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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 September 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
incorporation or organization) Identification 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, October 31, 2004
- ----------------------- ----------------------------------------------
.01 Par Value 74,425,184
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at September 30, 2004
and December 31, 2003 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2004 and September 30, 2003 3
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 2004 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and September 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 42
Item 4. Controls and Procedures 45
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 47
Item 6. Exhibits 47
Signatures 47
1
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
At At
(In Thousands, Except Share Data) September 30, 2004 December 31, 2003
- -------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 127,517 $ 173,828
Federal funds sold and repurchase agreements 126,535 65,926
Available-for-sale securities:
Encumbered 1,960,689 1,997,953
Unencumbered 497,495 657,039
- -------------------------------------------------------------------------------------------------------
2,458,184 2,654,992
Held-to-maturity securities, fair value of $6,242,312 and
$5,809,117, respectively:
Encumbered 5,148,046 5,508,864
Unencumbered 1,086,715 283,863
- -------------------------------------------------------------------------------------------------------
6,234,761 5,792,727
Federal Home Loan Bank of New York stock, at cost 144,950 213,450
Loans held-for-sale, net 17,132 23,023
Loans receivable:
Mortgage loans, net 12,308,297 12,248,772
Consumer and other loans, net 495,841 438,215
- -------------------------------------------------------------------------------------------------------
12,804,138 12,686,987
Allowance for loan losses (82,803) (83,121)
- -------------------------------------------------------------------------------------------------------
Loans receivable, net 12,721,335 12,603,866
Mortgage servicing rights, net 17,375 17,952
Accrued interest receivable 80,319 77,956
Premises and equipment, net 157,427 160,089
Goodwill 185,151 185,151
Bank owned life insurance 374,706 370,310
Other assets 129,471 122,324
- -------------------------------------------------------------------------------------------------------
Total assets $22,774,863 $22,461,594
=======================================================================================================
LIABILITIES:
Deposits:
Savings $ 2,962,260 $ 2,959,015
Money market 1,018,371 1,232,771
NOW and demand deposit 1,533,928 1,493,410
Certificates of deposit 6,655,310 5,501,398
- -------------------------------------------------------------------------------------------------------
Total deposits 12,169,869 11,186,594
Reverse repurchase agreements 6,884,592 7,235,000
Federal Home Loan Bank of New York advances 1,577,000 1,924,000
Other borrowings, net 458,384 473,037
Mortgage escrow funds 149,271 108,635
Accrued expenses and other liabilities 149,737 137,797
- -------------------------------------------------------------------------------------------------------
Total liabilities 21,388,853 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 74,960,208 and 78,670,254
shares outstanding, respectively) 1,110 1,110
Additional paid-in capital 810,170 798,583
Retained earnings 1,591,452 1,481,546
Treasury stock (36,036,384 and 32,326,338 shares, at cost,
respectively) (957,154) (811,993)
Accumulated other comprehensive loss (34,510) (46,489)
Unallocated common stock held by ESOP (4,559,470 and 4,760,054
shares, respectively) (25,058) (26,226)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,386,010 1,396,531
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,774,863 $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 Nine Months Ended
September 30, September 30,
------------------------------------------------------
(In Thousands, Except Share Data) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 105,299 $ 110,340 $ 320,854 $ 355,135
Multi-family, commercial real estate and construction 56,617 53,419 164,882 149,084
Consumer and other loans 5,385 4,736 15,073 14,468
Mortgage-backed securities 92,677 71,276 264,430 253,537
Other securities 3,777 7,265 11,797 25,394
Federal funds sold and repurchase agreements 325 219 701 1,436
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 264,080 247,255 777,737 799,054
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 62,116 55,176 173,248 170,606
Borrowed funds 80,106 112,447 254,802 343,557
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 142,222 167,623 428,050 514,163
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 121,858 79,632 349,687 284,891
Provision for loan losses -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 121,858 79,632 349,687 284,891
- ---------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 15,316 15,086 43,619 45,678
Other loan fees 1,186 2,001 3,636 5,868
Net gain on sales of securities 2,279 4,500 4,651 14,665
Mortgage banking (loss) income, net (1,229) 5,954 3,904 6,014
Income from bank owned life insurance 4,208 4,929 12,886 15,177
Other 2,276 1,410 5,345 3,916
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,036 33,880 74,041 91,318
- ---------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 30,500 27,211 91,546 83,579
Occupancy, equipment and systems 15,943 15,094 48,434 44,868
Federal deposit insurance premiums 439 480 1,329 1,440
Advertising 1,652 1,501 5,062 4,743
Other 10,634 7,122 25,200 20,584
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 59,168 51,408 171,571 155,214
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 86,726 62,104 252,157 220,995
Income tax expense 28,619 20,503 83,136 72,108
- ---------------------------------------------------------------------------------------------------------------------
Net income 58,107 41,601 169,021 148,887
Preferred dividends declared -- (1,500) -- (4,500)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 58,107 $ 40,101 $ 169,021 $ 144,387
=====================================================================================================================
Basic earnings per common share $ 0.81 $ 0.53 $ 2.32 $ 1.87
=====================================================================================================================
Diluted earnings per common share $ 0.80 $ 0.53 $ 2.28 $ 1.85
=====================================================================================================================
Dividends per common share $ 0.25 $ 0.22 $ 0.75 $ 0.64
=====================================================================================================================
Basic weighted average common shares 71,381,938 75,376,835 72,745,430 77,079,828
Diluted weighted average common and common equivalent shares 72,485,580 76,352,144 73,980,086 77,854,686
See accompanying Notes to Consolidated Financial Statements.
3
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2004
Unallocated
Accumulated Common
Additional Other Stock
Common Paid-in Retained Treasury Comprehensive Held
(In Thousands, Except Share Data) Total Stock Capital Earnings Stock Loss by ESOP
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,396,531 $1,110 $798,583 $1,481,546 $(811,993) $(46,489) $(26,226)
Comprehensive income:
Net income 169,021 -- -- 169,021 -- -- --
Other comprehensive income, net
of tax:
Net unrealized gain on securities 11,836 -- -- -- -- 11,836 --
Reclassification of net
unrealized loss on cash
flow hedge 143 -- -- -- -- 143 --
----------
Comprehensive income 181,000
----------
Common stock repurchased
(4,550,000 shares) (166,569) -- -- -- (166,569) -- --
Dividends on common stock ($0.75
per share) (54,610) -- -- (54,610) -- -- --
Exercise of stock options and
related tax benefit (839,954
shares issued) 21,939 -- 5,036 (4,505) 21,408 -- --
Amortization relating to allocation
of ESOP stock 7,719 -- 6,551 -- -- -- 1,168
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 $1,386,010 $1,110 $810,170 $1,591,452 $(957,154) $(34,510) $(25,058)
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
4
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended
September 30,
--------------------------
(In Thousands) 2004 2003
- ------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 169,021 $ 148,887
Adjustments to reconcile net income to net cash provided
by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 26,678 93,594
Net amortization on other securities, consumer and
other loans and borrowings 3,046 89
Net provision for real estate losses -- 4
Depreciation and amortization 10,024 9,237
Net gain on sales of loans and securities (7,488) (24,945)
Originations of loans held-for-sale (251,602) (543,574)
Proceeds from sales and principal payments of loans
held-for-sale 260,330 560,088
Amortization relating to allocation of ESOP stock 7,719 5,666
(Increase) decrease in accrued interest receivable (2,363) 8,053
Mortgage servicing rights amortization and valuation
allowance adjustments, net of capitalized amounts 577 4,470
Income from bank owned life insurance, net of
insurance proceeds received (4,396) (6,610)
(Increase) decrease in other assets (11,506) 17,736
Increase in accrued expenses and other liabilities 17,597 19,909
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 217,637 292,604
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (2,379,456) (4,376,136)
Loan purchases through third parties (746,388) (1,144,437)
Principal payments on loans receivable 2,985,557 5,229,628
Purchases of mortgage-backed securities
held-to-maturity (1,978,887) (4,119,277)
Purchases of mortgage-backed securities
available-for-sale (497,741) (3,680,394)
Purchases of other securities available-for-sale (508) (600)
Principal payments on mortgage-backed securities
held-to-maturity 1,524,586 4,151,290
Principal payments on mortgage-backed securities
available-for-sale 548,452 1,939,498
Proceeds from calls and maturities of other
securities held-to-maturity 5,044 68,264
Proceeds from calls and maturities of other
securities available-for-sale 355 132,736
Proceeds from sales of mortgage-backed securities
available-for-sale 147,497 829,680
Proceeds from sales of other securities
available-for-sale 22,692 50,057
Net redemptions of FHLB-NY stock 68,500 17,100
Proceeds from sales of real estate owned, net 2,093 1,502
Purchases of premises and equipment, net of proceeds
from sales (7,362) (10,533)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (305,566) (911,622)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 983,275 145,691
Net increase in borrowings with original terms of
three months or less 212,592 350,000
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 (3,330,000) (900,000)
Net increase in mortgage escrow funds 40,636 34,223
Common stock repurchased (166,569) (157,367)
Cash dividends paid to stockholders (54,610) (53,802)
Cash received for stock options exercised 16,903 6,767
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 102,227 225,512
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,298 (393,506)
Cash and cash equivalents at beginning of period 239,754 677,857
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,052 $ 284,351
==========================================================================================
Supplemental disclosures:
Cash paid during the period:
Interest $ 438,473 $ 513,472
==========================================================================================
Income taxes $ 67,579 $ 71,942
==========================================================================================
Additions to real estate owned $ 836 $ 986
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
5
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Astoria Financial Corporation and its wholly-owned subsidiaries Astoria Federal
Savings and Loan Association and its subsidiaries, referred to as Astoria
Federal, and AF Insurance Agency, Inc. As used in this quarterly report, "we,"
"us" and "our" refer to Astoria Financial Corporation and its consolidated
subsidiaries, including Astoria Federal and AF Insurance Agency, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
In addition to Astoria Federal and AF Insurance Agency, Inc., we have another
subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria
Financial Corporation for financial reporting purposes 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 September 30, 2004 and
December 31, 2003, our results of operations for the three and nine months ended
September 30, 2004 and 2003, changes in our stockholders' equity for the nine
months ended September 30, 2004 and our cash flows for the nine months ended
September 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 September 30, 2004 and December 31, 2003, and amounts of
revenues and expenses in the consolidated statements of income for the three and
nine months ended September 30, 2004 and 2003. The results of operations for the
three and nine months ended September 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 September 30,
----------------------------------------
2004 2003
----------------- -----------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS
- -------------------------------------------------------------------------------------
Net income $58,107 $58,107 $41,601 $41,601
Preferred dividends declared -- -- (1,500) (1,500)
- -------------------------------------------------------------------------------------
Net income available to common shareholders $58,107 $58,107 $40,101 $40,101
=====================================================================================
Total weighted average basic
common shares outstanding 71,382 71,382 75,377 75,377
Effect of dilutive securities:
Options -- 1,104 -- 975
- -------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 71,382 72,486 75,377 76,352
=====================================================================================
Net earnings per common share $ 0.81 $ 0.80 $ 0.53 $ 0.53
=====================================================================================
For the Nine Months Ended September 30,
-----------------------------------------
2004 2003
------------------- -------------------
Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS EPS EPS (2)
- ---------------------------------------------------------------------------------------
Net income $169,021 $169,021 $148,887 $148,887
Preferred dividends declared -- -- (4,500) (4,500)
- ---------------------------------------------------------------------------------------
Net income available to common shareholders $169,021 $169,021 $144,387 $144,387
=======================================================================================
Total weighted average basic
common shares outstanding 72,745 72,745 77,080 77,080
Effect of dilutive securities:
Options -- 1,235 -- 775
- ---------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 72,745 73,980 77,080 77,855
=======================================================================================
Net earnings per common share $ 2.32 $ 2.28 $ 1.87 $ 1.85
=======================================================================================
(1) Options to purchase 999,200 shares of common stock at prices between $36.25
per share and $36.60 per share were outstanding as of September 30, 2004,
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 September 30, 2004.
(2) Options to purchase 532,384 shares of common stock at prices between $27.29
per share and $29.88 per share were outstanding as of September 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 nine months ended September 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 $27.1 million at
September 30, 2004 and $29.6 million at December 31, 2003. The valuation
allowance totaled $9.7 million at September 30, 2004 and $11.6 million at
December 31, 2003. The cost of MSR is amortized over the estimated remaining
lives of the loans serviced. MSR amortization totaled $1.4 million for the three
months ended September 30, 2004 and $3.0 million for the three months ended
September 30,
7
2003. MSR amortization totaled $5.2 million for the nine months ended September
30, 2004 and $10.6 million for the nine months ended September 30, 2003. As of
September 30, 2004, estimated future MSR amortization through 2009, based on the
prepayment assumptions utilized in the September 30, 2004 MSR valuation, is as
follows: $1.4 million for the remainder of 2004, $5.4 million for 2005, $4.3
million for 2006, $3.4 million for 2007, $2.6 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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
(In Thousands, Except Per Share Data) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Net income:
As reported $58,107 $41,601 $169,021 $148,887
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,171 1,231 3,885 3,844
------- ------- -------- --------
Pro forma $56,936 $40,370 $165,136 $145,043
======= ======= ======== ========
Basic earnings per common share:
As reported $ 0.81 $ 0.53 $ 2.32 $ 1.87
======= ======= ======== ========
Pro forma $ 0.80 $ 0.52 $ 2.27 $ 1.82
======= ======= ======== ========
Diluted earnings per common share:
As reported $ 0.80 $ 0.53 $ 2.28 $ 1.85
======= ======= ======== ========
Pro forma $ 0.78 $ 0.51 $ 2.23 $ 1.81
======= ======= ======== ========
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
September 30, September 30,
-------------------------- --------------------------
(In Thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Service cost $ 834 $ 590 $128 $ 97
Interest cost 2,458 2,094 272 269
Expected return on plan assets (2,912) (2,177) -- --
Amortization of prior service cost 40 35 10 11
Recognized net actuarial loss (gain) 647 736 -- (41)
Amortization of transition asset (9) (23) -- --
- ----------------------------------------------------------------------------------------------
Net periodic cost $ 1,058 $ 1,255 $410 $336
==============================================================================================
Other Postretirement
Pension Benefits Benefits
------------------------- -------------------------
For the Nine Months Ended For the Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(In Thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------
Service cost $ 2,431 $ 1,770 $ 384 $ 291
Interest cost 7,327 6,282 815 807
Expected return on plan assets (8,736) (6,531) -- --
Amortization of prior service cost 120 105 31 33
Recognized net actuarial loss (gain) 1,894 2,208 -- (123)
Amortization of transition asset (26) (69) -- --
- --------------------------------------------------------------------------------------------
Net periodic cost $ 3,010 $ 3,765 $1,230 $1,008
============================================================================================
6. Impact of Accounting Standards and Interpretations
On September 30, 2004, the FASB issued Staff Position No. EITF Issue 03-1-1,
"Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
which delays the effective date for the measurement and recognition guidance
contained in Emerging Issues Task Force, or EITF, Issue No. 03-1. EITF Issue No.
03-1 provides guidance for evaluating whether an investment is
other-than-temporarily impaired and was originally effective for
other-than-temporary impairment evaluations made in reporting periods beginning
after June 15, 2004. The delay in the effective date for the measurement and
recognition guidance contained in paragraphs 10 through 20 of EITF Issue No.
03-1 does not suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The disclosure
guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. The
delay will be superseded concurrent with the final issuance of Staff Position
No. EITF Issue 03-1-a, which is expected to provide implementation guidance on
matters such as impairment evaluations for declines in fair value caused by
increases in interest rates and/or sector spreads. We do not expect the final
issuance of Staff Position No. EITF Issue 03-1-a to have a material impact on
our financial condition or results of operations.
On May 19, 2004, the FASB issued Staff Position No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," which is effective for the first interim or
annual period beginning after June 15, 2004. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or 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
9
benefit. Staff Position No. 106-2 requires employers who conclude their plans
were "actuarially equivalent" at December 8, 2003 and the Medicare Act'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 Medicare Act'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 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. While we have determined our plan to be actuarially
equivalent, the Medicare Act's effects are not a significant event and,
therefore, will not be accounted for until the plan's next measurement date
which is December 31, 2004.
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 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;
10
o changes in accounting principles, policies or guidelines may cause our
financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
Executive Summary
The following overview should be read in conjunction with our Management's
Discussion and Analysis of Financial Condition and Results of Operations, or
MD&A, in its entirety.
Astoria Financial Corporation is a Delaware corporation organized as the unitary
savings and loan association holding company of Astoria Federal 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 this goal over the past several years and that
trend has continued into 2004.
During the nine months ended September 30, 2004, the national and local real
estate markets remained strong and continued to support new and existing home
sales. The increase in U.S. Treasury yields 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. During the first six months of
2004, interest rates throughout the U.S. Treasury yield curve increased. The
Federal Open Market Committee, or FOMC, raised short-term interest rates three
times (a total of 75 basis points) since the end of June 2004. While short-term
U.S. Treasury yields have shown somewhat similar increases in the 2004 third
quarter, medium- and long-term U.S. Treasury yields have decreased since June
30, 2004, resulting in a significant flattening of the
11
U.S. Treasury yield curve. During 2004, there has been interest rate volatility
within individual quarters which has resulted in volatility in cash flows and
refinance activity during 2004, although not to the magnitude which we had
experienced in 2003.
Total deposits increased during the nine months ended September 30, 2004. This
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 as part of our interest
rate risk management strategy to extend liabilities as well as to enable us to
reduce borrowings. We continue to experience intense competition for deposits,
particularly money market and checking accounts, from certain local competitors
who have offered these accounts at premium rates. We have not offered premium
rates on these accounts because we do not consider it a cost effective strategy.
Our total loan portfolio increased slightly during the nine months ended
September 30, 2004. This increase was primarily 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, and home
equity lines of credit. Partially offsetting the increase in our multi-family
and commercial real estate loan portfolio and home equity lines of credit was a
decrease in our one-to-four family mortgage loan portfolio where repayments
continued to outpace originations. Our total non-performing assets declined from
December 31, 2003 to September 30, 2004.
Our securities portfolio increased slightly from December 31, 2003 as we
continued to purchase mortgage-backed securities to effectively redeploy our
securities and excess mortgage cash flows, as well as a portion of the cash
flows from deposit growth. The majority of the deposit growth was utilized to
reduce our overall borrowings during the nine months ended September 30, 2004.
Net income for the three and nine months ended September 30, 2004 increased
compared to the three and nine months ended September 30, 2003. The increases in
net income were primarily due to increases in net interest income, partially
offset by decreases in non-interest income and increases in non-interest
expense. 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. Interest income increased for the three months ended
September 30, 2004, compared to the same period in 2003, as a result of the
decrease in net premium amortization on our mortgage loan and mortgage-backed
securities portfolios, partially offset by the impact of reinvesting the
extraordinarily high levels of cash flows from repayments in these portfolios in
2003 in lower yielding assets as a result of the low interest rate environment.
Interest income decreased for the nine months ended September 30, 2004 compared
to the same period in 2003 as a result of the reinvestment of cash flows from
the mortgage loan and mortgage-backed securities portfolios in lower yielding
assets, partially offset by the decrease in net premium amortization on these
portfolios. The decreases in non-interest income relate primarily to decreases
in net gain on sales of securities and mortgage banking income, net. The
increases in non-interest expense relate primarily to increases in compensation
and benefits expense, occupancy, equipment and systems expense and other
expense.
In the current environment of low long-term interest rates, purchase mortgage
activity continues to remain strong. Accordingly, with continued mortgage loan
origination activity, we should
12
experience good "core business" balance sheet and net interest income growth.
However, the continued flattening of the U.S. Treasury yield curve will temper
near-term margin expansion. We expect to remain focused on building our core
businesses, with particular emphasis on growing our deposits and increasing our
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 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 Reports on Form 10-Q for the quarters ended March
31, 2004 and June 30, 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 following 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 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.
13
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
history. 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 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
14
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 yields
beginning in 2000, coupled with the FOMC's series of interest rate cuts during
2001 and 2002, substantially improved the ability of borrowers to service debt
and was the 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 completed 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.
Historically, 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 for our
portfolio segments 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 further 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 analyses did not result in any change
in our methodology for determining our general and specific valuation allowances
or our emphasis on the factors that we consider in establishing such allowances.
Accordingly, such analyses did not indicate that changes in our allowance
coverage percentages were required. Our allowance for loan losses to total loans
was 0.65% at September 30, 2004 and 0.66% at 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 estimates as a result
of changes in economic or market conditions. Changes in estimates could result
in a material change in the allowance for loan losses. While we believe that the
allowance for loan losses has been established and maintained at levels that
reflect the risks inherent in our loan portfolio, future adjustments may be
necessary if economic or market conditions differ substantially from the
conditions that existed at the time of the initial determinations.
15
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 September 30, 2004, our MSR, net, had an estimated fair value of $17.4
million and were valued based on expected future cash flows considering a
weighted average discount rate of 9.09%, a weighted average constant prepayment
rate on mortgages of 14.42% and a weighted average life of 5.0 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
September 30, 2004 reflects the increase in interest rates from December 31,
2003 to September 30, 2004 and the projected decrease in future prepayments as
of September 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 September 30, 2004, the
estimated fair value of our MSR would have been $6.6 million greater. Assuming a
decrease in interest rates of 100 basis points at September 30, 2004, the
estimated fair value of our MSR would have been $7.0 million lower.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested, at least
annually, for impairment at the reporting unit level. Impairment exists when the
carrying value of goodwill exceeds its implied fair value. As of September 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, 2004 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 $1.27 billion, using the quoted market price of our common
stock on our impairment testing date as the basis for determining the fair
value. Accordingly, as of our annual impairment test date, there was no
indication of goodwill impairment. 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.
16
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
September 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 September 30, 2004, we had 129
securities each of which had an amortized cost in excess of estimated fair
value. These securities had an estimated fair value totaling $4.60 billion and
had an unrealized loss totaling $87.3 million. At September 30, 2004, $1.09
billion of these securities, having an unrealized loss of $53.0 million, have
been in a continuous unrealized loss position for more than twelve months. We
determined the cause of all unrealized losses at September 30, 2004 to be
interest rate related, and, as such, have deemed the unrealized losses as
temporary. There were no securities write downs during the nine months ended
September 30, 2004. As previously discussed, further guidance on interest rate
related declines in fair value may be forthcoming pending the final issuance of
Staff Position No. EITF Issue 03-1-a. See Note 6, "Impact of Accounting
Standards and Interpretations," in Part I, Item 1, "Financial Statements
(Unaudited)."
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
$5.06 billion for the nine months ended September 30, 2004 and $11.52 billion
for the nine months ended September 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 nine months of 2004. Medium- and
long-term U.S. Treasury yields increased 103 basis points on average from June
30, 2003 to September 30, 2004. While the overall trend of rising interest rates
has reduced the level of refinance activity and related cash flows from what we
experienced during the first nine months of 2003, there has been significant
volatility in rates throughout 2004 which has resulted in varying cash flows and
refinance activity.
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 $217.6 million during the nine months ended September 30, 2004 and
$292.6 million during the nine months ended September 30, 2003. Deposits
increased $983.3 million during the nine months ended September 30, 2004 and
$145.7 million during the nine months ended September 30, 2003. The net
increases in deposits for the nine months ended September 30, 2004 and 2003
reflect our continued emphasis on attracting customer deposits through
competitive rates, extensive product offerings and quality service. As
previously discussed, the net increase in deposits for the nine months ended
September 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. During the nine
months ended September 30, 2004, $2.94 billion of certificates of
17
deposit, with a weighted average rate of 2.21% and a weighted average maturity
at inception of fourteen months, matured and $3.93 billion of certificates of
deposit were issued or repriced, with a weighted average rate of 2.62% and a
weighted average maturity at inception of twenty months. In addition, despite
continued intense local competition for checking accounts, we have been
successful in growing our total NOW and demand deposit account balances during
the nine months ended September 30, 2004, primarily our business checking
deposits, due in large part to our concerted sales and marketing efforts,
including our PEAK sales process. Net borrowings decreased $712.1 million during
the nine months ended September 30, 2004 and increased $252.7 million during the
nine months ended September 30, 2003. The decrease in net borrowings during the
nine months ended September 30, 2004 reflects the repayment of certain high cost
borrowings as they matured. During the nine months ended September 30, 2004,
$3.33 billion in medium-term borrowings with a weighted average rate of 5.11%
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 nine months ended
September 30, 2004 were either repaid or rolled over into short-term borrowings.
The increase in net borrowings during the nine months ended September 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 nine months ended
September 30, 2004 totaled $3.12 billion, of which $2.38 billion were
originations and $739.3 million were purchases. This compares to gross mortgage
loans originated and purchased during the nine months ended September 30, 2003
totaling $5.81 billion, of which $4.68 billion were originations and $1.13
billion were purchases. Total mortgage loans originated during the nine months
ended September 30, 2004 and 2003 include originations of loans held-for-sale
totaling $249.0 million and $540.8 million, respectively. The decrease in loan
originations and purchases for the nine months ended September 30, 2004 compared
to the nine months ended September 30, 2003 reflects the previously discussed
reduction in the level of mortgage refinance activity during 2004. Purchases of
mortgage-backed securities totaled $2.48 billion during the nine months ended
September 30, 2004 and $7.80 billion during the nine months ended September 30,
2003. The decrease in mortgage-backed securities purchases during the nine
months ended September 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 $254.1 million at September 30, 2004, compared to $239.8 million
at December 31, 2003. Borrowings maturing over the next twelve months total
$2.40 billion, including $875.0 million of medium-term borrowings. We have the
flexibility to either repay or rollover these borrowings as they mature. In
addition, we have $2.38 billion in certificates of deposit 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.
18
The following table details our borrowing and certificate of deposit maturities
and their weighted average rates as of September 30, 2004:
Borrowings Certificates of Deposit
----------------- -----------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- ------------------------------------------------------------- -----------------
Contractual Maturity:
Fourth quarter 2004 (1) $1,523 1.91% $ -- --%
Fourth quarter 2004 105 5.98 818 3.14
First quarter 2005 300 3.26 835 3.48
Second quarter 2005 200 7.23 448 3.12
Third quarter 2005 270 3.01 282 2.37
------ ------
Total maturing in next twelve months 2,398 2.82 2,383 3.16
Thirteen to twenty-four months 1,324 2.56 2,300 3.39
Twenty-five to thirty-six months 1,720 2.95 979 4.28
Thirty-seven to forty-eight months (2) 2,700 4.83 559 3.86
Forty-nine to sixty months 400 3.17 281 4.13
Over five years 378 7.11 153 5.08
------ ------
Total $8,920 3.61 $6,655 3.55
====== ======
(1) Overnight and other short-term borrowings.
(2) Includes $2.18 billion of borrowings which are callable by the counterparty
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. 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 $21.1 million during the nine months ended September
30, 2004. Our payment of dividends and repurchases of our common stock totaled
$221.2 million during the nine months ended September 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 nine months ended September 30, 2004, Astoria Federal paid dividends
to Astoria Financial Corporation totaling $300.0 million.
Stockholders' equity decreased to $1.39 billion at September 30, 2004, from
$1.40 billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $166.6 million and dividends declared of
$54.6 million. These decreases were partially offset by net income of $169.0
million, the effect of stock options exercised and related tax benefit of $21.9
million, a decrease in accumulated other comprehensive loss, net of tax, of
$12.0 million, which was primarily due to the net increase in the fair value of
our securities available-for-sale, and the amortization of the allocated portion
of shares held by the employee stock ownership plan, or ESOP, of $7.7 million.
19
On September 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 August 16,
2004 totaling $17.8 million. On October 20, 2004, we declared a quarterly cash
dividend of $0.25 per share on shares of our common stock payable on December 1,
2004 to stockholders of record as of the close of business on November 15, 2004.
During the quarter ended September 30, 2004, we completed our ninth stock
repurchase plan, which was approved by our Board of Directors on October 16,
2002. This plan authorized 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. 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. Under these plans, during the
nine months ended September 30, 2004, we repurchased 4,550,000 shares of our
common stock at an aggregate cost of $166.6 million, of which 1,941,800 shares
were acquired pursuant to our tenth stock repurchase plan. For further
information on our common stock repurchases, see Part II, Item 2, "Unregistered
Sales of Equity Securities and Use of Proceeds."
At September 30, 2004, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.85%, leverage
capital ratio of 6.85% and total risk-based capital ratio of 14.16%. 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%.
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 $57.5
million at September 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.
20
The following table details our contractual obligations as of September 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 $7,397,384 $ 875,000 $3,044,000 $3,100,000 $378,384
Commitments to originate and purchase loans (1) 637,136 637,136 -- -- --
Commitments to fund unused lines of credit (2) 384,936 384,936 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total $8,419,456 $1,897,072 $3,044,000 $3,100,000 $378,384
====================================================================================================================
(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 $587.4
million at September 30, 2004. The carrying amount of our liability for loans
sold with recourse totaled $276,000 at September 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 $36.8 million at
September 30, 2004. Outstanding standby letters of credit totaled $5.0 million
at September 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.
21
Loan Portfolio
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at September 30, 2004 and
December 31, 2003.
At September 30, 2004 At December 31, 2003
-----------------------------------------------
Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total
- -----------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 8,685,893 68.24% $ 8,971,048 71.13%
Multi-family 2,493,543 19.59 2,230,414 17.69
Commercial real estate 951,598 7.48 880,296 6.98
Construction 111,320 0.87 99,046 0.79
- -----------------------------------------------------------------------------------
Total mortgage loans 12,242,354 96.18 12,180,804 96.59
- -----------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 444,844 3.49 386,846 3.07
Commercial 21,413 0.17 21,937 0.17
Lines of Credit, Overdraft 12,103 0.10 12,963 0.10
Other 7,981 0.06 8,400 0.07
- -----------------------------------------------------------------------------------
Total consumer and other loans 486,341 3.82 430,146 3.41
- -----------------------------------------------------------------------------------
Total loans (gross) 12,728,695 100.00% 12,610,950 100.00%
Net unamortized premiums and
deferred loan costs 75,443 76,037
- -----------------------------------------------------------------------------------
Total loans 12,804,138 12,686,987
Allowance for loan losses (82,803) (83,121)
- -----------------------------------------------------------------------------------
Total loans, net $12,721,335 $12,603,866
===================================================================================
22
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
September 30, 2004 and December 31, 2003.
At September 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) $ 130,821 $ 134,956 $ 161,199 $ 166,724
REMICs and CMOs:
Agency issuance (1) 2,157,060 2,114,502 2,297,884 2,227,851
Non-agency issuance 84,435 80,495 109,669 103,740
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,372,316 2,329,953 2,568,752 2,498,315
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of the U.S.
Government and agencies 1,988 1,995 1,738 1,767
FNMA and FHLMC preferred stock 140,015 124,793 140,015 131,361
Corporate debt and other securities 1,445 1,443 21,991 23,549
- ----------------------------------------------------------------------------------------------
Total other securities 143,448 128,231 163,744 156,677
- ----------------------------------------------------------------------------------------------
Total securities available-for-sale $2,515,764 $2,458,184 $2,732,496 $2,654,992
==============================================================================================
Held-to-maturity:
Mortgage-backed securities:
Agency pass-through certificates (1) $ 10,256 $ 10,897 $ 14,345 $ 15,329
REMICs and CMOs:
Agency issuance (1) 5,659,545 5,663,757 4,958,633 4,974,316
Non-agency issuance 522,980 525,136 772,728 772,021
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities 6,192,781 6,199,790 5,745,706 5,761,666
- ----------------------------------------------------------------------------------------------
Other securities:
Obligations of states and
political subdivisions 31,993 31,993 37,038 37,038
Corporate debt securities 9,987 10,529 9,983 10,413
- ----------------------------------------------------------------------------------------------
Total other securities 41,980 42,522 47,021 47,451
- ----------------------------------------------------------------------------------------------
Total securities held-to-maturity $6,234,761 $6,242,312 $5,792,727 $5,809,117
==============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored
agencies.
23
Comparison of Financial Condition as of September 30, 2004 and December 31, 2003
and Operating Results for the Three and Nine Months Ended September 30, 2004 and
2003
Financial Condition
Total assets increased $313.3 million to $22.77 billion at September 30, 2004,
from $22.46 billion at December 31, 2003. The primary reasons for the increase
in total assets were the increases in loans receivable and mortgage-backed
securities.
Mortgage loans increased $59.5 million to $12.31 billion at September 30, 2004,
from $12.25 billion at December 31, 2003. This increase was primarily due to
increases in our multi-family and commercial real estate mortgage loan
portfolios, partially offset by a decrease in our one-to-four family mortgage
loan portfolio. Gross mortgage loans originated and purchased during the nine
months ended September 30, 2004 totaled $3.12 billion, of which $2.38 billion
were originations and $739.3 million were purchases. This compares to gross
mortgage loans originated and purchased during the nine months ended September
30, 2003 totaling $5.81 billion, of which $4.68 billion were originations and
$1.13 billion were purchases. Total mortgage loans originated during the nine
months ended September 30, 2004 and 2003 include originations of loans
held-for-sale totaling $249.0 million and $540.8 million, respectively. Mortgage
loan repayments decreased to $2.80 billion for the nine months ended September
30, 2004, from $5.06 billion for the nine months ended September 30, 2003. The
decreases 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 68.2% of our total loan portfolio at
September 30, 2004, decreased $285.2 million to $8.69 billion at September 30,
2004, from $8.97 billion at December 31, 2003. Although we have experienced a
decline in refinance activity, repayments have continued to outpace originations
and purchases in our one-to-four family mortgage loan portfolio for the nine
months ended September 30, 2004.
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 $263.1 million
to $2.49 billion at September 30, 2004, from $2.23 billion at December 31, 2003.
Our commercial real estate loan portfolio increased $71.3 million to $951.6
million at September 30, 2004, from $880.3 million at December 31, 2003.
Multi-family and commercial real estate loan originations totaled $863.8 million
for the nine months ended September 30, 2004 and $1.21 billion for the nine
months ended September 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.
Our portfolio of consumer and other loans increased $57.6 million to $495.8
million at September 30, 2004, from $438.2 million at December 31, 2003. This
increase is primarily in
24
home equity lines of credit as a result of the continued strong housing market
and the low interest rate environment.
Mortgage-backed securities increased $278.7 million to $8.52 billion at
September 30, 2004, from $8.24 billion at December 31, 2003. This increase was
primarily the result of purchases of fixed rate real estate mortgage investment
conduit, or REMIC, and collateralized mortgage obligation, or CMO,
mortgage-backed securities of $2.48 billion and a decrease of $28.1 million in
the net unrealized loss on our available-for-sale portfolio, partially offset by
principal payments received of $2.07 billion and sales of $145.2 million. We
continue to purchase mortgage-backed securities to effectively redeploy our
securities and excess mortgage cash flows in addition to cash flows from deposit
growth.
Federal Home Loan Bank of New York, or FHLB-NY, stock decreased $68.5 million to
$145.0 million primarily due to a reduction in FHLB-NY borrowings. Other
securities decreased $33.5 million to $170.2 million at September 30, 2004, from
$203.7 million at December 31, 2003, primarily due to sales of $20.3 million and
an increase of $8.2 million in the net unrealized loss on our available-for-sale
portfolio.
Deposits increased $983.3 million to $12.17 billion at September 30, 2004, from
$11.19 billion at December 31, 2003. The increase in deposits was primarily due
to an increase of $1.16 billion in certificates of deposit to $6.66 billion at
September 30, 2004 and an increase of $40.5 million in NOW and demand deposit
accounts to $1.53 billion at September 30, 2004, partially offset by a decrease
of $214.4 million in our money market accounts to $1.02 billion at September 30,
2004. The increase in our certificates of deposit was primarily the result of
the success of our marketing campaigns which have focused on attracting medium-
and long-term certificates of deposit as part of our interest rate risk
management strategy to extend liabilities as well as to enable us to reduce
borrowings, as previously discussed. The decrease in our money market accounts
is attributable to continued intense competition for these accounts. Certain
local competitors have continued to offer premium rates for money market and
checking accounts. We have not offered premium rates 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 total NOW and demand deposit account balances during the nine months ended
September 30, 2004, primarily our business checking deposits, due in large part
to our concerted sales and marketing efforts, including our PEAK sales process.
Reverse repurchase agreements decreased $350.4 million to $6.88 billion at
September 30, 2004, from $7.24 billion at December 31, 2003. FHLB-NY advances
decreased $347.0 million to $1.58 billion at September 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 nine months ended September 30, 2004, $3.33 billion in medium-term
borrowings matured, of which $2.40 billion were extended through new medium-term
borrowings and the remainder were either repaid or rolled over into short-term
borrowings.
Stockholders' equity decreased to $1.39 billion at September 30, 2004, from
$1.40 billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $166.6 million and dividends declared of
$54.6 million. These decreases were partially offset by net income of $169.0
million, the effect of stock options exercised and related tax benefit of $21.9
million, a decrease in accumulated other comprehensive loss, net
25
of tax, of $12.0 million, which was primarily due to the net increase in the
fair value of our securities available-for-sale, and the amortization of the
allocated portion of shares held by the ESOP of $7.7 million.
Results of Operations
General
Net income for the three months ended September 30, 2004 increased $16.5 million
to $58.1 million, from $41.6 million for the three months ended September 30,
2003. Diluted earnings per common share totaled $0.80 per share for the three
months ended September 30, 2004 and $0.53 per share for the three months ended
September 30, 2003. Return on average assets increased to 1.02% for the three
months ended September 30, 2004, from 0.74% for the three months ended September
30, 2003. Return on average stockholders' equity increased to 16.82% for the
three months ended September 30, 2004, from 11.35% for the three months ended
September 30, 2003. Return on average tangible stockholders' equity, which
represents average stockholders' equity less average goodwill, increased to
19.42% for the three months ended September 30, 2004, from 12.99% for the three
months ended September 30, 2003.
Net income for the nine months ended September 30, 2004 increased $20.1 million
to $169.0 million, from $148.9 million for the nine months ended September 30,
2003. Diluted earnings per common share totaled $2.28 per share for the nine
months ended September 30, 2004 and $1.85 per share for the nine months ended
September 30, 2003. Return on average assets increased to 1.00% for the nine
months ended September 30, 2004, from 0.88% for the nine months ended September
30, 2003. Return on average stockholders' equity increased to 16.15% for the
nine months ended September 30, 2004, from 13.13% for the nine months ended
September 30, 2003. Return on average tangible stockholders' equity increased to
18.62% for the nine months ended September 30, 2004, from 14.96% for the nine
months ended September 30, 2003. The increases in the returns on average assets
for the three and nine months ended September 30, 2004 are primarily due to the
increases in net income. The increases in the returns on average stockholders'
equity and average tangible stockholders' equity for the three and nine months
ended September 30, 2004 are due to the increases in net income, coupled with
the decreases in the average balances of stockholders' equity for the three and
nine months ended September 30, 2004 compared to the three and nine months ended
September 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 September 30, 2004, net interest income increased
$42.3 million to $121.9 million, from $79.6 million for the three months ended
September 30, 2003. The net interest margin increased to 2.25% for the three
months ended September 30, 2004, from 1.52% for the three months ended September
30, 2003. The increases in net interest income
26
and the net interest margin for the three months ended September 30, 2004 were
primarily the result of a decrease in interest expense, coupled with an increase
in interest income. The decrease in interest expense was attributable to a
decrease in our cost of funds, which is primarily due to the repayment and
refinancing of various higher cost borrowings. The increase in interest income
was primarily due to the increase in the average balance of interest-earning
assets, primarily in our multi-family, commercial real estate and construction
loans and mortgage-backed securities, coupled with an increase in the yield on
interest-earning assets primarily as a result of a reduction in net premium
amortization on mortgage-backed securities and mortgage loans. Net premium
amortization on our mortgage-backed securities and mortgage loan portfolios
decreased $29.0 million to $5.7 million for the three months ended September 30,
2004, from $34.7 million for the three months ended September 30, 2003,
primarily due to the reduction in repayment levels during 2004, as well as the
reduced amount of unamortized net premium remaining in our mortgage-backed
securities portfolio. The benefit from the reduction in net premium amortization
was partially offset by a reduction in coupon rates resulting from the
extraordinarily high levels of repayments on our mortgage-backed securities and
one-to-four family mortgage loan portfolios, primarily during the first nine
months of 2003, which were reinvested in assets at lower rates.
The average balance of net interest-earning assets increased $372.0 million to
$662.5 million for the three months ended September 30, 2004, from $290.5
million for the three months ended September 30, 2003. The increase in the
average balance of net interest-earning assets was the result of an increase of
$741.7 million in the average balance of total interest-earning assets to $21.70
billion for the three months ended September 30, 2004, from $20.96 billion for
the three months ended September 30, 2003, partially offset by an increase of
$369.7 million in the average balance of total interest-bearing liabilities to
$21.04 billion for the three months ended September 30, 2004, from $20.67
billion for the three months ended September 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 2.17% for the three months ended September 30, 2004, from
1.48% for the three months ended September 30, 2003, primarily due to a decrease
in the average cost of interest-bearing liabilities, coupled with an increase in
the average yield on interest-earning assets. The average cost of
interest-bearing liabilities decreased to 2.70% for the three months ended
September 30, 2004, from 3.24% for the three months ended September 30, 2003.
The average yield on interest-earning assets increased to 4.87% for the three
months ended September 30, 2004, from 4.72% for the three months ended September
30, 2003.
For the nine months ended September 30, 2004, net interest income increased
$64.8 million to $349.7 million, from $284.9 million for the nine months ended
September 30, 2003. The net interest margin increased to 2.17% for the nine
months ended September 30, 2004, from 1.79% for the nine months ended September
30, 2003. The increase in net interest income and the net interest margin for
the nine months ended September 30, 2004 were primarily the result of a decrease
in interest expense, partially offset by a decrease in interest income. The
decrease in interest expense was attributable to a decrease in our cost of
funds, which is primarily due to the repayment and refinancing of various higher
cost borrowings. The decrease in interest income was primarily due to the
decrease in the yield on interest-earning assets as a result of the
extraordinarily high level of mortgage loan and mortgage-backed securities
repayments we experienced throughout 2003 resulting in reinvestment in assets at
lower rates. Partially offsetting the negative impact of the reinvestment in
assets at lower rates
27
was an increase in the average balance of total interest-earning assets and a
reduction in net premium amortization on mortgage-backed securities and mortgage
loans. Net premium amortization on our mortgage-backed securities and mortgage
loan portfolios decreased $66.9 million to $26.7 million for the nine months
ended September 30, 2004, from $93.6 million for the nine months ended September
30, 2003.
The average balance of net interest-earning assets increased $276.7 million to
$637.6 million for the nine months ended September 30, 2004, from $360.9 million
for the nine months ended September 30, 2003. The increase in the average
balance of net interest-earning assets was primarily the result of an increase
of $283.9 million in the average balance of total interest-earning assets to
$21.46 billion for the nine months ended September 30, 2004, from $21.17 billion
for the nine months ended September 30, 2003, slightly offset by an increase in
the average balance of total interest-bearing liabilities to $20.82 billion for
the nine months ended September 30, 2004, from $20.81 billion for the nine
months ended September 30, 2003. Also contributing to the increase in the
average balance of net interest-earning assets was the decrease in
non-interest-earning assets previously discussed. The net interest rate spread
increased to 2.09% for the nine months ended September 30, 2004, from 1.74% for
the nine months ended September 30, 2003, primarily due to a decrease in the
average cost of interest-bearing liabilities, partially offset by a decrease in
the average yield on interest-earning assets. The average cost of
interest-bearing liabilities decreased to 2.74% for the nine months ended
September 30, 2004, from 3.29% for the nine months ended September 30, 2003. The
average yield on interest-earning assets decreased to 4.83% for the nine months
ended September 30, 2004, from 5.03% for the nine months ended September 30,
2003.
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
nine months ended September 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.
28
For the Three Months Ended September 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 $ 8,717,579 $105,299 4.83% $ 8,944,114 $110,340 4.93%
Multi-family, commercial
real estate and construction 3,490,790 56,617 6.49 2,857,110 53,419 7.48
Consumer and other loans (1) 487,294 5,385 4.42 413,519 4,736 4.58
----------- -------- ----------- --------
Total loans 12,695,663 167,301 5.27 12,214,743 168,495 5.52
Mortgage-backed securities (2) 8,578,352 92,677 4.32 8,179,267 71,276 3.49
Other securities (2) (3) 335,381 3,777 4.50 477,432 7,265 6.09
Federal funds sold and
repurchase agreements 94,472 325 1.38 90,642 219