billion were originations and $698.4 million were
purchases. Mortgage loan repayments decreased to $2.00 billion for the six
months ended June 30, 2004, from $3.23 billion for the six months ended June 30,
2003. The decrease in the levels of mortgage loan originations, purchases and
repayments reflect the decline in refinance activity previously discussed.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans, which represented 69.12% of our total loan portfolio at
June 30, 2004, decreased $296.5 million to $8.67 billion at June 30, 2004, from
$8.97 billion at December 31, 2003.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate mortgage loan
originations. Our multi-family mortgage loan portfolio increased $163.5 million
to $2.39 billion at June 30, 2004, from $2.23 billion at December 31, 2003. Our
commercial real estate loan portfolio increased $32.8 million to $913.1 million
at June 30, 2004, from $880.3 million at December 31, 2003. Multi-family and
commercial real estate loan originations totaled $514.1 million for the six
months ended June 30, 2004 and $648.6 million for the six months ended June 30,
2003. Our new multi-family and commercial real estate loan originations are
similar in type to the loans currently in our portfolio. The average loan
balance of loans in our combined multi-family and commercial real estate
portfolio continues to be less than $1.0 million and the average loan-to-value
ratio, based on current principal balance and original appraised value,
continues to be less than 65%. Prepayment activity within our multi-family and
commercial real estate loan portfolio is generally not as significant as that
which we have experienced in our one-to-four family mortgage loan portfolio due
in part to the prepayment penalties associated with these loans.
Mortgage-backed securities decreased $39.8 million to $8.20 billion at June 30,
2004, from $8.24 billion at December 31, 2003. This decrease was primarily the
result of an increase of $36.8 million in the net unrealized loss on our
available-for-sale portfolio. The increase in the net unrealized loss on our
mortgage-backed securities available-for-sale portfolio is primarily due to an
increase in interest rates from December 31, 2003 to June 30, 2004. Medium- to
23
long-term U.S. Treasury rates increased 62 basis points on average from December
31, 2003 to June 30, 2004. Principal payments received on our mortgage-backed
securities of $1.52 billion were reinvested into similar securities.
Federal funds sold and repurchase agreements increased $70.4 million to $136.3
million at June 30, 2004, from $65.9 million at December 31, 2003, primarily due
to cash flows which were not redeployed by the end of the 2004 second quarter.
Federal Home Loan Bank of New York, or FHLB-NY, stock decreased $59.8 million to
$153.7 million primarily due to a reduction in FHLB-NY borrowings. Other
securities decreased $33.3 million to $170.4 million at June 30, 2004, from
$203.7 million at December 31, 2003, primarily due to sales of $20.3 million and
an increase of $9.0 million in the net unrealized loss on our available-for-sale
portfolio due to the increase in interest rates previously discussed.
Deposits increased $709.1 million to $11.90 billion at June 30, 2004, from
$11.19 billion at December 31, 2003. The increase in deposits was primarily due
to an increase of $760.7 million in certificates of deposit to $6.26 billion at
June 30, 2004, from $5.50 billion at December 31, 2003, an increase of $39.4
million in savings accounts to $3.00 billion at June 30, 2004 and an increase of
$47.8 million in NOW and demand deposit accounts to $1.54 billion at June 30,
2004. These increases were partially offset by a decrease of $138.8 million in
our money market accounts to $1.09 billion at June 30, 2004, from $1.23 billion
at December 31, 2003. The increase in our certificates of deposit was primarily
the result of our efforts to extend the maturities of our certificates of
deposit through promotional rates and targeted marketing and sales efforts in
the prevailing low interest rate environment. During the six months ended June
30, 2004, $2.23 billion of certificates of deposit, with an average rate of
2.31% and an average maturity at inception of fourteen months, matured and $2.89
billion of certificates of deposit were issued or repriced, with an average rate
of 2.60% and an average maturity at inception of twenty months. The decrease in
our money market accounts is attributable to continued intense competition for
these accounts. Certain local competitors have continued to offer above market
rates for money market and checking accounts. We have not increased the rates we
offer on these accounts because we do not consider it a cost effective strategy.
However, despite continued intense competition for checking accounts, we have
been successful in increasing our NOW and demand deposit account balances,
including our business checking deposits, due in large part to our concerted
sales and marketing efforts, including our PEAK sales process.
Reverse repurchase agreements decreased $450.0 million to $6.79 billion at June
30, 2004, from $7.24 billion at December 31, 2003. FHLB-NY advances decreased
$375.0 million to $1.55 billion at June 30, 2004, from $1.92 billion at December
31, 2003. The decrease in borrowings reflects the repayment of certain high cost
borrowings that matured. As previously discussed, during the six months ended
June 30, 2004, $3.31 billion in medium-term borrowings with a weighted average
rate of 5.10% matured, of which $2.40 billion were extended through new
medium-term borrowings with a weighted average rate of 2.71% and a weighted
average original term of 3.3 years. All other borrowings that matured during the
six months ended June 30, 2004 were either repaid or rolled over into short-term
borrowings.
Stockholders' equity decreased to $1.37 billion at June 30, 2004, from $1.40
billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $95.3 million, dividends declared of $36.8
million and an increase in accumulated other comprehensive loss, net of tax, of
$26.2 million, which was primarily due to the decrease in the fair value of our
mortgage-backed securities available-for sale. These
24
decreases were partially offset by net income of $110.9 million, the effect of
stock options exercised and related tax benefit of $17.8 million and the
amortization of the allocated portion of shares held by the ESOP of $5.2
million.
Results of Operations
General
Net income for the three months ended June 30, 2004 increased $6.6 million to
$57.5 million, from $50.9 million for the three months ended June 30, 2003.
Diluted earnings per common share totaled $0.78 per share for the three months
ended June 30, 2004 and $0.64 per share for the three months ended June 30,
2003. Return on average assets increased to 1.03% for the three months ended
June 30, 2004, from 0.88% for the three months ended June 30, 2003. Return on
average stockholders' equity increased to 16.55% for the three months ended June
30, 2004, from 13.27% for the three months ended June 30, 2003. Return on
average tangible stockholders' equity, which represents average stockholders'
equity less average goodwill, increased to 19.09% for the three months ended
June 30, 2004, from 15.09% for the three months ended June 30, 2003.
Net income for the six months ended June 30, 2004 increased $3.6 million to
$110.9 million, from $107.3 million for the six months ended June 30, 2003.
Diluted earnings per common share totaled $1.48 per share for the six months
ended June 30, 2004 and $1.33 per share for the six months ended June 30, 2003.
Return on average assets increased to 0.99% for the six months ended June 30,
2004, from 0.94% for the six months ended June 30, 2003. Return on average
stockholders' equity increased to 15.85% for the six months ended June 30, 2004,
from 13.94% for the six months ended June 30, 2003. Return on average tangible
stockholders' equity increased to 18.27% for the six months ended June 30, 2004,
from 15.84% for the six months ended June 30, 2003. The increases in the returns
on average assets, average stockholders' equity and average tangible
stockholders' equity for the three and six months ended June 30, 2004 are due to
the increases in net income, coupled with the decreases in the average balances
of stockholders' equity and total assets for the three and six months ended June
30, 2004, compared to the three and six months ended June 30, 2003.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
primarily upon the volume of interest-earning assets and interest-bearing
liabilities and the corresponding interest rates earned or paid. Our net
interest income is significantly impacted by changes in interest rates and
market yield curves and their related impact on cash flows. See Item 3,
"Quantitative and Qualitative Disclosures About Market Risk," for further
discussion of the potential impact of changes in interest rates on our results
of operations.
For the three months ended June 30, 2004, net interest income increased $17.0
million to $113.3 million, from $96.3 million for the three months ended June
30, 2003. For the six months ended June 30, 2004, net interest income increased
$22.5 million to $227.8 million, from $205.3 million for the six months ended
June 30, 2003. The net interest margin increased to 2.13% for the three months
ended June 30, 2004, from 1.78% for the three months ended June 30, 2003. The
net interest margin increased to 2.14% for the six months
25
ended June 30, 2004, from 1.93% for the six months ended June 30, 2003. The
increases in net interest income and the net interest margin for the three and
six months ended June 30, 2004 were primarily the result of decreases in
interest expense, partially offset by decreases in interest income. The
decreases in interest expense were attributable to a decrease in our cost of
funds, which is primarily due to the repayment and refinancing of various higher
cost borrowings, coupled with the downward repricing of deposits in the
prevailing low interest rate environment. The decreases in interest income were
primarily due to the decreases in the yields on interest-earning assets as a
result of the extraordinarily high level of mortgage loan and mortgage-backed
securities repayments we experienced throughout 2003 as a result of the low
interest rate environment, as previously discussed, resulting in reinvestment in
those assets at lower rates. Partially offsetting the negative impact of the
reinvestment of assets at lower rates was a reduction in net premium
amortization resulting from the reduction in repayment levels during 2004, as
well as the reduced amount of unamortized net premium remaining in our
mortgage-backed securities portfolio. Net premium amortization on our
mortgage-backed securities and mortgage loan portfolios decreased $21.2 million
to $12.7 million for the three months ended June 30, 2004, from $33.9 million
for the three months ended June 30, 2003 and decreased $37.8 million to $21.0
million for the six months ended June 30, 2004 from $58.8 million for the six
months ended June 30, 2003.
The average balance of net interest-earning assets increased $205.1 million to
$579.3 million for the three months ended June 30, 2004, from $374.2 million for
the three months ended June 30, 2003. The increase in the average balance of net
interest-earning assets was the result of a decrease of $592.8 million in the
average balance of total interest-bearing liabilities to $20.69 billion for the
three months ended June 30, 2004, from $21.28 billion for the three months ended
June 30, 2003, partially offset by a decrease of $387.7 million in the average
balance of total interest-earning assets to $21.27 billion for the three months
ended June 30, 2004, from $21.65 billion for the three months ended June 30,
2003. Also contributing to the increase in the average balance of net
interest-earning assets was the decrease in non-interest-earning assets
primarily as a result of the reduction in the monthly mortgage-backed securities
principal payments receivable due to the reduction in the mortgage-backed
securities cash flow. The net interest rate spread increased to 2.06% for the
three months ended June 30, 2004, from 1.72% for the three months ended June 30,
2003. The average yield on interest-earning assets decreased to 4.75% for the
three months ended June 30, 2004, from 4.97% for the three months ended June 30,
2003. The average cost of interest-bearing liabilities decreased to 2.69% for
the three months ended June 30, 2004, from 3.25% for the three months ended June
30, 2003.
The average balance of net interest-earning assets increased $229.4 million to
$625.0 million for the six months ended June 30, 2004, from $395.6 million for
the six months ended June 30, 2003. The increase in the average balance of net
interest-earning assets was the result of a decrease of $176.6 million in the
average balance of total interest-bearing liabilities to $20.71 billion for the
six months ended June 30, 2004, from $20.89 billion for the six months ended
June 30, 2003, coupled with an increase of $52.8 million in the average balance
of total interest-earning assets to $21.33 billion for the six months ended June
30, 2004, from $21.28 billion for the six months ended June 30, 2003. Also
contributing to the increase in the average balance of net interest-earning
assets was the decrease in non-interest-earning assets discussed above. The net
interest rate spread increased to 2.06% for the six months ended June 30, 2004,
from 1.87% for the six months ended June 30, 2003. The average yield on
interest-earning assets decreased to 4.82% for the six months ended June 30,
2004, from 5.19% for the six months ended June 30, 2003. The average cost of
interest-bearing liabilities
26
decreased to 2.76% for the six months ended June 30, 2004, from 3.32% for the
six months ended June 30, 2003.
The changes in the yields on interest-earning assets and the costs of
interest-bearing liabilities for the three and six months ended June 30, 2004
were primarily a result of the low interest rate environment previously
discussed, coupled with the repayment or refinancing of high cost borrowings as
they matured. The changes in average interest-earning assets and
interest-bearing liabilities and their related yields and costs are discussed in
greater detail under "Interest Income" and "Interest Expense."
Analysis of Net Interest Income
The following tables set forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the three and
six months ended June 30, 2004 and 2003. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The yields and costs include amortization of fees, costs, premiums and discounts
which are considered adjustments to interest rates.
27
For the Three Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------
(Annualized) (Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 8,862,057 $104,205 4.70% $ 8,970,109 $117,866 5.26%
Multi-family, commercial
real estate and construction 3,350,010 54,634 6.52 2,601,732 49,449 7.60
Consumer and other loans (1) 466,745 4,798 4.11 406,785 4,960 4.88
----------- -------- ----------- --------
Total loans 12,678,812 163,637 5.16 11,978,626 172,275 5.75
Mortgage-backed securities (2) 8,150,915 84,880 4.17 8,952,753 88,213 3.94
Other securities (2) (3) 342,206 3,824 4.47 562,161 8,280 5.89
Federal funds sold and
repurchase agreements 94,515 222 0.94 160,646 465 1.16