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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22228
ASTORIA FINANCIAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3170868
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE ASTORIA FEDERAL PLAZA, LAKE SUCCESS, NEW YORK 11042
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(516) 327-3000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT):
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE NEW YORK
$.01 PER SHARE, AND RELATED STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS
(SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT): NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 28, 2002, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.76 billion. The number of shares of the registrant's Common
Stock outstanding as of March 13, 2003 was 83,095,757 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 8, 2003, in connection
with the Annual Meeting of Stockholders to be held on May 21, 2003 and any
adjournment thereof, which is expected to be filed with the Securities and
Exchange Commission on or about April 8, 2003, are incorporated by reference
into Part III.
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ASTORIA FINANCIAL CORPORATION
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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Part I
Item 1. Business.......................................................................... 2
Item 2. Properties........................................................................ 31
Item 3. Legal Proceedings................................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............................... 31
Part II
Item 5. Market for Astoria Financial Corporation's Common
Equity and Related Stockholder Matters.......................................... 32
Item 6. Selected Financial Data........................................................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 60
Item 8. Financial Statements and Supplementary Data....................................... 63
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 63
Part III
Item 10. Directors and Executive Officers of Astoria Financial Corporation................. 64
Item 11. Executive Compensation............................................................ 64
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................. 64
Item 13. Certain Relationships and Related Transactions.................................... 64
Item 14. Controls and Procedures........................................................... 64
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................................ 65
SIGNATURES..................................................................................... 66
CERTIFICATIONS................................................................................. 68
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These statements may be identified by the use of
the words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "outlook," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors it believes are appropriate under the circumstances. These statements
are not guarantees of future performance and are subject to risks, uncertainties
and other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
- the timing and occurrence or non-occurrence of events may be
subject to circumstances beyond our control;
- there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
- changes in the interest rate environment may reduce interest
margins;
- changes in deposit flows, loan demand or real estate values
may adversely affect our business;
- changes in accounting principles, policies or guidelines may
cause our financial condition to be perceived differently;
- general economic conditions, either nationally or locally in
some or all areas in which we do business, or conditions in
the securities markets or the banking industry may be less
favorable than we currently anticipate;
- legislative or regulatory changes may adversely affect our
business;
- technological changes may be more difficult or expensive than
we anticipate; or
- success or consummation of new business initiatives may be
more difficult or expensive than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, including Astoria Federal Savings
and Loan Association and its subsidiaries, Astoria Capital Trust I and AF
Insurance Agency, Inc.
ITEM 1. BUSINESS
GENERAL
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and
coordinating the business activities of Astoria Federal, we invest primarily in
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. We have acquired, and may continue to acquire or organize
either directly or indirectly through Astoria Federal, other operating
subsidiaries including other financial institutions. We continue to evaluate
merger and acquisition activity as part of our strategic objective for long term
growth.
Astoria Federal's primary business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, principal repayments on loans and securities and borrowed funds,
primarily in one-to-four family mortgage loans, mortgage-backed securities,
multi-family mortgage loans and commercial real estate loans. To a much smaller
degree, we also invest in construction loans and consumer and other loans. In
addition, Astoria Federal invests in U.S. Government and federal agency
securities and other investments permitted by federal laws and regulations.
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. Non-interest income
includes customer service fees; other loan fees; net gain on sales of
securities; mortgage banking income, net; income from bank owned life insurance,
or BOLI; and other non-interest income. General and administrative expense
consists of compensation and benefits, occupancy, equipment and systems expense,
federal deposit insurance premiums, advertising and other operating expenses.
Other non-interest expense consists of extinguishment of debt and, prior to
January 1, 2002, amortization of goodwill. Our earnings are also significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates and U.S. Treasury yield curves, government policies and
actions of regulatory authorities.
As a premier community bank our focus has been to originate mortgage loans, with
the goal of increasing our loan portfolio balances, and to increase our customer
deposit balances. We have been successful in achieving these goals over the past
several years. Total loans receivable increased $1.77 billion, or 17.2%, to
$12.06 billion at December 31, 2002, from $10.29 billion at December 31, 1999,
while total deposits increased $1.52 billion, or 15.8%, to $11.07 billion at
December 31, 2002, from $9.55 billion at December 31, 1999. In addition to our
focus on loan and deposit growth, we had implemented a strategy over the past
several years to reposition our balance sheet through decreases in our
securities portfolio and our borrowings. We have been successful in achieving
these goals as well. Total securities decreased $2.93 billion, or 27.2%, to
$7.83 billion at December 31, 2002, from $10.76 billion at December 31, 1999 and
total borrowings decreased $2.70 billion, or 23.5%, to $8.82 billion at December
31, 2002, from $11.52 billion at December 31, 1999.
2
With interest rates at historic lows, the level of mortgage loan refinance and
prepayment activity outpaced our origination activity in 2002. Despite record
mortgage loan originations and purchases, which totaled $5.59 billion in 2002,
including originations of loans held-for-sale totaling $484.3 million, the
increased cash flow we experienced resulted in a $107.9 million decrease in our
loan portfolio from December 31, 2001 to December 31, 2002. This pattern of
repayment activity was also reflected in our securities portfolio. We
significantly increased our purchases of mortgage-backed securities in order to
effectively redeploy our securities cash flows and excess mortgage cash flows.
During 2002, we purchased $6.84 billion of mortgage-backed securities, resulting
in a $305.5 million increase in our mortgage-backed securities portfolio from
December 31, 2001 to December 31, 2002. If the existing low interest rate
environment and extraordinarily high levels of cash flows continue throughout
2003, we may see a further reduction in our one-to-four family mortgage loan
portfolio, and will, in all likelihood, continue to purchase mortgage-backed
securities, resulting in additional growth of our mortgage-backed securities
portfolio. We hope to counter some of the potential reduction in our one-to-four
family loan portfolio through an increase in our originations of multi-family
and commercial real estate loans. These loans typically contain significant
prepayment penalties and, therefore, are less likely to prepay than our
one-to-four family mortgage loans. When interest rates begin to stabilize and/or
increase and prepayment activity subsides, we would expect our ability to resume
significant growth in our mortgage loan portfolio to be greatly enhanced.
Additional factors affecting our ability to resume this growth include the
strength of the housing market, the level of new housing construction and
general economic conditions.
Total deposits increased to $11.07 billion at December 31, 2002 from $10.90
billion at December 31, 2001 and total borrowings decreased to $8.82 billion at
December 31, 2002 from $9.82 billion at December 31, 2001. While we will
continue to focus on attracting and retaining deposits through marketing, new
products, quality service and long-standing customer relationships, we have
experienced increased competition for deposits, particularly money market and
checking accounts, from certain local competitors, as well as recent entrants
into the local market, who have offered these accounts at well above market
rates. We have not increased the rates we offer on these types of accounts as we
do not consider it a cost effective strategy in the current low interest rate
environment. However, in this low interest rate environment, borrowings offer a
low cost alternative to deposit generation as a funding source. As a result, we
may consider future increases in our borrowings to fund asset growth.
In addition to Astoria Federal, we have two other wholly-owned subsidiaries, AF
Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is
a life insurance and property and casualty insurance agency. Through contractual
agreements with various third party marketing organizations, AF Insurance
Agency, Inc. provides insurance products to the customers of Astoria Federal.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million aggregate liquidation amount of 9.75% Capital Securities due November 1,
2029, or Capital Securities, which are prepayable at our option on or after
November 1, 2009.
AVAILABLE INFORMATION
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at http://www.sec.gov.
3
LENDING ACTIVITIES
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2002, our loan portfolio totaled $12.06 billion, or 55.6% of total assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Loan originations totaled
$5.59 billion, including originations of loans held-for-sale totaling $484.3
million, for the year ended December 31, 2002 and $4.56 billion, including
originations of loans held-for-sale totaling $405.7 million, for the year ended
December 31, 2001. Our retail loan origination program accounted for $2.22
billion of originations during 2002 and $1.30 billion of originations during
2001. We have an extensive broker network in fifteen states: New York, New
Jersey, Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio,
Virginia, North Carolina, South Carolina, Georgia, Illinois, California and
Florida. Our broker loan origination program consists of relationships with
mortgage brokers and accounted for $1.84 billion of originations during 2002 and
$1.83 billion of originations during 2001. Our third party loan origination
program includes relationships with other financial institutions and mortgage
bankers in forty-four states and accounted for $1.53 billion of originations
during 2002 and $1.43 billion of originations during 2001. See the "Loan
Portfolio Composition" table on page 25 and the "Loan Maturity, Repricing and
Activity" tables on pages 26 and 27.
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment by
the borrower. We also offer second mortgage loans which are underwritten
according to the same standards as first mortgage loans, although we have
originated only a limited number of such loans.
At December 31, 2002, $9.21 billion, or 76.9%, of our total loan portfolio
consisted of one-to-four family loans, of which $7.77 billion, or 84.4%, were
adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists
primarily of hybrid ARM loans. We currently offer ARM loans which initially have
a fixed rate for one, three, five, seven or ten years and convert into one year
ARM loans at the end of the initial fixed rate period. The one, three, five and
seven year ARM loans have terms of up to forty years and the ten year ARM loans
have terms of up to thirty years. ARM loans may carry, for a period of time, an
initial interest rate which is less than the fully indexed rate for the loan at
the time of origination. We determine the initial discounted rate in accordance
with market and competitive factors. However, in the current low interest rate
environment, we generally have not been offering our ARM loans at interest rates
below the fully indexed rate. All ARM loans we offer have annual and lifetime
interest rate ceilings and floors. Generally, ARM loans pose credit risks
somewhat greater than the risks posed by fixed rate loans primarily because, as
interest rates rise, the underlying payments of the borrower rise, increasing
the potential for default. To recognize the credit risks associated with ARM
loans initially offered below their fully-indexed rates, we generally underwrite
our one-year ARM loans assuming a rate equal to 200 basis points over the
initial discounted rate, but not less than 7.00%. For ARM loans with longer
adjustment periods, and therefore less credit risk due to the longer period for
the borrower's income to adjust to anticipated higher future payments, we
underwrite the loans using the initial rate, which may be a discounted rate. We
use the same underwriting standards for our retail, broker and third party
mortgage loan originations.
4
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various governmental agencies or other
investors with either servicing retained or released. Generally, the sale of
such loans is arranged through a master commitment either on a mandatory
delivery or best efforts basis. At December 31, 2002, loans serviced for others
totaled $2.67 billion.
One-to-four family loan originations and purchases, including originations of
loans held-for-sale, increased $590.4 million to $4.53 billion in 2002, from
$3.94 billion in 2001. This increase was primarily the result of the significant
increase in mortgage refinance activity due to the continued decline in interest
rates.
Multi-Family and Commercial Real Estate Lending
As of December 31, 2002, our total loan portfolio contained $1.60 billion, or
13.4%, of multi-family loans and $744.6 million, or 6.2%, of commercial real
estate loans. Over the last few years we have increased our emphasis on
multi-family and commercial real estate lending. During 2002, we originated
$1.01 billion of multi-family, commercial real estate and mixed use loans
compared to $591.8 million in 2001. Mixed use loans are secured by properties
which are intended for both residential and business use and are classified as
multi-family or commercial real estate based on the greater number of
residential versus commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans generally are
provided as five to fifteen year term balloon loans amortized over fifteen to
thirty years. Our policy generally has been to originate multi-family and
commercial real estate loans in the New York metropolitan area. In making such
loans, we primarily consider the ability of the net operating income generated
by the real estate to support the debt service, the financial resources, income
level and managerial expertise of the borrower, the marketability of the
property and our lending experience with the borrower. Our current practice is
to require a minimum debt service coverage ratio of 1.20 times for multi-family
and commercial real estate loans. Additionally, on multi-family and commercial
real estate loans, our current practice is to finance up to 75% of the lesser of
the purchase price or appraised value of the property securing the loan on
purchases and up to 70% of the appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
forty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2002, our single largest multi-family loan
had an outstanding balance of $9.4 million, was current and secured by a
364-unit apartment complex located in Staten Island, New York. At December 31,
2002, the average balance of loans in our multi-family portfolio was
approximately $600,000.
Commercial real estate loans typically are secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2002, our single largest commercial real estate loan had an
outstanding principal balance of $8.6 million, was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2002, the
average balance of loans in our commercial real estate portfolio was
approximately $900,000.
Multi-family and commercial real estate loans generally involve a greater degree
of credit risk than one-to-four family loans because they typically have larger
balances and are more affected by adverse conditions in the economy. As such,
these loans require more ongoing evaluation and monitoring.
5
Because payments on loans secured by multi-family properties and commercial real
estate often depend upon the successful operation and management of the
properties and the businesses which operate from within them, repayment of such
loans may be affected by factors outside the borrower's control, such as adverse
conditions in the real estate market or the economy or changes in government
regulation.
Construction Loans
As of December 31, 2002, $56.5 million, or 0.5%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Generally, we offer
construction loans up to a maximum of $10.0 million. Construction lending
generally involves additional credit risks to the lender as compared with other
types of mortgage lending. These credit risks are attributable to the fact that
loan funds are advanced upon the security of the project under construction,
predicated on the present value of the property and the anticipated future value
of the property upon completion of construction or development. Construction
loans are funded monthly and monitored by a professional construction engineer
and our commercial real estate lending department.
Consumer and Other Loans
At December 31, 2002, $372.6 million, or 3.1%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity lines of credit, are offered primarily on a fixed rate,
short-term basis. The underwriting standards we employ for consumer loans
include a determination of the borrower's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness. In addition to the credit worthiness of the borrower, the
underwriting process also includes a review of the value of the collateral, if
any, in relation to the proposed loan amount. Our consumer loans tend to have
higher interest rates, shorter maturities and are considered to entail a greater
risk of default than one-to-four family mortgage loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 80% of the appraised value
of the property. Such lines of credit are underwritten based upon our internal
guidelines in order to evaluate the borrower's ability and willingness to repay
the debt.
Included in consumer and other loans were $22.6 million of commercial business
loans at December 31, 2002. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for loans in excess of $10.0 million, mortgage loan approval authority
has been delegated by the Board of Directors to our underwriters and Loan
Committee, which consists of certain members of executive management and other
Astoria Federal officers.
Upon receipt of a completed application from a prospective borrower, for
mortgage loans secured by one-to-four family properties, we generally order a
credit report, verify income and other information and, if necessary, obtain
additional financial or credit related information. An appraisal of the real
estate used for collateral is also obtained. For mortgage loans secured by
multi-family properties and commercial real estate, appraisals are obtained as
part of the final underwriting process. All appraisals are performed by licensed
or certified appraisers. Most appraisals are performed by licensed independent
third party appraisers. The Board of Directors annually reviews and approves our
appraisal policy.
6
ASSET QUALITY
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, the maintenance of sound credit standards for new loan originations and
a strong real estate market have resulted in our maintaining a very low level of
non-performing assets. Through a variety of strategies, including, but not
limited to, early intervention on delinquent loans, borrower workout
arrangements and aggressive marketing of foreclosed properties, we have been
proactive in addressing problem and non-performing assets which, in turn, has
helped to build the strength of our financial condition.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent
primarily on employment and other sources of income, which in turn is impacted
by general economic conditions, although other factors, such as unanticipated
expenditures or changes in the financial markets may also impact a borrower's
ability to pay. Collateral values, particularly real estate values, are also
impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
Non-performing Assets
Non-performing assets include non-accrual loans, loans delinquent 90 days or
more and still accruing interest and real estate owned, or REO. Total
non-performing assets decreased to $35.6 million at December 31, 2002, from
$40.1 million at December 31, 2001. Non-performing loans, the most significant
component of non-performing assets, decreased $2.6 million to $34.5 million at
December 31, 2002, from $37.1 million at December 31, 2001. The ratio of
non-performing loans to total loans decreased to 0.29% at December 31, 2002,
from 0.31% at December 31, 2001. Our ratio of non-performing assets to total
assets was 0.16% at December 31, 2002, compared to 0.l8% at December 31, 2001.
The allowance for loan losses as a percentage of total non-performing loans was
242.04% at December 31, 2002, compared to 221.70% at December 31, 2001. For a
further discussion of the allowance for loan losses and non-performing assets
and loans, see Item 7, "Management's Discussion and Analysis," or "MD&A."
We discontinue accruing interest when loans become 90 days delinquent as to
their interest due, even though in most instances the borrower has only missed
two payments. In addition, we reverse all previously accrued and uncollected
interest through a charge to interest income. While loans are in non-accrual
status, interest due is monitored and income is recognized only to the extent
cash is received until a return to accrual status is warranted. In some
circumstances we continue to accrue interest on loans delinquent 90 days or more
as to their maturity date but not their interest due. In general, 90 days prior
to a loan's maturity, the borrower is reminded of the maturity date. Where the
borrower has continued to make monthly payments to us and where we do not have a
reason to believe that any loss will be incurred on the loan, we have treated
these loans as current and have continued to accrue interest. Such loans consist
primarily of one-to-four family mortgage loans and totaled $1.0 million at
December 31, 2002 and $1.3 million at December 31, 2001.
Real Estate Owned
The net carrying value of our REO totaled $1.1 million at December 31, 2002 and
consisted of one-to-four family properties. The REO balance decreased $1.9
million, from $3.0 million at December 31, 2001. REO is carried net of all
allowances for losses at the lower of cost or fair value less estimated selling
costs. See the table on page 57 for further detail on our REO.
7
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our classified assets.
Federal regulations and our policy require the classification of loans and other
assets, such as debt and equity securities considered to be of lesser quality,
as "special mention," "substandard," "doubtful" or "loss" assets. An asset
classified as special mention has potential weaknesses, which, if uncorrected,
may result in the deterioration of the repayment prospects or in the
institution's credit position at some future date. An asset classified as
substandard is inadequately protected by the current net worth and paying
capacity of the obligor or the collateral pledged, if any. Substandard assets
include those characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all of the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses present make
collection or liquidation in full satisfaction of the loan amount, on the basis
of currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of
such little value that their continuance as assets without the establishment of
a specific loss reserve is not warranted. Those assets classified as
substandard, doubtful or loss are considered adversely classified. See the table
on page 57 for additional information on our classified assets.
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the estimated fair value.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2002, net of
their related allowance for loan losses of $1.6 million, totaled $15.0 million.
Interest income recognized on impaired loans amounted to $1.3 million for the
year ended December 31, 2002. For further detail on our impaired loans, see Note
4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies," in Item 7, "MD&A."
In addition to the requirements of accounting principles generally accepted in
the United States of America, or GAAP, related to loss contingencies, a
federally chartered savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other
federal banking agencies, provides guidance for financial institutions on both
the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of valuation allowances. It is required that all
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institutions have effective systems and controls to identify, monitor and
address asset quality problems, analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner and establish acceptable
allowance evaluation processes that meet the objectives of the federal
regulatory agencies. While we believe that the allowance for loan losses has
been established and maintained at adequate levels, future adjustments may be
necessary if economic or other conditions differ substantially from the
conditions used in making the initial determinations. In addition, there can be
no assurance that the OTS or other regulators, as a result of reviewing our loan
portfolio and/or allowance, will not request us to alter our allowance for loan
losses, thereby affecting our financial condition and earnings.
INVESTMENT ACTIVITIES
General
Our investment policy is designed primarily to complement our lending
activities, to generate a favorable return without incurring undue interest rate
and credit risk, to enable us to manage the interest rate sensitivity of our
overall assets and liabilities and to provide and maintain liquidity, primarily
through cash flow. In establishing our investment strategies, we consider our
business and growth plans, the economic environment, our interest rate
sensitivity position, the types of securities held and other factors. At
December 31, 2002, our portfolio of mortgage-backed and other securities totaled
$7.83 billion, or 36.1% of total assets.
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, including collateralized mortgage
obligations, or CMOs, and real estate mortgage investment conduits, or REMICs,
certain certificates of deposit of insured banks and federally chartered savings
associations, certain bankers acceptances and, subject to certain limits,
corporate securities, commercial paper and mutual funds.
Our investment policy also permits us to invest in certain derivative financial
instruments. We do not use derivatives for trading purposes. See Note 1 and Note
11 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data," for further discussion of such derivative
financial instruments.
Securities
As previously mentioned, we utilize mortgage-backed and other securities
purchases as a complement to our mortgage lending activities. Purchases during
2002 consisted primarily of CMO and REMIC agency and non-agency securities which
provide liquidity, collateral for borrowings and minimal credit risk while
providing appropriate returns. At December 31, 2002, we had $7.11 billion in
REMIC and CMO mortgage-backed securities, or 32.7% of total assets, of which
96.9% had fixed rates. Of the REMIC and CMO securities portfolio, $4.21 billion,
or 59.3%, are insured or guaranteed, either directly or indirectly, by Fannie
Mae, or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, or the
Government National Mortgage Association, or GNMA, as issuer. The balance of
this portfolio is comprised of privately issued securities, substantially all of
which have a credit rating of AAA. Our fixed rate REMIC and CMO securities had
coupon rates ranging from 4.50% to 7.00% and a weighted average yield of 5.00%
at December 31, 2002. Our adjustable rate REMIC and CMO securities, a majority
of which are indexed to the one-month LIBOR, had coupon rates ranging from 2.38%
to 6.98% and a weighted average yield of 2.87% at December 31, 2002. During the
year ended December 31, 2002, we purchased $6.84 billion of REMIC and CMO
securities as a result of our redeployment of our cash flows in excess of our
mortgage and other loan fundings. We believe these securities represent
attractive and limited risk alternatives to other investments due to the wide
variety of maturity and repayment options available. In addition, at December
31, 2002, we had $274.0 million, or 1.3% of total assets, in mortgage-backed
pass-through certificates insured or guaranteed by either FNMA, FHLMC or GNMA.
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Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, mortgage-backed securities issued or guaranteed by FNMA,
FHLMC or GNMA, are weighted at no more than 20% for OTS risk-based capital
purposes, compared to the 50% risk weighting assigned to most non-securitized
one-to-four family mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, they, along with whole loans, remain subject to the risk of a
fluctuating interest rate environment. Changes in interest rates affect both the
prepayment rate and estimated market value of mortgage-backed securities and
mortgage loans.
The other securities portfolio totaled $454.3 million, or 2.1% of total assets,
and consisted of obligations of the U.S. Government and agencies, obligations of
state and political subdivisions and equity and corporate debt securities.
Included in the other securities portfolio are various securities, which, by
their terms, may be called by the issuer, typically after the passage of a fixed
period of time. As of December 31, 2002, the amortized cost of such callable
securities totaled $397.6 million. Securities called during the year ended
December 31, 2002 totaled $569.2 million.
At December 31, 2002, our securities available-for-sale totaled $2.79 billion
and our securities held-to-maturity totaled $5.04 billion. For a further
discussion of our securities portfolio, see the tables on pages 28 and 29, Item
7, "MD&A" and Note 3 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data."
As a member of the Federal Home Loan Bank of New York, or FHLB-NY, Astoria
Federal is required to maintain a specified investment in the capital stock of
the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System."
Federal Funds Sold and Repurchase Agreements
We invest in various money market instruments, including overnight and term
federal funds and repurchase agreements (securities purchased under agreements
to resell). Money market instruments are used to invest our available funds
resulting from cash flow and to help satisfy liquidity needs. For a further
discussion of our federal funds sold and repurchase agreements, see Item 7,
"MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
SOURCES OF FUNDS
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and
mortgage-backed and other securities. Our other sources of funds are provided by
operating activities (primarily net income) and financing activities, including
borrowings and deposits.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, NOW accounts, money
market accounts, demand deposit accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on marketing, new products, quality service and long-standing customer
relationships to attract and retain these deposits. During the year ended
December 31, 2002, we initiated our "PEAK Process," an
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interactive, disciplined sales and service approach, in the first quarter and an
integrated checking account promotion in the second quarter. Brokered deposits
are used occasionally to supplement retail customer deposits in raising funds
for financing and liquidity purposes. At December 31, 2002, our deposits totaled
$11.07 billion. Of the total deposit balance, $1.44 billion, or 13.0%, represent
Individual Retirement Accounts. We held no brokered deposits at December 31,
2002.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a strong level of core deposits,
which has contributed to our low cost of funds. Core deposits include savings,
money market, NOW and demand deposit accounts, which, in the aggregate,
represented 53.4% of total deposits at December 31, 2002 and 52.7% of total
deposits at December 31, 2001.
For a further discussion of our deposits, see the tables on pages 30 and 31,
Item 7, "MD&A" and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
Borrowings
We enter into reverse repurchase agreements (securities sold under agreements to
repurchase) with nationally recognized primary securities dealers and the
FHLB-NY. Reverse repurchase agreements are accounted for as borrowings and are
secured by the securities sold under the agreements. We also obtain advances
from the FHLB-NY which are generally secured by a blanket lien against, among
other things, our one-to-four family mortgage loan portfolio and our investment
in the stock of the FHLB-NY. The maximum amount that the FHLB-NY will advance,
for purposes other than for meeting withdrawals, fluctuates from time to time in
accordance with the policies of the FHLB-NY. See "Regulation and Supervision -
Federal Home Loan Bank System." Occasionally, we will obtain funds through the
issuance of unsecured debt obligations. These obligations are classified as
other borrowings in our statement of financial condition.
In addition, at December 31, 2002, we had available a 12-month commitment for
overnight and one month lines of credit with the FHLB-NY totaling $100.0
million. Both lines of credit are priced at the federal funds rate plus 10.0
basis points and reprice daily. Effective January 2003, both lines of credit are
priced at the federal funds rate plus 5.0 basis points and reprice daily.
During the year ended December 31, 2002, as part of our interest rate risk
management strategy as well as part of our strategy to reposition our
liabilities, we decreased our borrowings by $1.00 billion, or 10.2%, to $8.82
billion at December 31, 2002, from $9.82 billion at December 31, 2001. Included
in our borrowings are various obligations which, by their terms, may be called
by the securities dealers and the FHLB-NY. At December 31, 2002, we had $5.94
billion of borrowings which are callable within one year and at various times
thereafter and have contractual maturities of up to six years.
For a further discussion of our borrowings, see Item 7, "MD&A" and Note 8 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and
growing our mutual fund, deferred annuities and insurance sales. Our mutual
fund, deferred annuities and insurance sales are operated out of our
wholly-owned subsidiaries. See "Subsidiary Activities."
MARKET AREA AND COMPETITION
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our
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retail banking network includes multiple delivery channels including full
service banking offices, automated teller machines, or ATMs, and telephone and
internet banking capabilities. We consider our strong retail banking network,
together with our reputation for financial strength and customer service, as our
major competitive advantage in attracting and retaining customers in our market
areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. Astoria Federal ranked third in deposit market share, with an
8.9% market share, in the Long Island market, which includes the counties of
Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance
Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30,
2002. Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network in fifteen states and through a third party loan origination
program in forty-four states.
Our broker and third party loan origination programs provide efficient and
diverse delivery channels for deployment of our cash flows. Additionally, they
provide geographic diversification, reducing our exposure to concentrations of
credit risk. At December 31, 2002, $5.89 billion, or 50.8%, of our total
mortgage loan portfolio was secured by properties located in 47 states other
than New York. Excluding New York, we have a concentration of mortgage lending
of greater than 5.0% in four states: Connecticut, which comprises 10.3% of our
total mortgage loan portfolio; New Jersey, which comprises 8.6% of our total
mortgage loan portfolio; Illinois, which comprises 5.5% of our total mortgage
loan portfolio; and Massachusetts, which comprises 5.1% of our total mortgage
loan portfolio.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past two years, several large out-of-state
financial institutions have entered the New York metropolitan area market. All
are our competitors to varying degrees. Our competition for loans, both locally
and in the aggregate, comes principally from mortgage banking companies,
commercial banks, savings banks and savings and loan associations. Our most
direct competition for deposits comes from commercial banks, savings banks,
savings and loan associations and credit unions. We also face intense
competition for deposits from money market mutual funds and other corporate and
government securities funds as well as from other financial intermediaries such
as brokerage firms and insurance companies.
During 2002, the nation began an extremely slow recovery from the country's
first recession in more than a decade. U.S. Treasury yields continued to fall
during the year with interest rates at forty year lows. Companies have
experienced revenue losses and, as a result, have had to lay off employees.
Corporate scandals undermined the public's confidence in companies and the
equity markets. The nation is faced with major geopolitical uncertainties.
Additionally, the New York City economy is still troubled by the aftermath of
the terrorist attacks on September 11, 2001. Despite the lackluster economy, we
have not experienced any deterioration in our credit quality and related
measures. The national and local real estate markets have remained strong and
continue to support new and existing home sales. While the strength of the real
estate markets has helped us maintain our strong credit quality and purchase
mortgage activity, the decline in interest rates has resulted in an
extraordinary increase in refinance and prepayment activity. As a result, we,
along with other mortgage originators and investors, have been faced with the
increased challenge of redeployment of funds in a lower interest rate
environment. To date, other than the additional challenges resulting from the
low interest rate environment, our banking and lending operations have not been
negatively affected by the national and New York City economies. However, we
cannot guarantee that our operations will not be affected in the future should
current economic conditions continue or worsen.
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SUBSIDIARY ACTIVITIES
We have three direct wholly-owned subsidiaries, Astoria Federal, Astoria Capital
Trust I and AF Insurance Agency, Inc., which are reported on a consolidated
basis.
Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0
million of Capital Securities. See Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data" for further
discussion of the Capital Securities.
AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. provides insurance products
to the customers of Astoria Federal.
At December 31, 2002, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety
of mutual funds through its licensed agents and stock brokerage services through
an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses
and administrative services it provides to AF Agency, Inc. Fees generated by AF
Agency, Inc. totaled $9.0 million for the year ended December 31, 2002, which
represented 8.4% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. The initial premium paid was $250.0 million. An additional
$100.0 million premium was paid in the first quarter of 2002 to purchase
additional BOLI.
Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999, to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, and Starline Development Corp.,
or Starline, which qualify as real estate investment trusts under the Internal
Revenue Code of 1986, as amended. During the year ended December 31, 2002,
Starline was merged with and into APFC. APFC mortgage loans totaled $5.14
billion at December 31, 2002.
Suffco Service Corporation serves as document custodian in connection with
mortgage loans being serviced for FNMA and certain other investors.
201 Old Country Road Inc. was formed as a special purpose subsidiary which
previously held mortgage loans that served as collateral for a funding note
which was repaid in June 2001. Astoria Federal intends to dissolve this
subsidiary.
Infoserve Corporation provides research information services for Astoria Federal
and other financial institutions. The research generally relates to check
clearing and processing as well as check and money order issuances.
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has four subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
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Astoria Federal has five additional subsidiaries, two of which are single
purpose entities that have interests in individual real estate investments,
which individually and in the aggregate are not material to our financial
condition, and two of which have no assets or operations but may be used to
acquire interests in real estate in the future. The fifth such subsidiary serves
as a holding company for one of the other four.
Astoria Federal has three additional subsidiaries which are inactive and which
Astoria Federal intends to dissolve.
PERSONNEL
As of December 31, 2002, we had 1,796 full-time employees and 319 part-time
employees, or 1,956 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
REGULATION AND SUPERVISION
GENERAL
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the Federal Home Loan
Bank, or FHLB, System and its deposit accounts are insured up to applicable
limits by the FDIC under the Savings Association Insurance Fund, or SAIF, except
for those deposits acquired from The Greater New York Savings Bank, or The
Greater, which are insured by the FDIC under the Bank Insurance Fund, or BIF. We
and Astoria Federal must file reports with the OTS concerning our activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other financial institutions. The OTS and the FDIC periodically perform safety
and soundness examinations of Astoria Federal and us and test our compliance
with various regulatory requirements. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the OTS that enforcement action be taken with respect to a
particular federally chartered savings association and, if action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.
This regulation and supervision establish a comprehensive framework to regulate
and control the activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, FDIC or Congress, could have a
material adverse impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
FEDERALLY CHARTERED SAVINGS ASSOCIATION REGULATION
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations,
14
Astoria Federal may invest in mortgage loans secured by residential and
non-residential real estate, commercial and consumer loans, certain types of
debt securities and certain other assets. Astoria Federal may also establish
service corporations that may engage in activities not otherwise permissible for
Astoria Federal, including certain real estate equity investments and securities
and insurance brokerage activities. These investment powers are subject to
various limitations, including (1) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories, (2) a limit of 400% of an association's capital on the aggregate
amount of loans secured by non-residential real estate property, (3) a limit of
20% of an association's assets on commercial loans, with the amount of
commercial loans in excess of 10% of assets being limited to small business
loans, (4) a limit of 35% of an association's assets on the aggregate amount of
consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of
assets on non-conforming loans (loans in excess of the specific limitations of
HOLA), and (6) a limit of the greater of 5% of assets or an association's
capital on certain construction loans made for the purpose of financing what is
or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core capital) ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2002, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 7.23%, leverage capital ratio of 7.23% and total risk-based
capital ratio of 15.44%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS adopted regulations, effective January 1,
1994, that set forth the methodology for calculating an IRR component to be
incorporated into the OTS risk-based capital regulations. On May 10, 2002, the
OTS adopted an amendment to its capital regulations which eliminated the IRR
component of the risk-based capital requirement. Pursuant to the amendment, the
OTS will continue to monitor the IRR of individual institutions through the OTS
requirements for IRR management, the ability of the OTS to impose individual
minimum capital requirements on institutions that exhibit a high degree of IRR,
and the requirements of Thrift Bulletin 13a, which provides guidance on the
management of IRR and the responsibility of boards of directors in that area.
The OTS continues to monitor the IRR of individual institutions through analysis
of the change in net portfolio value, or NPV. NPV is defined as the net present
value of the expected future cash flows of an entity's assets and liabilities
and, therefore, hypothetically represents the value of an institution's net
worth. The OTS has also used this NPV analysis as part of its evaluation of
certain applications or notices submitted by thrift institutions. The OTS,
through its general oversight of the safety and soundness of savings
associations, retains the right to impose minimum capital requirements on
individual institutions to the extent the institution is not in compliance with
certain written guidelines established by the OTS regarding NPV analysis. The
OTS has not imposed any such requirements on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to
15
take other, supervisory actions against undercapitalized institutions, based
upon five categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," the severity of which depends upon the
institution's degree of capitalization. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2002, Astoria Federal was considered
"well capitalized" by the OTS.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2002 for
the assessment for the FICO payments was $2.0 million.
Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are secured by readily-marketable collateral. Astoria
Federal is in compliance with applicable loans to one borrower limitations. At
December 31, 2002, Astoria Federal's largest aggregate amount of loans to one
borrower totaled $32.2 million. All of the loans for the largest borrower were
performing in accordance with their terms and the borrower had no affiliation
with Astoria Federal.
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and
16
related investments, including certain mortgage-backed securities, credit card
loans, student loans, and small business loans) on a monthly basis during at
least 9 out of every 12 months. As of December 31, 2002, Astoria Federal
maintained in excess of 92% of its portfolio assets in qualified thrift
investments and had more than 65% of its portfolio assets in qualified thrift
investments for each of the 12 months ending December 31, 2002. Therefore,
Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Astoria Federal may not pay dividends to us if, after paying those dividends, it
would fail to meet the required minimum levels under risk-based capital
guidelines and the minimum leverage and tangible capital ratio requirements or
the OTS notified Astoria Federal that it was in need of more than normal
supervision. Under the Federal Deposit Insurance Act, or FDIA, an insured
depository institution such as Astoria Federal is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the FDIA). Payment of dividends by Astoria Federal also may be
restricted at any time at the discretion of the appropriate regulator if it
deems the payment to constitute an unsafe and unsound banking practice.
In addition, Astoria Federal may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below the amounts required for the
liquidation accounts which were established as a result of Astoria Federal's
conversion from mutual to stock form of ownership and the acquisitions of
Fidelity New York, FSB, or Fidelity, The Greater and Long Island Bancorp, Inc.,
or LIB. For further discussion on the liquidation accounts, see Note 9 of Notes
to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic
17
assessment is based; the association's supervisory condition, which results in
an additional assessment based on a percentage of the basic assessment for any
savings institution with a composite rating of 3, 4 or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which results in an additional assessment based on a percentage of
the basic assessment for any savings association that managed over $1.00 billion
in trust assets, serviced for others loans aggregating more than $1.00 billion,
or had certain off-balance sheet assets aggregating more than $1.00 billion. For
the year ended December 31, 2002, we paid $2.8 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with its examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans in its service areas; (2) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and businesses; and (3) a service test, to evaluate
the institution's delivery of banking services throughout its CRA assessment
area. The CRA also requires all institutions to make public disclosure of their
CRA ratings. Astoria Federal has been rated as "outstanding" over its last four
CRA examinations. Regulations require that we publicly disclose certain
agreements that are in fulfillment of CRA. We have no such agreements in place
at this time.
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
as well as additional limitations as may be adopted by the Director of the OTS.
These provisions, among other things, prohibit, limit or place restrictions upon
a savings institution extending credit to, or entering into certain transactions
with, its affiliates (which for Astoria Federal would include us and our
non-federally chartered savings association subsidiaries, if any), principal
stockholders, directors and executive officers.
Effective April 1, 2003, the Federal Reserve Board, or FRB, is rescinding its
interpretations of Sections 23A and 23B of the FRA and is replacing these
interpretations with Regulation W. In addition, Regulation W makes various
changes to existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
Under Regulation W all transactions entered into on or before December 12, 2002
that would become subject to Sections 23A and 23B solely because of Regulation W
and all transactions covered by Sections 23A and 23B, the treatment of which
will change solely because of Regulation W, will not become subject to
Regulation W until July 1, 2003. All other covered affiliate transactions become
18
subject to Regulation W on April 1, 2003. The FRB expects each depository
institution that is subject to Sections 23A and 23B to implement policies and
procedures to ensure compliance with Regulation W. We do not expect that the
changes made by Regulation W will have a material adverse effect on our
business.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Astoria
Federal, that is subject to the insider lending restrictions of Section 22(h) of
the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, or Community Development
Act, the OTS, together with the other federal bank regulatory agencies, adopted
guidelines establishing general standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS adopted regulations
pursuant to FDICIA to require a savings association that is given notice by the
OTS that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the OTS. If, after being so notified, a savings
association fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing corrective actions and may issue an order directing other
actions of the types to which a significantly undercapitalized institution is
subject under the "prompt corrective action" provisions of FDICIA. If a savings
association fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties. For further
discussion, see "Regulation and Supervision - Federally Chartered Savings
Association Regulation - Prompt Corrective Regulatory Action."
Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
PRIVACY PROTECTION
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the ability
to "opt-out" of having Astoria Federal share their nonpublic personal
information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines
19
describe the agencies' expectations for the creation, implementation and
maintenance of an information security program, which would include
administrative, technical and physical safeguards appropriate to the size and
complexity of the institution and the nature and scope of its activities. The
standards set forth in the guidelines are intended to insure the security and
confidentiality of customer records and information, protect against any
anticipated threats or hazards to the security or integrity of such records and
protect against unauthorized access to or use of such records or information
that could result in substantial harm or inconvenience to any customer.
FEDERAL HOME LOAN BANK SYSTEM
Astoria Federal is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, 0.3% of total
assets, or 5% of its borrowings from the FHLB-NY, whichever is greater. Astoria
Federal was in compliance with this requirement with an investment in FHLB-NY
stock at December 31, 2002, of $247.6 million. Dividends from the FHLB-NY to
Astoria Federal amounted to $10.7 million for the year ended December 31, 2002,
$17.5 million for the year ended December 31, 2001 and $19.2 million for the
year ended December 31, 2000.
Pursuant to regulations promulgated by the Federal Housing Finance Board, as
required by Gramm-Leach, the FHLB-NY has adopted a capital plan, which is
expected to become effective during the second half of 2003, that will change
the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the
new capital plan, each member of the FHLB-NY will have to maintain a minimum
investment in FHLB-NY capital stock in an amount equal to the sum of (1) the
greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50%
of the dollar amount of any outstanding advances under such member's Advances,
Collateral Pledge and Security Agreement with the FHLB-NY.
FEDERAL RESERVE SYSTEM
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $6.0 million and $42.1 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $42.1 million. The first $6.0 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, President George W. Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT
Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. By way of amendments to the Bank Secrecy
Act, Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among bank regulatory
20
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (1) internal policies, procedures and controls, (2)
specific designation of an anti-money laundering compliance
officer, (3) ongoing employee training programs and (4) an
independent audit function to test the anti-money laundering
program. Interim final rules implementing Section 352 were
issued by the Treasury Department on April 29, 2002. Such
rules state that a financial institution is in compliance with
Section 352 if it implements and maintains an anti-money
laundering program that complies with the anti-money
laundering regulations of its federal functional regulator.
Astoria Federal is in compliance with the OTS's anti-money
laundering regulations.
- Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
On July 23, 2002, the OTS and the other federal bank
regulators jointly issued proposed rules to implement Section
326. The proposed rules require financial institutions to
establish a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts. This identifying information would be essentially
the same information currently obtained by most financial
institutions for individual customers. A financial
institution's program would also have to contain procedures to
verify the identity of customers within a reasonable period of
time, generally through the use of the same forms of identity
verification currently in use, such as driver's licenses,
passports, credit reports and other similar means.
- Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish
appropriate, specific and, where necessary, enhanced due
diligence policies, procedures and controls designed to detect
and report money laundering. Interim rules under Section 312
were issued by the Treasury Department on July 23, 2002. The
interim rules state that a due diligence program is reasonable
if it comports with existing best practices standards for
banks that maintain correspondent accounts for foreign banks
and evidences good faith efforts to incorporate due diligence
procedures for accounts posing increased risk of money
laundering. In addition, an enhanced due diligence program is
reasonable if it comports with best practices standards and
focuses enhanced due diligence measures on those correspondent
accounts posing a particularly high risk of money laundering
based on the bank's overall assessment of the risk posed by
the foreign correspondent bank. Finally, a private banking due
diligence program must be reasonably designed to detect and
report money laundering and the existence of proceeds of
foreign corruption. Such a program is reasonable if it focuses
on those private banking accounts that present a high risk of
money laundering.
- Financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a
physical presence in any country), and are subject to certain
recordkeeping obligations with respect to correspondent
accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on FRA
and Bank Merger Act applications.
Compliance with the regulations adopted under the USA PATRIOT Act is not
expected to have a material adverse impact on our financial condition or results
of operations.
21
HOLDING COMPANY REGULATION
We are a unitary savings and loan association holding company within the meaning
of the HOLA. As such, we are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over us and our savings association
subsidiary. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan association holding
companies that are "grandfathered," i.e., unitary savings and loan association
holding companies in existence or with applications filed with the OTS on or
before May 4, 1999, such as us, retain their authority under the prior law. All
other unitary savings and loan association holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies
from acquiring grandfathered unitary savings and loan association holding
companies.
The HOLA prohibits a savings and loan association holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
FEDERAL SECURITIES LAWS
We are subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Exchange Act.
DELAWARE CORPORATION LAW
We are incorporated under the laws of the State of Delaware. Thus, we are
subject to regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
FEDERAL TAXATION
General
We report our income on a calendar year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations.
Corporate Alternative Minimum Tax
In addition to the regular income tax, corporations (including savings and loan
associations) generally are subject to an alternative minimum tax, or AMT, in an
amount equal to 20% of alternative minimum taxable income to the extent the AMT
exceeds the corporation's regular tax. The AMT is available as a credit against
future regular income tax. We do not expect to be subject to the AMT.
Tax Bad Debt Reserves
Effective 1996, federal tax legislation modified the methods by which a thrift
computes its bad debt deduction. As a result, Astoria Federal is required to
claim a deduction equal to its actual loss
22
experience, and the "reserve method" is no longer available. Any cumulative
reserve additions (i.e., bad debt deductions) in excess of actual loss
experience for tax years 1988 through 1995 are subject to recapture over a six
year period. Generally, reserve balances as of December 31, 1987 will only be
subject to recapture upon distribution of such reserves to shareholders. For a
further discussion of bad debt reserves see "Distributions."
Distributions
To the extent that Astoria Federal makes "nondividend distributions" to
shareholders, such distributions will be considered to result in distributions
from Astoria Federal's "base year reserve," (i.e., its reserve as of December
31, 1987), to the extent thereof, and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in Astoria Federal's taxable income. Nondividend distributions include
distributions in excess of Astoria Federal's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Astoria Federal's current or accumulated earnings
and profits will not constitute nondividend distributions and, therefore, will
not be included in Astoria Federal's taxable income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 35% federal corporate income tax rate.
Dividends Received Deduction and Other Matters
We may exclude from our income 100% of dividends received from Astoria Federal
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which we will not file a consolidated tax
return, except that if we own more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
STATE AND LOCAL TAXATION
New York State Taxation
New York State imposes an annual franchise tax on banking corporations, based on
net income allocable to New York State, at a rate of 8.0%, (7.5% effective for
taxable years beginning after July 1, 2002). If, however, the application of an
alternative minimum tax (based on taxable assets allocated to New York,
"alternative" net income, or a flat minimum fee) results in a greater tax, an
alternative minimum tax will be imposed. In addition, New York State imposes a
tax surcharge of 17.0% of the New York State franchise tax, calculated using an
annual franchise tax rate of 9.0% (which represents the 2000 annual franchise
tax rate), allocable to business activities carried on in the Metropolitan
Commuter Transportation District. These taxes apply to us, Astoria Federal and
certain of Astoria Federal's subsidiaries. Certain subsidiaries of a banking
corporation may be subject to a general business corporation tax in lieu of the
tax on banking corporations. The rules regarding the determination of income
allocated to New York and alternative minimum taxes differ for these
subsidiaries.
Bad Debt Deduction
New York State passed legislation that incorporated the former provisions of
Internal Revenue Code, or IRC, Section 593 into New York State tax law. The
impact of this legislation enabled Astoria Federal to defer the recapture of the
New York State tax bad debt reserves that would have otherwise occurred as a
result of the federal amendment to IRC 593. The legislation also enabled Astoria
Federal to continue to utilize the reserve method for computing its bad debt
deduction. Astoria Federal must meet
23
certain definitional tests, primarily relating to its assets and the nature of
its business to be a qualifying thrift and would then be permitted to establish
a reserve for bad debts and to make annual additions thereto, which additions
may, within specified formula limits, be deducted in arriving at its taxable
income. Astoria Federal will be a qualifying thrift if, among other
requirements, at least 60% of its assets are assets described in Section
1453(h)(1) of the New York State tax law, or the 60% Test.
Astoria Federal presently satisfies the 60% Test. Although there can be no
assurance that Astoria Federal will satisfy the 60% Test in the future, we
believe that this level of qualifying assets can be maintained by Astoria
Federal. Astoria Federal's deduction for additions to its bad debt reserve with
respect to qualifying loans may be computed using the experience method or a
percentage equal to 32% of Astoria Federal's taxable income, computed with
certain modifications, without regard to Astoria Federal's actual loss
experience, and reduced by the amount of any addition permitted to the reserve
for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria
Federal's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on its actual loss experience.
Under the experience method, the amount of a reasonable addition, in general,
equals the amount necessary to increase the balance of the bad debt reserve at
the close of the taxable year to the greater of (1) the amount that bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years
bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the base year (assuming
that the loans outstanding have not declined since then). The "base year" for
these purposes is the last taxable year beginning before the NYS Percentage of
Taxable Income Method bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the addition to the
reserve for qualifying real property loans calculated under the NYS Percentage
of Taxable Income Method. Each year Astoria Federal reviews the most favorable
way to calculate the deduction attributable to an addition to the bad debt
reserve.
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS Percentage of Taxable Income Method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which 12% of the amount
that the total deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeded the sum of the qualifying
thrift's surplus, undivided profits and reserves at the beginning of such year.
New York City Taxation
Astoria Federal is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. New York City has enacted
legislation regarding the use and treatment of tax bad debt reserves that is
substantially similar to the New York State legislation described above. A
significant portion of Astoria Federal's entire net income for New York City
purposes is allocated outside the jurisdiction which has the effect of
significantly reducing the New York City taxable income of Astoria Federal.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, we are exempt from
Delaware corporate income tax but are required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
24
STATISTICAL DATA
The detailed statistical data which follows is presented in accordance with
Industry Guide 3, prescribed by the SEC. This data should be read in conjunction
with the description of our business appearing earlier in this Item 1, Item 7,
"MD&A" and Item 8, "Financial Statements and Supplementary Data."
Information regarding distribution of assets, liabilities and stockholders'
equity; interest rates and interest differential appears under Item 7, "MD&A."
Pages 43 and 44 present the distribution of assets, liabilities and
stockholders' equity under the caption "Analysis of Net Interest Income," and
the interest differential under the caption "Rate/Volume Analysis."
LOAN PORTFOLIO
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF OF OF
(Dollars in Thousands) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS (GROSS):
One-to-four family $ 9,209,360 76.86% $ 10,105,063 83.59% $ 9,850,390 86.79%
Multi-family 1,599,985 13.35 1,094,312 9.05 801,917 7.07
Commercial real estate 744,623 6.21 598,334 4.95 480,211 4.23
Construction 56,475 0.47 50,739 0.42 34,599 0.30
- -----------------------------------------------------------------------------------------------------------------------
Total mortgage loans 11,610,443 96.89 11,848,448 98.01 11,167,117 98.39
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (GROSS):
Home equity 323,494 2.70 189,259 1.57 133,748 1.18
Commercial 22,569 0.19 18,124 0.15 8,822 0.08
Line of Credit, Overdraft 15,475 0.13 18,046 0.15 20,603 0.18
Passbook 7,502 0.06 9,012 0.07 8,710 0.08
Other 3,598 0.03 5,753 0.05 10,673 0.09
- -----------------------------------------------------------------------------------------------------------------------
Total consumer and other loans 372,638 3.11 240,194 1.99 182,556 1.61
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 11,983,081 100.00% 12,088,642 100.00% 11,349,673 100.00%
Net unamortized premiums
and deferred loans costs 76,280 78,619 72,622
Allowance for loan losses (83,546) (82,285) (79,931)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $ 11,975,815 $ 12,084,976 $ 11,342,364
- -----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
--------------------------------------------------
1999 1998
--------------------------------------------------
PERCENT PERCENT
OF OF
(Dollars in Thousands) AMOUNT TOTAL AMOUNT TOTAL
- ------------------------------------------------------------------------------------------
MORTGAGE LOANS (GROSS):
One-to-four family $ 9,006,894 88.07% $ 7,646,641 87.12%
Multi-family 615,438 6.02 452,854 5.16
Commercial real estate 398,198 3.89 414,565 4.72
Construction 34,837 0.34 37,822 0.43
- ------------------------------------------------------------------------------------------
Total mortgage loans 10,055,367 98.32 8,551,882 97.43
- ------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS (GROSS):
Home equity 116,726 1.14 142,437 1.63
Commercial 4,531 0.04 5,573 0.06
Line of Credit, Overdraft 23,186 0.23 24,846 0.28
Passbook 7,481 0.07 6,653 0.08
Other 20,200 0.20 45,750 0.52
- ------------------------------------------------------------------------------------------
Total consumer and other loans 172,124 1.68 225,259 2.57
- ------------------------------------------------------------------------------------------
TOTAL LOANS 10,227,491 100.00% 8,777,141 100.00%
Net unamortized premiums
and deferred loans costs 58,803 32,463
Allowance for loan losses (76,578) (74,403)
- ------------------------------------------------------------------------------------------
TOTAL LOANS, NET $ 10,209,716 $ 8,735,201
- ------------------------------------------------------------------------------------------
25
Loan Maturity, Repricing and Activity
The following table shows the maturities of our loans receivable at December 31,
2002 and does not reflect the effect of prepayments or scheduled principal
amortization.
AT DECEMBER 31, 2002
---------------------------------------------------------------------------------------------
ONE-TO CONSUMER
-FOUR MULTI- COMMERCIAL AND TOTAL LOANS
(In Thousands) FAMILY FAMILY REAL ESTATE CONSTRUCTION OTHER RECEIVABLE
- -------------------------------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 13,466 $ 5,403 $ 20,272 $ 31,457 $ 28,065 $ 98,663
After one year:
One to three years 13,398 7,141 22,688 25,018 12,904 81,149
Three to five years 37,120 29,742 25,798 - 11,042 103,702
Five to ten years 504,738 616,515 368,563 - 13,352 1,503,168
Ten to twenty years 1,060,245 762,498 299,750 - 36,903 2,159,396
Over twenty years 7,580,393 178,686 7,552 - 270,372 8,037,003
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Total due after one year 9,195,894 1,594,582 724,351 25,018 344,573 11,884,418
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Total amount due $ 9,209,360 $ 1,599,985 $ 744,623 $ 56,475 $ 372,638 11,983,081
Net unamortized premiums and deferred loan costs 76,280
Allowance for loan losses (83,546)
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Loans receivable, net $ 11,975,815
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The following table sets forth at December 31, 2002, the dollar amount of our
loans receivable due after December 31, 2003, and whether such loans have fixed
interest rates or adjustable interest rates. Our hybrid ARM loans are classified
as adjustable rate loans.
DUE AFTER DECEMBER 31, 2003
--------------------------------------------------
(In Thousands) FIXED ADJUSTABLE TOTAL
- ------------------------------------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 1,428,082 $ 7,767,812 $ 9,195,894
Multi-family 402,707 1,191,875 1,594,582
Commercial real estate 142,379 581,972 724,351
Construction - 25,018 25,018
Consumer and other loans 29,482 315,091 344,573
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Total $ 2,002,650 $ 9,881,768 $ 11,884,418
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26
The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
(In Thousands) 2002 2001 2000
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MORTGAGE LOANS (GROSS) (1):
At beginning of year $ 11,889,940 $ 11,180,662 $ 10,066,743
Mortgage loans originated:
One-to-four family 2,992,746 2,510,227 1,533,299
Multi-family 750,196 413,518 204,948
Commercial real estate 259,986 178,246 109,533
Construction 50,942 29,187 43,449
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Total mortgage loans originated 4,053,870 3,131,178 1,891,229
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Purchases of mortgage loans (2) 1,534,999 1,427,099 836,782
Sales of mortgage loans (463,984) (379,929) (125,086)
Transfer of loans to REO (1,900) (5,420) (8,146)
Principal repayments (5,341,016) (3,462,677) (1,480,354)
Net loans charged off (342) (973) (506)
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At end of year $ 11,671,567 $ 11,889,940 $ 11,180,662
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CONSUMER AND OTHER LOANS (GROSS) (3):
At beginning of year $ 242,092 $ 184,710 $ 174,904
Consumer and other loans originated 279,905 178,682 118,286
Sales of consumer and other loans