Astoria Financial 10-Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
OR
o	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 001-11967

ASTORIA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware 11-3170868

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
One Astoria Federal Plaza, Lake Success, New York	11042-1085
(Address of principal executive offices)	(Zip Code)
(516) 327-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESx   NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer  o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  o NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Classes of Common Stock	Number of Shares Outstanding, October 31, 2006
.01 Par Value	99,110,578

	PART I — FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (Unaudited):
	Consolidated Statements of Financial Condition at September 30, 2006 and December 31, 2005	2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and September 30, 2005	3
	Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2006	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and September 30, 2005	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	45
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		52

1

ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition

(In Thousands, Except Share Data)	(Unaudited) At September 30, 2006				At December 31, 2005
ASSETS:
Cash and due from banks		$	152,735			$	169,234
Repurchase agreements			54,660				182,803
Available-for-sale securities:
Encumbered			1,361,492				1,598,320
Unencumbered			255,969				243,031
			1,617,461				1,841,351
Held-to-maturity securities, fair value of $3,878,082 and $4,627,013, respectively:
Encumbered			3,718,864				4,500,867
Unencumbered			262,198				230,086
			3,981,062				4,730,953
Federal Home Loan Bank of New York stock, at cost			139,349				145,247
Loans held-for-sale, net			14,629				23,651
Loans receivable:
Mortgage loans, net			14,286,640				13,879,804
Consumer and other loans, net			459,245				512,489
			14,745,885				14,392,293
Allowance for loan losses			(79,930	)			(81,159	)
Loans receivable, net			14,665,955				14,311,134
Mortgage servicing rights, net			16,167				16,502
Accrued interest receivable			80,341				80,318
Premises and equipment, net			146,077				151,494
Goodwill			185,151				185,151
Bank owned life insurance			381,886				382,613
Other assets			163,655				159,820
Total assets		$	21,599,128			$	22,380,271
LIABILITIES:
Deposits:
Savings		$	2,209,535			$	2,510,897
Money market			478,932				648,730
NOW and demand deposit			1,466,725				1,569,859
Liquid certificates of deposit			1,402,562				619,784
Certificates of deposit			7,619,252				7,461,185
Total deposits			13,177,006				12,810,455
Reverse repurchase agreements			4,780,000				5,780,000
Federal Home Loan Bank of New York advances			1,628,527				1,724,000
Other borrowings, net			415,832				433,526
Mortgage escrow funds			165,816				124,929
Accrued expenses and other liabilities			170,768				157,134
Total liabilities			20,337,949				21,030,044
STOCKHOLDERS’ EQUITY:
Preferred stock, $1.00 par value; (5,000,000 shares authorized; none issued and outstanding)			—				—
Common stock, $.01 par value; (200,000,000 shares authorized; 166,494,888 shares issued; and 99,326,924 and 104,967,280 shares outstanding, respectively)			1,665				1,665
Additional paid-in capital			837,567				824,102
Retained earnings			1,839,443				1,774,924
Treasury stock (67,167,964 and 61,527,608 shares, at cost, respectively)			(1,350,189	)			(1,171,604	)
Accumulated other comprehensive loss			(44,421	)			(49,536	)
Unallocated common stock held by ESOP (6,246,454 and 6,465,273 shares, respectively)			(22,886	)			(23,688	)
Deferred compensation			—				(5,636	)
Total stockholders’ equity			1,261,179				1,350,227
Total liabilities and stockholders’ equity		$	21,599,128			$	22,380,271

See accompanying Notes to Consolidated Financial Statements.

2

ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In Thousands, Except Share Data)	2006		2005		2006			2005
Interest income:
Mortgage loans:
One-to-four family	$	127,735	$	115,118	$	378,226		$	339,598
Multi-family, commercial real estate and construction		65,933		60,951		192,178			177,447
Consumer and other loans		9,099		8,199		26,918			22,455
Mortgage-backed and other securities		64,946		82,072		205,373			264,520
Repurchase agreements		1,266		1,056		5,205			3,866
Federal Home Loan Bank of New York stock		2,049		1,577		5,535			4,400
Total interest income		271,028		268,973		813,435			812,286
Interest expense:
Deposits		102,103		71,903		275,357			203,928
Borrowings		78,258		78,534		234,549			243,262
Total interest expense		180,361		150,437		509,906			447,190
Net interest income		90,667		118,536		303,529			365,096
Provision for loan losses		—		—		—			—
Net interest income after provision for loan losses		90,667		118,536		303,529			365,096
Non-interest income:
Customer service fees		16,170		17,798		49,208			49,049
Other loan fees		983		1,397		2,755			3,643
Mortgage banking income, net		181		3,703		3,810			5,067
Income from bank owned life insurance		3,957		4,070		12,063			12,435
Other		1,573		1,404		(348	)		5,446
Total non-interest income		22,864		28,372		67,488			75,640
Non-interest expense:
General and administrative:
Compensation and benefits		27,584		31,060		86,423			91,817
Occupancy, equipment and systems		16,104		15,978		49,209			47,790
Federal deposit insurance premiums		414		432		1,263			1,327
Advertising		1,839		1,765		5,668			7,540
Other		7,374		8,680		22,280			27,516
Total non-interest expense		53,315		57,915		164,843			175,990
Income before income tax expense		60,216		88,993		206,174			264,746
Income tax expense		19,122		29,814		68,383			88,692
Net income	$	41,094	$	59,179	$	137,791		$	176,054
Basic earnings per common share	$	0.44	$	0.59	$	1.44		$	1.72
Diluted earnings per common share	$	0.43	$	0.57	$	1.40		$	1.69
Dividends per common share	$	0.24	$	0.20	$	0.72		$	0.60
Basic weighted average common shares		93,944,367		101,058,022		95,563,670			102,149,797
Diluted weighted average common and common equivalent shares		96,489,271		103,088,233		98,137,080			104,069,045

See accompanying Notes to Consolidated Financial Statements.

3

ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
For the Nine Months Ended September 30, 2006

(In Thousands, Except Share Data)	Total			Common Stock		Additional Paid-in Capital		RetainedEarnings			Treasury Stock			Accumulated Other Comprehensive Loss			Unallocated Common Stock Held by ESOP			Deferred Compensation
Balance at December 31, 2005	$	1,350,227		$	1,665	$	824,102	$	1,774,924		$	(1,171,604	)	$	(49,536	)	$	(23,688	)	$	(5,636	)
Reclassification of deferred compensation upon adoption of SFAS No. 123(R)		—			—		—		(1,890	)		(3,746	)		—			—			5,636
Comprehensive income:
Net income		137,791			—		—		137,791			—			—			—			—
Other comprehensive income, net of tax:
Net unrealized gain on securities		4,971			—		—		—			—			4,971			—			—
Reclassification of loss on cash flow hedge		144			—		—		—			—			144			—			—
																��
Comprehensive income		142,906
Common stock repurchased (6,515,000 shares)		(195,661	)		—		—		—			(195,661	)		—			—			—
Dividends on common stock ($0.72 per share)		(68,948	)		—		—		(68,948	)		—			—			—			—
Exercise of stock options and related tax benefit (1,071,472 shares issued)		23,026			—		4,638		(2,434	)		20,822			—			—			—
Stock-based compensation and allocation of ESOP stock		9,629			—		8,827		—			—			—			802			—
Balance at September 30, 2006	$	1,261,179		$	1,665	$	837,567	$	1,839,443		$	(1,350,189	)	$	(44,421	)	$	(22,886	)	$	—

See accompanying Notes to Consolidated Financial Statements.

4

ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months Ended September 30,
(In Thousands)	2006			2005
Cash flows from operating activities:
Net income	$	137,791		$	176,054
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization on mortgage loans and mortgage-backed securities		10,644			13,336
Net amortization on consumer and other loans, other securities and borrowings		3,325			3,550
Net provision for real estate losses		121			56
Depreciation and amortization		10,426			10,488
Net gain on sales of loans		(1,683	)		(2,750	)
Originations of loans held-for-sale		(182,174	)		(286,632	)
Proceeds from sales and principal repayments of loans held-for-sale		192,922			285,064
Stock-based compensation and allocation of ESOP stock		9,629			7,774
Increase in accrued interest receivable		(23	)		(1,107	)
Mortgage servicing rights amortization, valuation allowance adjustments and capitalized amounts, net		335			(415	)
Insurance proceeds received, net of income from bank owned life insurance		727			(3,882	)
Increase in other assets		(8,730	)		(5,494	)
Increase in accrued expenses and other liabilities		15,396			46,199
Net cash provided by operating activities		188,706			242,241
Cash flows from investing activities:
Originations of loans receivable		(2,140,222	)		(2,594,658	)
Loan purchases through third parties		(266,085	)		(642,358	)
Principal payments on loans receivable		2,026,354			2,375,145
Proceeds from sales of non-performing loans		10,148			—
Purchases of securities held-to-maturity		—			(177,599	)
Purchases of securities available-for-sale		(25	)		(25	)
Principal payments on securities held-to-maturity		750,831			1,368,629
Principal payments on securities available-for-sale		233,158			415,953
Net redemptions of FHLB-NY stock		5,898			40,555
Proceeds from sales of real estate owned, net		1,222			1,263
Purchases of premises and equipment, net of proceeds from sales		(5,009	)		(4,564	)
Net cash provided by investing activities		616,270			782,341
Cash flows from financing activities:
Net increase in deposits		366,551			482,393
Net decrease in borrowings with original terms of three months or less		(291,473	)		(1,303,000	)
Proceeds from borrowings with original terms greater than three months		550,000			700,000
Repayments of borrowings with original terms greater than three months		(1,374,000	)		(770,000	)
Net increase in mortgage escrow funds		40,887			42,353
Common stock repurchased		(195,661	)		(110,030	)
Cash dividends paid to stockholders		(68,948	)		(61,309	)
Cash received for stock options exercised		18,388			10,572
Excess tax benefits from share-based payment arrangements		4,638			—
Net cash used in financing activities		(949,618	)		(1,009,021	)
Net (decrease) increase in cash and cash equivalents		(144,642	)		15,561
Cash and cash equivalents at beginning of period		352,037			406,387
Cash and cash equivalents at end of period	$	207,395		$	421,948
Supplemental disclosures:
Cash paid during the period:
Interest	$	503,714		$	448,222
Income taxes	$	65,165		$	75,262
Additions to real estate owned	$	702		$	1,695

See accompanying Notes to Consolidated Financial Statements.

5

ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The accompanying consolidated financial statements include the accounts of Astoria Financial Corporation and its wholly-owned subsidiaries: Astoria Federal Savings and Loan Association and its subsidiaries, referred to as Astoria Federal, and AF Insurance Agency, Inc. As used in this quarterly report, “we,” “us” and “our” refer to Astoria Financial Corporation and its consolidated subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

In addition to Astoria Federal and AF Insurance Agency, Inc., we have another subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with Financial Accounting Standards Board, or FASB, revised interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, and $3.9 million of common securities which are 100% owned by Astoria Financial Corporation, and using the proceeds to acquire Junior Subordinated Debentures issued by Astoria Financial Corporation. The Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have the same prepayment provisions as the Junior Subordinated Debentures. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities. See Note 9 of Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of our 2005 Annual Report on Form 10-K for restrictions on our subsidiaries’ ability to pay dividends to us.

In our opinion, the accompanying consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial condition as of September 30, 2006 and December 31, 2005, our results of operations for the three and nine months ended September 30, 2006 and 2005, changes in our stockholders’ equity for the nine months ended September 30, 2006 and our cash flows for the nine months ended September 30, 2006 and 2005. In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities for the consolidated statements of financial condition as of September 30, 2006 and December 31, 2005, and amounts of revenues and expenses in the consolidated statements of income for the three and nine months ended September 30, 2006 and 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC.

These consolidated financial statements should be read in conjunction with our December 31, 2005 audited consolidated financial statements and related notes included in our 2005 Annual Report on Form 10-K.

6

2. Earnings Per Share, or EPS

The following table is a reconciliation of basic and diluted EPS.

	For the Three Months Ended September 30,
	2006				2005
(In Thousands, Except Per Share Data)	Basic EPS		Diluted EPS (1)		Basic EPS		Diluted EPS
Net income	$	41,094	$	41,094	$	59,179	$	59,179
Total weighted average basic common shares outstanding		93,944		93,944		101,058		101,058
Effect of dilutive securities:
Options		—		2,500		—		2,030
Restricted stock		—		45		—		—
Total weighted average basic and diluted common shares outstanding		93,944		96,489		101,058		103,088
Net earnings per common share	$	0.44	$	0.43	$	0.59	$	0.57

	For the Nine Months Ended September 30,
	2006				2005
(In Thousands, Except Per Share Data)	Basic EPS		Diluted EPS (1)		Basic EPS		Diluted EPS
Net income	$	137,791	$	137,791	$	176,054	$	176,054
Total weighted average basic common shares outstanding		95,564		95,564		102,150		102,150
Effect of dilutive securities:
Options		—		2,544		—		1,919
Restricted stock		—		29		—		—
Total weighted average basic and diluted common shares outstanding		95,564		98,137		102,150		104,069
Net earnings per common share	$	1.44	$	1.40	$	1.72	$	1.69

(1)	Options to purchase 1,224,100 shares of common stock were outstanding as of September 30, 2006, but were not included in the computation of diluted EPS because the options were anti-dilutive for the three and nine months ended September 30, 2006.
3. Stock Incentive Plans

Effective January 1, 2006, we adopted revised Statement of Financial Accounting Standards, or SFAS, No. 123, “Share-Based Payment,” or SFAS No. 123(R), which requires us to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS No. 123(R) applies to all awards granted after January 1, 2006 and to awards modified, repurchased or cancelled after that date. Additionally, beginning January 1, 2006, we recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for pro forma disclosures.

Prior to January 1, 2006, we applied the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our stock incentive plans. Accordingly, no stock-based compensation cost was reflected in net income for stock option grants, as all options granted under our stock incentive plans had an exercise price equal to the market value of the underlying common stock on the date of grant. However, we

7

recognized stock-based compensation cost during the 2005 fourth quarter related to restricted stock grants and the acceleration of vesting of certain stock option grants. The purpose of the acceleration of vesting of certain stock option grants was to eliminate compensation expense associated with these options in future periods upon our adoption of SFAS No. 123(R). The accelerated vesting eliminated pre-tax compensation expense of approximately $10.4 million, which would have been recognized in future periods, including approximately $1.7 million for the three months ended September 30, 2006, approximately $5.0 million for the nine months ended September 30, 2006 and approximately $6.7 million for the year ending December 31, 2006. See Note 16 of Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of our 2005 Annual Report on Form 10-K for a further discussion of the acceleration of vesting of certain stock option grants.

As a result of our adoption of SFAS No. 123(R), our net income was reduced by stock-based compensation expense recognized for our December 2005 option grants to employees and our January 2006 option grants to directors totaling $271,000, net of taxes of $196,000, for the three months ended September 30, 2006, and $974,000, net of taxes of $706,000, for the nine months ended September 30, 2006. Additional compensation expense to be recognized with respect to our December 2005 option grants will further reduce our net income over the remainder of 2006 by approximately $271,000. Additional equity grants that may be made in 2006 will also result in compensation expense.

Stock-based compensation expense recognized for stock options and restricted stock for the three months ended September 30, 2006 totaled $534,000, net of taxes of $387,000, and totaled $1.8 million, net of taxes of $1.3 million, for the nine months ended September 30, 2006. The following table illustrates the effect on net income and EPS if we had applied the fair value recognition provisions of SFAS No. 123(R) to stock-based compensation for the three and nine months ended September 30, 2005.

(In Thousands, Except Per Share Data)	For the Three Months Ended September 30, 2005			For the Nine Months Ended September 30, 2005
Net income:
As reported		$	59,179		$	176,054
Add: Total stock-based compensation expense included in net income as reported			—			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax benefit of $845 and $2,744, respectively			1,501			4,811
Pro forma		$	57,678		$	171,243
Basic earnings per common share:
As reported		$	0.59		$	1.72
Pro forma		$	0.57		$	1.68
Diluted earnings per common share:
As reported		$	0.57		$	1.69
Pro forma		$	0.56		$	1.64

The following disclosures, which are generally not required in interim period financial statements, are included herein as a result of our adoption of SFAS No. 123(R) in the first quarter of 2006.

In 2005, we adopted the 2005 Re-designated, Amended and Restated Stock Incentive Plan for Officers and Employees of Astoria Financial Corporation, or the 2005 Employee Stock Incentive Plan. In 1999, we adopted the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation, or the 1999 Directors’ Option Plan. As a result of the adoption of these plans, all

8

previous employee and director option plans were frozen and no further option grants were made pursuant to those plans. The number of shares reserved for option, restricted stock and/or stock appreciation right grants was 5,250,000 under the 2005 Employee Stock Incentive Plan. The number of shares reserved for option grants was 525,000 under the 1999 Directors’ Option Plan. At September 30, 2006, remaining shares available for issuance of future grants totaled 3,829,072 under the 2005 Employee Stock Incentive Plan and 69,000 under the 1999 Directors’ Option Plan. In general, option grants occur annually in December for employees upon approval by our board of directors on the date of their regular monthly meeting and in January for outside directors.

Options and restricted stock granted under the 2005 Employee Stock Incentive Plan vest approximately three years after the grant date, with a maximum term of seven years for option grants. Options previously granted to employees under plans other than the 2005 Employee Stock Incentive Plan have a maximum term of ten years. Under plans involving grants of options or restricted stock to employees, in the event the grantee terminates his/her employment due to death, disability, retirement or in the event we experience a change in control, as defined and specified in such plans, all options and restricted stock granted immediately vest. Under plans involving grants to outside directors, all options granted have a maximum term of ten years and are exercisable immediately on their grant date. Options granted under all plans were granted in tandem with limited stock appreciation rights exercisable only in the event we experience a change in control, as defined by the plans.

Prior to our adoption of SFAS No. 123(R), we “recognized” compensation cost for purposes of the pro forma disclosures required by SFAS No. 123 over the stated vesting period regardless of whether or not an employee was retirement-eligible. As a result of our adoption of SFAS No. 123(R), the fair value of future awards of equity instruments to retirement-eligible employees will be recognized as compensation cost on the grant date, as the vesting conditions are considered non-substantive because upon retirement, the award vests immediately regardless of the award’s stated vesting period. We recognized pre-tax stock-based compensation cost related to options and restricted stock awards granted to retirement-eligible employees prior to our adoption of SFAS 123(R) totaling $271,000 for the three months ended September 30, 2006 and $812,000 for the nine months ended September 30, 2006. At September 30, 2006, compensation cost of approximately $2.5 million will be recognized over the remaining stated vesting period for such awards granted to retirement-eligible employees.

In December 2005, 196,828 shares of restricted stock were granted to select officers with a fair value of $29.02 per share on the grant date. Compensation cost related to restricted stock grants is recognized on a straight-line basis over the vesting period. We recognized pre-tax compensation expense related to restricted stock grants of $454,000 for the three months ended September 30, 2006 and $1.4 million for the nine months ended September 30, 2006. There was no other restricted stock activity during the nine months ended September 30, 2006 and 2005.

9

Option activity in our stock incentive plans for the nine months ended September 30, 2006 is summarized as follows:

	Number of Options			Weighted Average Exercise Price
Outstanding at January 1, 2006		11,128,700			$20.50
Granted		54,000			29.79
Exercised		(1,071,472)			(17.16)
			��
Outstanding at September 30, 2006		10,111,228			20.90
Options exercisable at September 30, 2006		8,887,128			19.78

At September 30, 2006, there were 10,111,228 options outstanding, with a weighted average exercise price of $20.90 per share, a weighted average remaining contractual term of approximately 5.8 years and an aggregate intrinsic value of approximately $100.3 million. Of the total options outstanding, 8,887,128 options were exercisable, with a weighted average exercise price of $19.78 per share, a weighted average remaining contractual term of approximately 5.8 years and an aggregate intrinsic value of approximately $98.1 million. At September 30, 2006, pre-tax compensation cost related to all nonvested awards of options and restricted stock not yet recognized totaled $8.7 million and will be recognized over a weighted average period of approximately 2.3 years.

During the three months ended September 30, 2006, 91,489 options were exercised with a total intrinsic value of $936,000 and during the nine months ended September 30, 2006, 1,071,472 options were exercised with a total intrinsic value of $13.7 million. During the three months ended September 30, 2005, 193,654 options were exercised with a total intrinsic value of $2.3 million and during the nine months ended September 30, 2005, 707,681 options were exercised with a total intrinsic value of $8.3 million. Shares issued upon the exercise of stock options are issued from treasury stock. We have an adequate number of treasury shares available for future stock option exercises.

In January 2006, 54,000 options were granted to outside directors with a grant date fair value of $5.16 per share and in January 2005, 60,000 options were granted to outside directors with a grant date fair value of $5.36 per share. There were no other options granted during the nine months ended September 30, 2006 and 2005. The per share fair value of option grants was estimated on the grant dates using the Black-Scholes option pricing model with the following assumptions:

	For the Nine Months Ended September 30,
	2006		2005
Expected dividend yield	3.22	%	2.54	%
Expected stock price volatility	20.94		24.66
Risk-free interest rate based upon equivalent-term U.S. Treasury rates	4.17		3.66
Expected option term	5.00	years	5.00	years

The per share fair value of option grants was calculated using the above assumptions, based on our analyses of our historical experience and our judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.

10

4. Pension Plans and Other Postretirement Benefits

The following tables set forth information regarding the components of net periodic cost for our defined benefit pension plans and other postretirement benefit plan.

	Pension Benefits						Other Postretirement Benefits
	For the Three Months Ended September 30,						For the Three Months Ended September 30,
(In Thousands)	2006			2005			2006		2005
Service cost	$	864		$	821		$	150	$	137
Interest cost		2,546			2,460			283		261
Expected return on plan assets		(3,039	)		(2,932	)		—		—
Amortization of prior service cost		92			126			42		10
Recognized net actuarial loss		796			644			—		—
Net periodic cost	$	1,259		$	1,119		$	475	$	408

	Pension Benefits						Other Postretirement Benefits
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(In Thousands)	2006			2005			2006		2005
Service cost	$	2,593		$	2,529		$	450	$	411
Interest cost		7,638			7,562			849		783
Expected return on plan assets		(9,117	)		(9,038	)		—		—
Amortization of prior service cost		276			297			126		30
Recognized net actuarial loss		2,390			1,993			—		—
Net periodic cost	$	3,780		$	3,343		$	1,425	$	1,224

5. Goodwill Litigation

We are a party to two actions pending in the U.S. Court of Federal Claims against the United States, involving assisted acquisitions made in the early 1980’s and supervisory goodwill accounting utilized in connection therewith, which could result in a gain.

The trial in one of the actions, which is entitledThe Long Island Savings Bank, FSB et al vs. The United States, or the LISB goodwill litigation, concluded on July 7, 2005 and the Court, on September 15, 2005, rendered a decision awarding us $435.8 million in damages from the U.S. government. On December 14, 2005, the United States filed an appeal of such decision. The appeal remains pending before the United States Court of Appeals for the Federal Circuit. Oral arguments for the appeal were completed in October 2006. No assurance can be given as to the timing, content or ultimate outcome of any such appeal. No portion of the $435.8 million award has been recognized in our consolidated financial statements. Legal expense has been recognized as it was incurred.

The other action is entitledAstoria Federal Savings and Loan Association vs. United States. The Court, on August 22, 2006, denied the U.S. government’s motion for summary judgment related to damages. The Court has scheduled the trial of this action to commence on April 19, 2007.

The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation.

11

6. Impact of Accounting Standards and Interpretations

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to: (1) recognize the overfunded or underfunded status of a defined benefit postretirement plan, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its statement of financial position; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end statement of financial position. SFAS No. 158 also requires additional disclosures related to net actuarial gains or losses, prior service costs or credits and transition assets or obligations and their impact on comprehensive income and net periodic benefit cost. SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” and other related accounting literature. SFAS No. 158 does not change how an employer measures plan assets and benefit obligations as of the date of its statement of financial position or how it determines the amount of net periodic benefit cost. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure defined benefit plan assets and obligations as of the date of an employers’ year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Based on the funded status of our plans at December 31, 2005, our adoption of SFAS No. 158 would decrease total assets by $14.0 million, increase total liabilities by $16.0 million and reduce our stockholders’ equity by $30.0 million. The actual effect of our adoption on December 31, 2006 will depend on the funded status of our plans at that time which, in turn, will depend on factors such as plan asset performance and actuarial assumptions.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. SFAS No. 157 was issued to increase consistency and comparability in reporting fair values. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions are to be applied prospectively as of the beginning of the fiscal year in which the statement is initially applied, with certain exceptions. The transition adjustment, measured as the difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initially applied, is to be recognized as a cumulative-effect adjustment to the opening balance of retained earnings for the fiscal year in which SFAS No. 157 is initially applied. We do not expect our adoption of SFAS No. 157 to have a material impact on our financial condition or results of operations.

In September 2006, the FASB ratified a consensus reached by the Emerging Issues Task Force, or EITF, on Issue No. 06-05, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance,” requires that the amount that could be realized under a life insurance contract as of the date of the statement of financial position should be reported as an asset. The EITF concluded that a policyholder should

12

consider any additional amounts (i.e., amounts other than cash surrender value) included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. When it is probable that contractual restrictions would limit the amount that could be realized, these contractual limitations should be considered when determining the realizable amounts. Amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. Amounts that are recoverable beyond one year from the surrender of the policy should be discounted to present value. A policyholder should determine the amount that could be realized under the insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that would ultimately be realized by the policyholder upon the assumed surrender of the final policy (or final certificate in a group policy) should be included in the amount that could be realized under the insurance contract. A policyholder should not discount the cash surrender value component of the amount that could be realized when contractual restrictions on the ability to surrender a policy exist. However, if the contractual limitations prescribe that the cash surrender value component of the amount that could be realized is a fixed amount, then the amount that could be realized should be discounted. EITF Issue No. 06-05 is effective for fiscal years beginning after December 15, 2006 and should be applied through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or (2) a change in accounting principle through retrospective application to all prior periods. The application of EITF Issue No. 06-05 will not have a material impact on our financial condition or results of operations.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect our adoption of FIN 48 to have a material impact on our financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140,” which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to choose either the amortization or fair value measurement method for subsequent measurements. Additionally, at the initial adoption, SFAS No. 156 permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities, provided that the securities are identified in some manner as offsetting the entity’s exposure to changes in the fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. SFAS No. 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. We intend to apply the amortization method for measurements of our mortgage servicing rights, or MSR, and do not expect our adoption of SFAS No. 156 to have a material impact on our financial condition or results of operations.

13

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140 and allows an entity to re-measure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument is to be recognized as a cumulative-effect adjustment to beginning retained earnings. We do not expect our adoption of SFAS No. 155 to have a material impact on our financial condition or results of operations.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may be identified by the use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and phrases, including references to assumptions.

Forward-looking statements are based on various assumptions and analyses made by us in light of our management’s experience and its perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, without limitation, the following:

• 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 or affect the value of our investments;

• 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;

• success or consummation of new business initiatives may be more difficult or expensive than we anticipate; or

• litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate.

14

We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Executive Summary

The following overview should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, in its entirety, as well as Part II, Item 1A, “Risk Factors.”

Astoria Financial Corporation is a Delaware corporation organized as the unitary savings and loan association holding company of Astoria Federal. Our primary business is the operation of Astoria Federal. Astoria Federal’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one-to-four family mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. Our earnings are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.

As a premier Long Island community bank, our goal is to enhance shareholder value while building a solid banking franchise. We focus on growing our core businesses of mortgage lending and retail banking while maintaining superior asset quality and controlling operating expenses. Additionally, we continue to provide returns to shareholders through dividends and stock repurchases. We have been successful in achieving this goal over the past several years and that trend has continued in 2006.

During the first half of 2006, the national and local real estate markets, although somewhat weaker than a year ago, continued to support new and existing home sales at reduced levels. There has been a slowdown in the housing market, particularly during the 2006 third quarter, both nationally and locally, as evidenced by reports of reduced levels of new and existing home sales, increasing inventories of houses on the market, stagnant to declining property values and an increase in the length of time houses remain on the market. The Federal Open Market Committee’s, or FOMC, policy of monetary tightening through seventeen consecutive Federal Funds rate increases from June 2004 through June 2006, resulted in a significant flattening of the U.S. Treasury yield curve in 2005 and a flat-to-inverted yield curve throughout 2006. The pause in Federal Funds rate hikes since June 2006 has reversed the trend of rising U.S. Treasury yields and resulted in a further inversion of the yield curve throughout the quarter ended September 30, 2006. This continued pattern of interest yield curve inversion limits our growth opportunities and continues to put pressure on our net interest margin. As a result, we have continued to pursue our strategy of shrinking the balance sheet through a reduction in the securities and borrowings portfolios through normal cash flow, while emphasizing deposit and loan growth.

Our total loan portfolio increased during the nine months ended September 30, 2006, despite a reduction in mortgage loan originations from previous periods. The previously mentioned higher overall level of interest rates and slowing housing market have also reduced the level of

15

repayment and refinance activity which has enabled us to continue to grow our mortgage loan portfolios.

Total deposits increased during the nine months ended September 30, 2006. This increase was attributable to the growth of our Liquid certificates of deposit, or Liquid CDs, and our certificates of deposit, which include all time deposits other than Liquid CDs. Liquid CDs have maturities of three months, require the maintenance of a minimum balance and allow depositors the ability to make periodic deposits to and withdrawals from their account during the account’s three month term. We consider Liquid CDs as part of our core deposits, along with savings accounts, money market accounts and NOW and demand deposit accounts, due to their depositor flexibility. Liquid CDs and certificates of deposit increased as a result of the continued success of our marketing efforts and competitive pricing strategies which have focused on attracting these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities.

Our securities and borrowings portfolios decreased from December 31, 2005, which is consistent with our strategy of reducing these portfolios through normal cash flow in response to the continued flat-to-inverted U.S. Treasury yield curve.

Net income, the net interest margin and the net interest rate spread for the three and nine months ended September 30, 2006 decreased compared to the three and nine months ended September 30, 2005. The decreases in net income were primarily due to decreases in net interest income and non-interest income, partially offset by decreases in non-interest expense. The decreases in net interest income, as well as the decreases in the net interest margin and the net interest rate spread, were primarily the result of increases in interest expense due to the upward repricing of our liabilities which are more sensitive to increases in short-term interest rates than our assets. The interest rate environment, characterized by a flat-to-inverted yield curve, coupled with a very competitive environment for deposits, resulted in significant increases in the costs of our Liquid CDs and certificates of deposits. The decrease in non-interest income for the three months ended September 30, 2006 was primarily due to decreases in mortgage banking income, net, customer service fees and other loan fees. The decrease in non-interest income for the nine months ended September 30, 2006 was primarily due to decreases in mortgage banking income, net and other loan fees, coupled with a $5.5 million charge for the termination of our interest rate swap agreements in March 2006. The decreases in non-interest expense were primarily due to decreases in compensation and benefits expense and other expense, and, for the nine months ended September 30, 2006, a decrease in advertising expense, partially offset by an increase in occupancy, equipment and systems expense.

We expect the operating environment to remain very challenging as a result of the prolonged flat-to-inverted U.S. Treasury yield curve that continues to negatively impact our net interest margin and earnings and limits opportunities for profitable growth. We anticipate continued margin compression for the fourth quarter, although the magnitude of the compression should be less than the current quarter. Based on the external economic forecasting model we utilize, which as of October 2006 projected three 25 basis point reductions by the Federal Reserve in 2007 and a gradual flattening of the yield curve, we anticipate our net interest margin should remain relatively stable in 2007. We will, as a result, continue our strategy of shrinking the balance sheet through reductions in the securities and borrowings portfolios through normal cash flow, while we emphasize deposit and loan growth, all of which should continue to

16

improve both the quality of the balance sheet and earnings. While growth opportunities remain limited, we will continue to focus on the repurchase of our stock as a desirable use of capital. These strategies should better position us to take advantage of more profitable asset growth opportunities when the yield curve steepens.

Available Information

Our internet website address is www.astoriafederal.com. Financial information, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, can be obtained free of charge from our investor relations website at http://ir.astoriafederal.com. The above reports are available on our website immediately after they are electronically filed with or furnished to the SEC. Such reports are also available on the SEC’s website at www.sec.gov.

Critical Accounting Policies

Note 1 of Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of our 2005 Annual Report on Form 10-K, as supplemented by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 and this report, contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of MSR and stock-based compensation and judgments regarding goodwill and securities impairment are our most critical accounting policies because they are important to the presentation of our financial condition and results of operations, involve a high degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition. These critical accounting policies and their application are reviewed quarterly with the Audit Committee of our Board of Directors. The following description of these policies should be read in conjunction with the corresponding section of our 2005 Annual Report on Form 10-K.

Allowance for Loan Losses

Our allowance for loan losses is established and maintained through a provision for loan losses based on our evaluation of the risks inherent in our loan portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The allowance is comprised of both specific valuation allowances and general valuation allowances.

Specific valuation allowances are established in connection with individual loan reviews and the asset classification process, including the procedures for impairment recognition under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an amendment of FASB Statement No. 114.” Such evaluation, which includes a review of loans on which full collectibility is not reasonably assured, considers the estimated fair value of the underlying collateral, if any, current and anticipated economic and regulatory conditions, current and historical loss experience of similar loans and other factors that determine risk exposure to arrive at an adequate loan loss allowance.

Individual loan loss reviews are completed quarterly for all classified loans. Individual loan loss reviews are generally completed annually for multi-family, commercial real estate and construction loans in excess of $2.5 million, commercial business loans in excess of $200,000,

17

one-to-four family loans in excess of $1.0 million and debt restructurings. In addition, we generally review annually at least fifty percent of the outstanding balances of multi-family, commercial real estate and construction loans to single borrowers with concentrations in excess of $2.5 million.

The primary considerations in establishing specific valuation allowances are the appraised value of a loan’s underlying collateral and the loan’s payment history. Other current and anticipated economic conditions on which our specific valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values, the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. For multi-family and commercial real estate loans, additional factors specific to a borrower or the underlying collateral are considered. These factors include, but are not limited to, the composition of tenancy, occupancy levels for the property, cash flow estimates and the existence of personal guarantees. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of specific valuation allowances. The Office of Thrift Supervision, or OTS, periodically reviews our specific reserve methodology during regulatory examinations and any comments regarding changes to reserves are considered by management in determining specific valuation allowances.

Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessments of economic and regulatory conditions are subject to assumptions and judgments by management. Specific valuation allowances could differ materially as a result of changes in these assumptions and judgments.

General valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. The determination of the adequacy of the valuation allowance takes into consideration a variety of factors. We segment our loan portfolio into like categories by composition and size and perform analyses against each category. These include historical loss experience and delinquency levels and trends. We analyze our historical loan loss experience by category (loan type) over 3, 5, 10 and 12-year periods. Losses within each loan category are stress tested by applying the highest level of charge-offs and the lowest amount of recoveries as a percentage of the average portfolio balance during those respective time horizons. The resulting allowance percentages are used as an integral part of our judgment in developing estimated loss percentages to apply to the portfolio. We also consider the size, composition, risk profile, delinquency levels and cure rates of our portfolio, as well as our credit administration and asset management philosophies and procedures. In addition, we evaluate and consider the impact that existing and projected economic and market conditions may have on the portfolio, as well as known and inherent risks in the portfolio. We also evaluate and consider the allowance ratios and coverage percentages set forth in both peer group and regulatory agency data. Our focus, however, is primarily on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses.

Our allowance coverage percentages are used to estimate the amount of probable losses inherent in our loan portfolio in determining our general valuation allowances. Our evaluations of general valuation allowances are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the

18

appropriate allowance. Therefore, we annually review the actual performance and charge-off history of our portfolio and compare that to our previously determined allowance coverage percentages and specific valuation allowances. In doing so, we evaluate the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to our assumptions and analyses.

Our loss experience in 2006 has been consistent with our experience over the past several years. Our 2006 analyses did not result in any change in our methodology for determining our general and specific valuation allowances or our emphasis on the factors that we consider in establishing such allowances. Accordingly, such analyses did not indicate that changes in our allowance coverage percentages were required. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio.

Actual results could differ from our estimates as a result of changes in economic or market conditions. Changes in estimates could result in a material change in the allowance for loan losses. While we believe that the allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, future adjustments may be necessary if portfolio performance or economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations.

For additional information regarding our allowance for loan losses, see “Provision for Loan Losses” and “Asset Quality” in this document and Part II, Item 7, “MD&A,” in our 2005 Annual Report on Form 10-K.

Valuation of MSR

The cost of MSR is amortized over the estimated remaining lives of the loans serviced. MSR are carried at amortized cost less impairment, if any, which is recognized through a valuation allowance through charges to earnings. Impairment exists if the carrying value of MSR exceeds the estimated fair value. The estimated fair value of MSR is obtained through independent third party valuations.

At September 30, 2006, our MSR, net, had an estimated fair value of $16.2 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.03%, a weighted average constant prepayment rate on mortgages of 13.53% and a weighted average life of 5.2 years. At December 31, 2005, our MSR, net, had an estimated fair value of $16.5 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.07%, a weighted average constant prepayment rate on mortgages of 15.84% and a weighted average life of 4.7 years.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Assuming an increase in interest rates of 100 basis points at September 30, 2006, the estimated fair value of our MSR would have been $3.3 million greater. Assuming a decrease in interest rates of 100 basis points at September 30, 2006, the estimated fair value of our MSR would have been $6.0 million lower.

19

Stock-Based Compensation

We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards for all awards granted, modified, repurchased or cancelled after January 1, 2006 in accordance with SFAS No. 123(R). For the portion of outstanding awards for which the requisite service was not rendered as of January 1, 2006, the recognition of the cost of employee services is based on the grant-date fair value of those awards calculated under SFAS No. 123 for pro forma disclosures. Option grants generally occur annually in December for employees upon approval by our board of directors on the date of their regular monthly meeting and in January for outside directors. See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements (Unaudited),” for further discussion of the impact of our adoption of SFAS No. 123(R).

We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are based on our analysis of our historical option exercise experience and our judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.

The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

Goodwill Impairment

Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. At September 30, 2006, the carrying amount of our goodwill totaled $185.2 million. When performing the impairment test, if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.

On September 30, 2006 we performed our annual goodwill impairment test. We determined the fair value of our reporting unit to be in excess of its carrying amount by $1.80 billion, using the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The identification of additional reporting units or the use of other valuation techniques could result in materially different evaluations of impairment.

20

Securities Impairment

Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values of our securities, which are primarily fixed rate mortgage-backed securities at September 30, 2006, are based on published or securities dealers’ market values and are affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income. At September 30, 2006, we had 230 securities with an estimated fair value totaling $5.31 billion which had an unrealized loss totaling $180.0 million, substantially all of which have been in a continuous unrealized loss position for more than twelve months. At September 30, 2006, the impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, the estimated remaining life and high credit quality of the investments and our ability and intent to hold these investments until there is a full recovery of the unrealized loss, which may be until maturity. There were no other-than-temporary impairment write-downs during the nine months ended September 30, 2006.

Liquidity and Capital Resources

Our primary source of funds is cash provided by principal and interest payments on loans and securities. The most significant liquidity challenge we face is the variability in cash flows as a result of changes in mortgage refinance activity. Principal payments on loans and securities totaled $3.01 billion for the nine months ended September 30, 2006 and $4.16 billion for the nine months ended September 30, 2005. The decrease in loan and securities repayments was primarily the result of the lower levels of mortgage loan refinance activity during the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, as a result of the increase in interest rates compared to the prior year.

In addition to cash provided by principal and interest payments on loans and securities, our other sources of funds include cash provided by operating activities, deposits and borrowings. Net cash provided by operating activities totaled $188.7 million for the nine months ended September 30, 2006 and $242.2 million for the nine months ended September 30, 2005. Deposits increased $366.6 million during the nine months ended September 30, 2006 and $482.4 million during the nine months ended September 30, 2005. As previously discussed, the net increases in deposits for the nine months ended September 30, 2006 and 2005 are primarily attributable to increases in Liquid CDs and certificates of deposit as a result of the success of our marketing efforts and competitive pricing strategies which have focused on attracting these types of deposits.

Net borrowings decreased $1.12 billion during the nine months ended September 30, 2006 and $1.37 billion during the nine months ended September 30, 2005. The decreases in net borrowings during the nine months ended September 30, 2006 and 2005 reflect our strategy of

21

reducing the securities and borrowings portfolios through normal cash flow in response to the continued flat-to-inverted U.S. Treasury yield curve.

Our primary use of funds is for the origination and purchase of mortgage loans. Gross mortgage loans originated and purchased during the nine months ended September 30, 2006 totaled $2.36 billion, of which $2.10 billion were originations and $263.3 million were purchases. This compares to gross mortgage loans originated and purchased during the nine months ended September 30, 2005 totaling $3.28 billion, of which $2.64 billion were originations and $636.4 million were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $180.7 million during the nine months ended September 30, 2006 and $284.7 million during the nine months ended September 30, 2005. As with our reduced loan prepayments, the reduced levels of loan originations and purchases are indicative of lower overall loan activity in response to higher interest rates.

We maintain liquidity levels to meet our operational needs in the normal course of our business. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks and repurchase agreements, our most liquid assets, totaled $207.4 million at September 30, 2006 and $352.0 million at December 31, 2005. Borrowings maturing over the next twelve months total $2.25 billion with a weighted average rate of 3.52%. We have the flexibility to either repay or rollover these borrowings as they mature. In addition, we have $6.21 billion in certificates of deposit and Liquid CDs with a weighted average rate of 4.69% maturing over the next twelve months. We expect to retain or replace a significant portion of such deposits based on our competitive pricing and historical experience.

The following table details our borrowing, certificate of deposit and Liquid CD maturities and their weighted average rates at September 30, 2006:

	Borrowings					Certificates of Deposit and Liquid CDs
(Dollars in Millions)	Amount			Weighted Average Rate		Amount		Weighted Average Rate
Contractual Maturity:
Within twelve months	$	2,248	(1)	3.52	%	$	6,214	4.69	%
Thirteen to twenty-four months		2,550	(2)	4.82			1,525	4.32
Twenty-five to thirty-six months		850		4.03			749	4.58
Thirty-seven to forty-eight months		—		—			331	4.66
Forty-nine to sixty months		100	(3)	5.02			184	5.00
Over five years		1,079	(4)	5.37			19	4.23
Total	$	6,827		4.38	%	$	9,022	4.62	%

(1)	Includes $528.5 million of overnight and other short-term borrowings with a weighted average rate of 5.40%.
(2)	Includes $1.93 billion of borrowings, with a weighted average rate of 5.30%, which are callable by the counterparty within the next twelve months and at various times thereafter.
(3)	Callable by the counterparty within the next thirteen to twenty-four months and at various times thereafter.
(4)	Includes $600.0 million of borrowings, with a weighted average rate of 4.41%, which are callable by the counterparty within the next twelve months and at various times thereafter, and $100.0 million of borrowings, with a weighted average rate of 4.50%, which are callable by the counterparty within thirteen to twenty-four months and at various times thereafter.

Additional sources of liquidity at the holding company level have included issuances of securities into the capital markets, including private issuances of trust preferred securities and senior debt. Holding company debt obligations are included in other borrowings. Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market demand, interest rates, our capital levels, Astoria

22

Federal’s ability to pay dividends to Astoria Financial Corporation, our credit profile and ratings and our business model.

Astoria Financial Corporation’s primary uses of funds include payment of dividends, payment of principal and interest on its debt obligations and repurchases of common stock. Astoria Financial Corporation paid principal and interest on its debt obligations totaling $37.2 million during the nine months ended September 30, 2006. Our payment of dividends and repurchases of our common stock totaled $264.6 million during the nine months ended September 30, 2006. Our ability to pay dividends, service our debt obligations and repurchase common stock is dependent primarily upon receipt of capital distributions from Astoria Federal. Since Astoria Federal is a federally chartered savings association, there are limits on its ability to make distributions to Astoria Financial Corporation. During the nine months ended September 30, 2006, Astoria Federal paid dividends to Astoria Financial Corporation totaling $150.0 million. On October 20, 2006, Astoria Federal paid another dividend to Astoria Financial Corporation totaling $100.0 million.

On September 1, 2006, we paid a quarterly cash dividend of $0.24 per share on shares of our common stock outstanding as of the close of business on August 15, 2006 totaling $22.6 million. On October 18, 2006, we declared a quarterly cash dividend of $0.24 per share on shares of our common stock payable on December 1, 2006 to stockholders of record as of the close of business on November 15, 2006.

On December 21, 2005, our Board of Directors approved our eleventh stock repurchase plan authorizing the purchase, at management’s discretion, of 10,000,000 shares, or approximately 10% of our common stock outstanding, through December 31, 2007 in open-market or privately negotiated transactions. Stock repurchases under our eleventh stock repurchase plan commenced immediately following the completion of our tenth stock repurchase plan on January 10, 2006. Under these plans, during the nine months ended September 30, 2006, we repurchased 6,515,000 shares of our common stock at an aggregate cost of $195.7 million, of which 6,252,700 shares were acquired pursuant to our eleventh stock repurchase plan. For further information on our common stock repurchases, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Our board of directors approved an amendment to our Certificate of Incorporation to eliminate the previous designation of 1,800,000 shares of Series A Junior Participating Preferred Stock, or the Series A Stock, and 2,000,000 shares of Series B 12% Noncumulative Perpetual Preferred Stock, or the Series B Stock, none of which were outstanding at the time of the amendment. The elimination of the Series A Stock occurred in connection with the expiration of the rights issued under the Rights Agreement, dated July 17, 1996, as amended, by and between Astoria Financial Corporation and ChaseMellon Shareholder Services, LLC, now known as Mellon Investor Services LLC, as rights agent. We now have 5,000,000 shares of preferred stock, par value $1.00 per share, authorized, none of which are issued and outstanding. For further information regarding the elimination of the Series A Stock and the Series B Stock, see our Current Reports on Form 8-K filed with the SEC on September 11, 2006 and September 22, 2006.

See “Financial Condition” for a further discussion of the changes in stockholders’ equity.

At September 30, 2006, Astoria Federal’s capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 6.84%, leverage capital ratio of 6.84% and total risk-based capital ratio of 12.66%. The minimum regulatory requirements are a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and total risk-based capital ratio of 8.00%. As of September 30, 2006, Astoria Federal continues to be a well capitalized institution.

23

Off-Balance Sheet Arrangements and Contractual Obligations

We are a party to financial instruments with off-balance sheet risk in the normal course of our business in order to meet the financing needs of our customers and in connection with our overall interest rate risk management strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments, lease commitments and derivative instruments.

Lending commitments include commitments to originate and purchase loans and commitments to fund unused lines of credit. Derivative instruments may include interest rate caps, locks and swaps which are recorded as either assets or liabilities in the consolidated statements of financial condition at fair value. Additionally, in connection with our mortgage banking activities, we have commitments to fund loans held-for-sale and commitments to sell loans which are considered derivative instruments. Commitments to sell loans totaled $41.2 million at September 30, 2006. The fair values of our mortgage banking derivative instruments are immaterial to our financial condition and results of operations. We also have contractual obligations related to operating lease commitments which have not changed significantly from December 31, 2005.

The following table details our contractual obligations at September 30, 2006.

	Payments due by period
(In Thousands)	Total		Less than One Year		One to Three Years		Three to Five Years		More than Five Years
Contractual Obligations:
Borrowings with original terms greater than three months	$	6,298,866	$	1,720,000	$	3,400,000	$	100,000	$	1,078,866
Commitments to originate and purchase loans (1)		454,358		454,358		—		—		—
Commitments to fund unused lines of credit (2)		434,288		434,288		—		—		—
Total	$	7,187,512	$	2,608,646	$	3,400,000	$	100,000	$	1,078,866

(1)	Includes $35.7 million of commitments to originate loans held-for-sale.
(2)	Unused lines of credit relate primarily to home equity lines of credit.

In addition to the contractual obligations previously discussed, we have contingent liabilities related to assets sold with recourse and standby letters of credit. Contingent liabilities related to assets sold with recourse and standby letters of credit as of September 30, 2006 have not changed significantly from December 31, 2005.

For further information regarding our off-balance sheet arrangements and contractual obligations, see Part II, Item 7, “MD&A,” in our 2005 Annual Report on Form 10-K.

24

Loan Portfolio

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 September 30, 2006						At December 31, 2005
(Dollars in Thousands)	Amount			Percent of Total			Amount			Percent of Total
Mortgage loans (gross):
One-to-four family	$	9,931,184			67.79	%	$	9,757,920			68.24	%
Multi-family		2,995,723			20.45			2,826,807			19.77
Commercial real estate		1,121,960			7.66			1,075,914			7.52
Construction		150,996			1.03			137,012			0.96
Total mortgage loans		14,199,863			96.93			13,797,653			96.49
Consumer and other loans (gross):
Home equity		410,604			2.80			460,064			3.22
Commercial		23,277			0.16			24,644			0.17
Other		16,454			0.11			17,796			0.12
Total consumer and other loans		450,335			3.07			502,504			3.51
Total loans (gross)		14,650,198			100.00	%		14,300,157			100.00	%
Net unamortized premiums and deferred loan costs		95,687						92,136
Total loans		14,745,885						14,392,293
Allowance for loan losses		(79,930	)					(81,159	)
Total loans, net	$	14,665,955					$	14,311,134

25

Securities Portfolio

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at the dates indicated.

	At September 30, 2006				At December 31, 2005
(In Thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available-for-sale:
Mortgage-backed securities:
REMICs and CMOs (1):
GSE (2) issuance	$	1,441,251	$	1,367,802	$	1,645,961	$	1,567,312
Non-GSE issuance		53,840		50,634		61,735		57,938
GSE pass-through certificates		72,548		73,741		91,211		93,124
Total mortgage-backed securities		1,567,639		1,492,177		1,798,907		1,718,374
Other securities:
FNMA and FHLMC preferred stock		123,495		123,793		123,495		120,495
Other securities		1,501		1,491		2,503		2,482
Total other securities		124,996		125,284		125,998		122,977
Total securities available-for-sale	$	1,692,635	$	1,617,461	$	1,924,905	$	1,841,351
Securities held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance	$	3,659,534	$	3,566,028	$	4,346,631	$	4,250,726
Non-GSE issuance		299,051		289,536		354,395		346,099
GSE pass-through certificates		3,935		4,027		5,737		5,926
Total mortgage-backed securities		3,962,520		3,859,591		4,706,763		4,602,751
Obligations of states and political sub-divisions and corporate debt securities		18,542		18,491		24,190		24,262
Total securities held-to-maturity	$	3,981,062	$	3,878,082	$	4,730,953	$	4,627,013

(1)	Real estate mortgage investment conduits and collateralized mortgage obligations
(2)	Government-sponsored enterprise

26

Comparison of Financial Condition as of September 30, 2006 and December 31, 2005 and Operating Results for the Three and Nine Months Ended September 30, 2006 and 2005

Financial Condition

Total assets decreased $781.1 million to $21.60 billion at September 30, 2006, from $22.38 billion at December 31, 2005, consistent with our strategy of balance sheet reduction in the current flat-to-inverted yield curve environment. The decrease in total assets primarily reflects a decrease in securities, partially offset by an increase in loans receivable.

Our total loan portfolio increased $353.6 million to $14.75 billion at September 30, 2006, from $14.39 billion at December 31, 2005, despite a lower level of mortgage loan originations compared to previous periods. As previously discussed, the increase in interest rates compared to the prior year and the slowing housing market have reduced the level of repayment and refinance activity, which has enabled us to continue to grow our mortgage loan portfolios.

Mortgage loans, net, increased $406.8 million to $14.29 billion at September 30, 2006, from $13.88 billion at December 31, 2005. This increase was due to increases in each of our mortgage loan portfolios. Gross mortgage loans originated and purchased during the nine months ended September 30, 2006 totaled $2.36 billion, of which $2.10 billion were originations and $263.3 million were purchases. This compares to gross mortgage loans originated and purchased during the nine months ended September 30, 2005 totaling $3.28 billion, of which $2.64 billion were originations and $636.4 million were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $180.7 million during the nine months ended September 30, 2006 and $284.7 million during the nine months ended September 30, 2005. The decrease in mortgage loans originated and purchased is primarily attributable to the softening in the real estate market and the decrease in refinance activity due to increased interest rate levels previously discussed. Mortgage loan repayments decreased to $1.81 billion for the nine months ended September 30, 2006, from $2.15 billion for the nine months ended September 30, 2005.

Our mortgage loan portfolio, as well as our originations and purchases, continues to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans increased $173.3 million to $9.93 billion at September 30, 2006, from $9.76 billion at December 31, 2005, and represented 67.8% of our total loan portfolio at September 30, 2006. Our multi-family mortgage loan portfolio increased $168.9 million to $3.00 billion at September 30, 2006, from $2.83 billion at December 31, 2005. Our commercial real estate loan portfolio increased $46.0 million to $1.12 billion at September 30, 2006, from $1.08 billion at December 31, 2005. Multi-family and commercial real estate loan originations totaled $559.4 million for the nine months ended September 30, 2006 and $769.0 million for the nine months ended September 30, 2005. The average loan balance within our combined multi-family and commercial real estate portfolio continues to be less than $1.0 million and the average loan-to-value ratio, based on current principal balance and original appraised value, continues to be less than 65%.

Securities decreased $973.8 million to $5.60 billion at September 30, 2006, from $6.57 billion at December 31, 2005. This decrease was primarily the result of principal payments received of $984.0 million, which reflects our previously discussed strategy of reducing the securities and borrowings portfolios through normal cash flow in the current interest rate environment. Our securities portfolio is comprised primarily of fixed rate REMIC and CMO securities. The

27

amortized cost of our fixed rate REMICs and CMOs totaled $5.44 billion at September 30, 2006, and had a weighted average current coupon of 4.29%, a weighted average collateral coupon of 5.74% and a weighted average life of 3.7 years.

Deposits increased $366.6 million to $13.18 billion at September 30, 2006, from $12.81 billion at December 31, 2005, primarily due to increases in Liquid CDs and certificates of deposit, partially offset by decreases in savings, money market and NOW and demand deposit accounts. Liquid CDs increased $782.8 million to $1.40 billion at September 30, 2006, from $619.8 million at December 31, 2005. Certificates of deposit increased $158.1 million to $7.62 billion at September 30, 2006, from $7.46 billion at December 31, 2005. Our Liquid CDs and certificates of deposit increased primarily as a result of the continued success of our marketing efforts and competitive pricing strategies previously discussed. We continue to experience intense competition for deposits. Savings accounts decreased $301.4 million from December 31, 2005 to $2.21 billion at September 30, 2006. Money market accounts decreased $169.8 million from December 31, 2005 to $478.9 million at September 30, 2006. NOW and demand deposit accounts decreased $103.1 million from December 31, 2005 to $1.47 billion at September 30, 2006. The decreases in savings and money market accounts may be indicative of increasing consumer demand for higher yielding investment alternatives.

Total borrowings, net, decreased $1.12 billion to $6.82 billion at September 30, 2006, from $7.94 billion at December 31, 2005, primarily due to a decrease in reverse repurchase agreements. The net decrease in total borrowings reflects our previously discussed strategy of reducing the securities and borrowings portfolios. For additional information, see “Liquidity and Capital Resources.”

Stockholders’ equity decreased to $1.26 billion at September 30, 2006, from $1.35 billion at December 31, 2005. The decrease in stockholders’ equity was the result of common stock repurchased of $195.7 million and dividends declared of $68.9 million. These decreases were partially offset by net income of $137.8 million, the effect of stock options exercised and related tax benefit of $23.0 million, stock-based compensation and the allocation of shares held by the employee stock ownership plan, or ESOP, of $9.6 million and a decrease in accumulated other comprehensive loss, net of tax, of $5.1 million, which was primarily due to the net increase in the fair value of our securities available-for-sale.

Results of Operations

General

Net income for the three months ended September 30, 2006 decreased $18.1 million to $41.1 million, from $59.2 million for the three months ended September 30, 2005. Diluted earnings per common share decreased to $0.43 per share for the three months ended September 30, 2006, from $0.57 per share for the three months ended September 30, 2005. Return on average assets decreased to 0.76% for the three months ended September 30, 2006, from 1.05% for the three months ended September 30, 2005. Return on average stockholders’ equity decreased to 13.06% for the three months ended September 30, 2006, from 17.09% for the three months ended September 30, 2005. Return on average tangible stockholders’ equity, which represents average stockholders’ equity less average goodwill, decreased to 15.31% for the three months ended September 30, 2006, from 19.73% for the three months ended September 30, 2005.

28

Net income for the nine months ended September 30, 2006 decreased $38.3 million to $137.8 million, from $176.1 million for the nine months ended September 30, 2005. Diluted earnings per common share decreased to $1.40 per share for the nine months ended September 30, 2006, from $1.69 per share for the nine months ended September 30, 2005. Return on average assets decreased to 0.84% for the nine months ended September 30, 2006, from 1.02% for the nine months ended September 30, 2005. Return on average stockholders’ equity decreased to 14.27% for the nine months ended September 30, 2006, from 17.06% for the nine months ended September 30, 2005. Return on average tangible stockholders’ equity decreased to 16.67% for the nine months ended September 30, 2006, from 19.71% for the nine months ended September 30, 2005. The decreases in the returns on average assets, average stockholders’ equity and average tangible stockholders’ equity for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, were primarily due to the decreases in net income, partially offset by the decreases in average assets and stockholders’ equity.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” for further discussion of the potential impact of changes in interest rates on our results of operations.

For the three months ended September 30, 2006, net interest income decreased $27.8 million to $90.7 million, from $118.5 million for the three months ended September 30, 2005. For the nine months ended September 30, 2006, net interest income decreased $61.6 million to $303.5 million, from $365.1 million for the nine months ended September 30, 2005. The decreases in net interest income for the three and nine months ended September 30, 2006 were primarily the result of increases in interest expense due to the upward repricing of our liabilities which are more sensitive to increases in short-term interest rates than our assets. As previously discussed, the interest rate environment, characterized by a flat-to-inverted yield curve, coupled with a very competitive environment for deposits, resulted in significant increases in the costs of our short-term borrowings, Liquid CDs and certificates of deposit. The impact from these increases was partially offset by decreases in the average balance of borrowings, which have a higher average cost than deposits.

The net interest margin decreased to 1.75% for the three months ended September 30, 2006, from 2.20% for the three months ended September 30, 2005, and decreased to 1.93% for the nine months ended September 30, 2006, from 2.21% for the nine months ended September 30, 2005. The net interest rate spread decreased to 1.64% for the three months ended September 30, 2006 from 2.11% for the three months ended September 30, 2005, and decreased to 1.83% for the nine months ended September 30, 2006, from 2.13% for the nine months ended September 30, 2005. The decreases in the net interest margin and net interest rate spread were primarily due to the cost of our interest-bearing liabilities rising more rapidly than the yield on our interest-earning assets. Our short-term borrowings, Liquid CDs and certificates of deposit reprice more frequently, reflecting increases in interest rates more rapidly, than our mortgage loans and securities which have longer repricing intervals and terms.

29

The average balance of net interest-earning assets decreased $9.0 million to $639.3 million for the three months ended September 30, 2006, from $648.3 million for the three months ended September 30, 2005, and $1.9 million to $659.1 million for the nine months ended September 30, 2006, from $661.0 million for the nine months ended September 30, 2005.

The changes in average interest-earning assets and interest-bearing liabilities and their related yields and costs are discussed in greater detail under “Interest Income” and “Interest Expense.”

Analysis of Net Interest Income

The following tables set forth certain information about the average balances of our assets and liabilities and their related yields and costs for the three and nine months ended September 30, 2006 and 2005. Average yields are derived by dividing income by the average balance of the related assets and average costs are derived by dividing expense by the average balance of the related liabilities, for the periods shown. Average balances are derived from average daily balances. The yields and costs include amortization of fees, costs, premiums and discounts which are considered adjustments to interest rates.

30

	For the Three Months Ended September 30,
	2006								2005
(Dollars in Thousands)	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost
						(Annualized)								(Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family	$	9,952,037		$	127,735		5.13	%	$	9,471,378		$	115,118		4.86	%
Multi-family, commercial real estate and construction		4,268,318			65,933		6.18			3,930,711			60,951		6.20
Consumer and other loans (1)		468,436			9,099		7.77			529,622			8,199		6.19
Total loans		14,688,791			202,767		5.52			13,931,711			184,268		5.29
Mortgage-backed and other securities (2)		5,774,554			64,946		4.50			7,378,492			82,072		4.45
Repurchase agreements		95,969			1,266		5.28			122,585			1,056		3.45
FHLB-NY stock		142,998			2,049		5.73			123,199			1,577		5.12
Total interest-earning assets		20,702,312			271,028		5.24			21,555,987			268,973		4.99
Goodwill		185,151								185,151
Other non-interest-earning assets		778,978								878,590
Total assets	$	21,666,441							$	22,619,728
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Savings	$	2,277,608			2,309		0.41		$	2,710,873			2,744		0.40
Money market		506,959			1,281		1.01			767,711			1,866		0.97
NOW and demand deposit		1,482,642			218		0.06			1,565,633			233		0.06
Liquid CDs		1,243,914			15,184		4.88			393,735			3,053		3.10
Total core deposits		5,511,123			18,992		1.38			5,437,952			7,896		0.58
Certificates of deposit		7,505,903			83,111		4.43			7,222,728			64,007		3.54
Total deposits		13,017,026			102,103		3.14			12,660,680			71,903		2.27
Borrowings		7,045,962			78,258		4.44			8,247,037			78,534		3.81
Total interest-bearing liabilities		20,062,988			180,361		3.60			20,907,717			150,437		2.88
Non-interest-bearing liabilities		344,467								326,857
Total liabilities		20,407,455								21,234,574
Stockholders’ equity		1,258,986								1,385,154
Total liabilities and stockholders’ equity	$	21,666,441							$	22,619,728
Net interest income/net interest rate spread (3)				$	90,667		1.64	%				$	118,536		2.11	%
Net interest-earning assets/net interest margin (4)	$	639,324					1.75	%	$	648,270					2.20	%
Ratio of interest-earning assets to interest-bearing liabilities		1.03	x							1.03	x

(1)	Mortgage loans and consumer and other loans include loans held-for-sale and non-performing loans and exclude the allowance for loan losses.
(2)	Securities available-for-sale are included at average amortized cost.
(3)	Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
(4)	Net interest margin represents net interest income divided by average interest-earning assets.

31

	For the Nine Months Ended September 30,
	2006								2005
(Dollars in Thousands)	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost
						(Annualized)								(Annualized)
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family	$	9,921,036		$	378,226		5.08	%	$	9,362,018		$	339,598		4.84	%
Multi-family, commercial real estate and construction		4,192,095			192,178		6.11			3,813,944			177,447		6.20
Consumer and other loans (1)		488,223			26,918		7.35			527,298			22,455		5.68
Total loans		14,601,354			597,322		5.45			13,703,260			539,500		5.25
Mortgage-backed and other securities (2)		6,098,527			205,373		4.49			7,962,719			264,520		4.43
Repurchase agreements		145,121			5,205		4.78			184,637			3,866		2.79
FHLB-NY stock		141,577			5,535		5.21			130,618			4,400		4.49
Total interest-earning assets		20,986,579			813,435		5.17			21,981,234			812,286		4.93
Goodwill		185,151								185,151
Other non-interest-earning assets		788,337								863,831
Total assets	$	21,960,067							$	23,030,216
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Savings	$	2,380,057			7,164		0.40		$	2,802,298			8,417		0.40
Money market		563,485			4,135		0.98			843,232			5,825		0.92
NOW and demand deposit		1,512,951			662		0.06			1,574,350			698		0.06
Liquid CDs		981,897			32,636		4.43			288,023			5,998		2.78
Total core deposits		5,438,390			44,597		1.09			5,507,903			20,938		0.51
Certificates of deposit		7,513,758			230,760		4.09			7,054,729			182,990		3.46
Total deposits		12,952,148			275,357		2.83			12,562,632			203,928		2.16
Borrowings		7,375,315			234,549		4.24			8,757,579			243,262		3.70
Total interest-bearing liabilities		20,327,463			509,906		3.34			21,320,211			447,190		2.80
Non-interest-bearing liabilities		345,408								334,032
Total liabilities		20,672,871								21,654,243
Stockholders’ equity		1,287,196								1,375,973
Total liabilities and stockholders’ equity	$	21,960,067							$	23,030,216
Net interest income/net interest rate spread (3)				$	303,529		1.83	%				$	365,096		2.13	%
Net interest-earning assets/net interest margin (4)	$	659,116					1.93	%	$	661,023					2.21	%
Ratio of interest-earning assets to interest-bearing liabilities		1.03	x							1.03	x

(1)	Mortgage loans and consumer and other loans include loans held-for-sale and non-performing loans and exclude the allowance for loan losses.
(2)	Securities available-for-sale are included at average amortized cost.
(3)	Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
(4)	Net interest margin represents net interest income divided by average interest-earning assets.

32

Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) the changes attributable to changes in rate (changes in rate multiplied by prior volume), and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Three Months Ended September 30, 2006 Compared to									Nine Months Ended September 30, 2006 Compared to
	Three Months Ended September 30, 2005									Nine Months Ended September 30, 2005
	Increase (Decrease)									Increase (Decrease)
(In Thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest-earning assets:
Mortgage loans:
One-to-four family	$	6,023		$	6,594		$	12,617		$	21,103		$	17,525		$	38,628
Multi-family, commercial real estate and construction		5,181			(199	)		4,982			17,341			(2,610	)		14,731
Consumer and other loans		(1,023	)		1,923			900			(1,761	)		6,224			4,463
Mortgage-backed and other securities		(18,038	)		912			(17,126	)		(62,687	)		3,540			(59,147	)
Repurchase agreements		(265	)		475			210			(963	)		2,302			1,339
FHLB-NY stock		271			201			472			390			745			1,135
Total		(7,851	)		9,906			2,055			(26,577	)		27,726			1,149
Interest-bearing liabilities:
Savings		(493	)		58			(435	)		(1,253	)		—			(1,253	)
Money market		(659	)		74			(585	)		(2,046	)		356			(1,690	)
NOW and demand deposit		(15	)		—			(15	)		(36	)		—			(36	)
Liquid CDs		9,583			2,548			12,131			21,373			5,265			26,638
Certificates of deposit		2,577			16,527			19,104			12,576			35,194			47,770
Borrowings		(12,295	)		12,019			(276	)		(41,383	)		32,670			(8,713	)
Total		(1,302	)		31,226			29,924			(10,769	)		73,485			62,716
Net change in net interest income	$	(6,549	)	$	(21,320	)	$	(27,869	)	$	(15,808	)	$	(45,759	)	$	(61,567	)

Interest Income

Interest income for the three months ended September 30, 2006 increased $2.0 million to $271.0 million, from $269.0 million for the three months ended September 30, 2005. This increase was primarily the result of an increase in the average yield on interest-earning assets to 5.24% for the three months ended September 30, 2006, from 4.99% for the three months ended September 30, 2005, partially offset by a decrease of $853.7 million in the average balance of interest-earning assets to $20.70 billion for the three months ended September 30, 2006, from $21.56 billion for the three months ended September 30, 2005. The increase in the average yield on interest-earning assets was primarily the result of an increase in interest rates compared to the prior year. The decrease in the average balance of interest-earning assets was primarily due to a decrease in the average balance of mortgage-backed and other securities, partially offset by an increase in the average balance of mortgage loans.

Interest income on one-to-four family mortgage loans increased $12.6 million to $127.7 million for the three months ended September 30, 2006, from $115.1 million for the three months ended

33

September 30, 2005, which was primarily the result of an increase in the average yield to 5.13% for the three months ended September 30, 2006, from 4.86% for the three months ended September 30, 2005, coupled with an increase of $480.7 million in the average balance of such loans. The increase in the average yield on one-to-four family mortgage loans was primarily due to the impact of the increase in interest rates compared to the prior year on our adjustable rate mortgage loans, coupled with a decrease in net premium amortization, primarily due to lower repayment levels. Net premium amortization on one-to-four family mortgage loans decreased $569,000 to $4.8 million for the three months ended September 30, 2006, from $5.3 million for the three months ended September 30, 2005. The increase in the average balance of one-to-four family mortgage loans was the result of the levels of originations and purchases outpacing the levels of repayments over the past year.

Interest income on multi-family, commercial real estate and construction loans increased $4.9 million to $65.9 million for the three months ended September 30, 2006, from $61.0 million for the three months ended September 30, 2005, which was primarily the result of an increase of $337.6 million in the average balance of such loans, slightly offset by a decrease in the average yield to 6.18% for the three months ended September 30, 2006, from 6.20% for the three months ended September 30, 2005. The increase in the average balance of multi-family, commercial real estate and construction loans reflects the levels of originations which outpaced the levels of repayments. The decrease in the average yield on multi-family, commercial real estate and construction loans was primarily due to a decrease of $1.1 million in prepayment penalties to $2.1 million for the three months ended September 30, 2006, compared to $3.2 million for the three months ended September 30, 2005, partially offset by the impact of the increase in interest rates.

Interest income on consumer and other loans increased $900,000 to $9.1 million for the three months ended September 30, 2006, from $8.2 million for the three months ended September 30, 2005, primarily due to an increase in the average yield to 7.77% for the three months ended September 30, 2006, from 6.19% for the three months ended September 30, 2005, partially offset by a decrease of $61.2 million in the average balance of the portfolio. The increase in the average yield on consumer and other loans was primarily the result of an increase in the average yield on our home equity lines of credit which are adjustable rate loans that generally reset monthly and are indexed to the prime rate. The prime rate increased 200 basis points during 2005 and 100 basis points during the nine months ended September 30, 2006. The decrease in the average balance of home equity lines of credit was primarily the result of a decline in consumer demand resulting from the increases in the prime rate. Home equity lines of credit represented 91.2% of this portfolio at September 30, 2006.

Interest income on mortgage-backed and other securities decreased $17.2 million to $64.9 million for the three months ended September 30, 2006, from $82.1 million for the three months ended September 30, 2005. This decrease was primarily the result of a decrease of $1.60 billion in the average balance of the portfolio, slightly offset by an increase in the average yield to 4.50% for the three months ended September 30, 2006, from 4.45% for the three months ended September 30, 2005. The decrease in the average balance of mortgage-backed and other securities reflects our previously discussed strategy of reducing the securities and borrowings portfolios.

Interest income for the nine months ended September 30, 2006 increased $1.1 million to $813.4 million, from $812.3 million for the nine months ended September 30, 2005. This increase was primarily the result of an increase in the average yield on interest-earning assets to 5.17% for the nine months ended September 30, 2006, from 4.93% for the nine months ended September 30, 2005, substantially offset by a decrease of $994.7 million in the average balance of interest-

34

earning assets to $20.99 billion for the nine months ended September 30, 2006, from $21.98 billion for the nine months ended September 30, 2005.

Interest income on one-to-four family mortgage loans increased $38.6 million to $378.2 million for the nine months ended September 30, 2006, from $339.6 million for the nine months ended September 30, 2005, which was primarily the result of an increase of $559.0 million in the average balance of such loans, coupled with an increase in the average yield to 5.08% for the nine months ended September 30, 2006, from 4.84% for the nine months ended September 30, 2005. Net premium amortization on one-to-four family mortgage loans decreased $2.0 million to $12.9 million for the nine months ended September 30, 2006, from $14.9 million for the nine months ended September 30, 2005.

Interest income on multi-family, commercial real estate and construction loans increased $14.8 million to $192.2 million for the nine months ended September 30, 2006, from $177.4 million for the nine months ended September 30, 2005, which was primarily the result of an increase of $378.2 million in the average balance of such loans, partially offset by a decrease in the average yield to 6.11% for the nine months ended September 30, 2006, from 6.20% for the nine months ended September 30, 2005. Prepayment penalties decreased $3.3 million to $5.8 million for the nine months ended September 30, 2006, from $9.1 million for the nine months ended September 30, 2005.

Interest income on consumer and other loans increased $4.4 million to $26.9 million for the nine months ended September 30, 2006, from $22.5 million for the nine months ended September 30, 2005, primarily due to an increase in the average yield to 7.35% for the nine months ended September 30, 2006, from 5.68% for the nine months ended September 30, 2005, partially offset by a decrease of $39.1 million in the average balance of the portfolio.

Interest income on mortgage-backed and other securities decreased $59.1 million to $205.4 million for the nine months ended September 30, 2006, from $264.5 million for the nine months ended September 30, 2005. This decrease was primarily the result of a decrease of $1.86 billion in the average balance of the portfolio, slightly offset by an increase in the average yield to 4.49% for the nine months ended September 30, 2006, from 4.43% for the nine months ended September 30, 2005.

The principal reasons for the changes in the average yields and average balances of the various assets noted above for the nine months ended September 30, 2006 are consistent with the principal reasons for the changes noted for the three months ended September 30, 2006, previously discussed.

Interest Expense

Interest expense for the three months ended September 30, 2006 increased $30.0 million to $180.4 million, from $150.4 million for the three months ended September 30, 2005. This increase was primarily the result of an increase in the average cost of interest-bearing liabilities to 3.60% for the three months ended September 30, 2006, from 2.88% for the three months ended September 30, 2005, slightly offset by a decrease of $844.7 million in the average balance of interest-bearing liabilities to $20.06 billion for the three months ended September 30, 2006, from $20.91 billion for the three months ended September 30, 2005. The increase in the average cost of interest-bearing liabilities was primarily due to the impact of the increase in short- and medium-term interest rates compared to the prior year on our Liquid CDs, certificates of deposit and borrowings, coupled with the impact of the increases in the average balances of Liquid CDs and certificates of deposit, which have a higher average cost than our other deposit products.

35

The decrease in the average balance of interest-bearing liabilities was primarily due to a decrease in the average balance of borrowings, partially offset by an increase in the average balance of deposits.

Interest expense on deposits increased $30.2 million to $102.1 million for the three months ended September 30, 2006, from $71.9 million for the three months ended September 30, 2005, primarily due to an increase in the average cost of total deposits to 3.14% for the three months ended September 30, 2006, from 2.27% for the three months ended September 30, 2005, coupled with an increase of $356.3 million in the average balance of total deposits. As previously discussed, the increase in the average cost of total deposits was primarily due to the impact of higher interest rates on our Liquid CDs and certificates of deposit, coupled with the increases in the average balances of those deposits. The increase in the average balance of total deposits was primarily the result of increases in the average balances of Liquid CDs and certificates of deposit, partially offset by decreases in the average balances of savings, money market and NOW and demand deposit accounts primarily as a result of continued intense competition for these types of deposits. As previously discussed, the decreases in savings and money market accounts may be indicative of increasing consumer demand for higher yielding investment alternatives.

Interest expense on certificates of deposit increased $19.1 million to $83.1 million for the three months ended September 30, 2006, from $64.0 million for the three months ended September 30, 2005, primarily due to an increase in the average cost to 4.43% for the three months ended September 30, 2006, from 3.54% for the three months ended September 30, 2005, coupled with an increase of $283.2 million in the average balance. During the three months ended September 30, 2006, $1.54 billion of certificates of deposit, with a weighted average rate of 3.92% and a weighted average maturity at inception of twenty months, matured and $1.53 billion of certificates of deposit were issued or repriced, with a weighted average rate of 5.21% and a weighted average maturity at inception of twelve months. Interest expense on Liquid CDs increased $12.1 million to $15.2 million for the three months ended September 30, 2006, from $3.1 million for the three months ended September 30, 2005, primarily due to an increase of $850.2 million in the average balance, coupled with an increase in the average cost to 4.88% for the three months ended September 30, 2006, from 3.10% for the three months ended September 30, 2005. The increases in the average balances of certificates of deposit and Liquid CDs were primarily a result of the success of our marketing efforts and competitive pricing strategies which focused on attracting these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities.

Interest expense on borrowings for the three months ended September 30, 2006 decreased $276,000 to $78.3 million, from $78.5 million for the three months ended September 30, 2005, resulting from a decrease of $1.20 billion in the average balance, substantially offset by an increase in the average cost to 4.44% for the three months ended September 30, 2006, from 3.81% for the three months ended September 30, 2005. The decrease in the average balance of borrowings was primarily the result of our previously discussed strategy of reducing the securities and borrowings portfolios. The increase in the average cost of borrowings reflects the impact of the increase in interest rates compared to the prior year.

Interest expense for the nine months ended September 30, 2006 increased $62.7 million to $509.9 million, from $447.2 million for the nine months ended September 30, 2005. This increase was primarily the result of an increase in the average cost of interest-bearing liabilities to 3.34% for the nine months ended September 30, 2006, from 2.80% for the nine months ended

36

September 30, 2005, partially offset by a decrease of $992.7 million in the average balance of total interest-bearing liabilities to $20.33 billion for the nine months ended September 30, 2006, from $21.32 billion for the nine months ended September 30, 2005.

Interest expense on deposits increased $71.5 million to $275.4 million for the nine months ended September 30, 2006, from $203.9 million for the nine months ended September 30, 2005, primarily due to an increase in the average cost of total deposits to 2.83% for the nine months ended September 30, 2006, from 2.16% for the nine months ended September 30, 2005, coupled with an increase of $389.5 million in the average balance of total deposits.

Interest expense on certificates of deposit increased $47.8 million to $230.8 million for the nine months ended September 30, 2006, from $183.0 million for the nine months ended September 30, 2005, primarily due to an increase in the average cost to 4.09% for the nine months ended September 30, 2006, from 3.46% for the nine months ended September 30, 2005, coupled with an increase of $459.0 million in the average balance. During the nine months ended September 30, 2006, $4.76 billion of certificates of deposit, with a weighted average rate of 3.58% and a weighted average maturity at inception of eighteen months, matured and $4.69 billion of certificates of deposit were issued or repriced, with a weighted average rate of 4.83% and a weighted average maturity at inception of twelve months. Interest expense on Liquid CDs increased $26.6 million to $32.6 million for the nine months ended September 30, 2006, from $6.0 million for the nine months ended September 30, 2005, primarily due to an increase of $693.9 million in the average balance, coupled with an increase in the average cost to 4.43% for the nine months ended September 30, 2006, from 2.78% for the nine months ended September 30, 2005.

Interest expense on borrowings for the nine months ended September 30, 2006 decreased $8.8 million to $234.5 million, from $243.3 million for the nine months ended September 30, 2005, resulting from a decrease of $1.38 billion in the average balance, partially offset by an increase in the average cost to 4.24% for the nine months ended September 30, 2006, from 3.70% for the nine months ended September 30, 2005.

The principal reasons for the changes in the average costs and average balances of the various liabilities noted above for the nine months ended September 30, 2006 are consistent with the principal reasons for the changes noted for the three months ended September 30, 2006, previously discussed.

Provision for Loan Losses

During the three and nine months ended September 30, 2006 and 2005, no provision for loan losses was recorded. The allowance for loan losses totaled $79.9 million at September 30, 2006 and $81.2 million at December 31, 2005. We believe our allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, giving consideration to the composition and size of our loan portfolio, our charge-off experience and our non-accrual and non-performing loans. The composition of our loan portfolio has remained consistent over the last several years. At September 30, 2006, our loan portfolio was comprised of 68% one-to-four family mortgage loans, 20% multi-family mortgage loans, 8% commercial real estate loans and 4% other loan categories. Our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. Our non-performing loans, which are comprised primarily of mortgage loans, decreased $9.9 million to $55.1 million, or 0.37% of total loans, at September 30, 2006, from $65.0 million, or 0.45% of total loans, at December 31, 2005. This decrease was primarily due to a reduction in non-performing multi-family mortgage loans as five such loans, totaling $11.7 million, were brought current by the borrowers during

37

the 2006 first quarter and returned to performing status, coupled with the sale of certain non-performing loans during the three months ended September 30, 2006 totaling $10.1 million. There were no non-performing loans held for sale at September 30, 2006.

We review our allowance for loan losses on a quarterly basis. Material factors considered during our quarterly review are our historical loss experience and the impact of current economic conditions. Our net charge-off experience was three basis points of average loans outstanding, annualized, for the three months ended September 30, 2006 and was one basis point of average loans outstanding, annualized, for the nine months ended September 30, 2006 and for the three and nine months ended September 30, 2005. Net loan charge-offs totaled $1.1 million for the three months ended September 30, 2006, compared to $472,000 for the three months ended September 30, 2005, and $1.2 million for the nine months ended September 30, 2006, compared to $711,000 for the nine months ended September 30, 2005. The increase in net charge-offs for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, was primarily due to a $947,000 charge-off in the 2006 third quarter related to a non-performing multi-family loan in foreclosure which was sold. While the charge-off related to that loan caused our net charge-off experience in the 2006 third quarter to increase somewhat, it did not impact our charge-off experience for the nine months ended September 30, 2006, which remained consistent with our past experience at one basis point of average loans outstanding, annualized. As previously discussed, there has been a slow down in the housing market, particularly during the 2006 third quarter. We are closely monitoring the local and national real estate markets and other factors related to the risks inherent in the loan portfolio. Based on our evaluation of the foregoing factors, our 2006 analyses did not indicate that a change in our allowance for loan losses at September 30, 2006 was warranted.

The allowance for loan losses as a percentage of non-performing loans increased to 145.16% at September 30, 2006, from 124.81% at December 31, 2005, primarily due to the decrease in non-performing loans from December 31, 2005 to September 30, 2006. The allowance for loan losses as a percentage of total loans was 0.54% at September 30, 2006 and 0.56% at December 31, 2005. For further discussion of the methodology used to evaluate the allowance for loan losses, see “Critical Accounting Policies” and for further discussion of non-performing loans, see “Asset Quality.”

Non-Interest Income

Non-interest income for the three months ended September 30, 2006 decreased $5.5 million to $22.9 million, from $28.4 million for the three months ended September 30, 2005, primarily due to decreases in mortgage banking income, net, customer service fees and other loan fees. For the nine months ended September 30, 2006, non-interest income decreased $8.1 million to $67.5 million, from $75.6 million for the nine months ended September 30, 2005, primarily due to decreases in other non-interest income, mortgage banking income, net, and other loan fees.

Mortgage banking income, net, which includes loan servicing fees, net gain on sales of loans, amortization of MSR and valuation allowance adjustments for the impairment of MSR, decreased $3.5 million to $181,000 for the three months ended September 30, 2006, from $3.7 million for the three months ended September 30, 2005. For the nine months ended September 30, 2006, mortgage banking income, net, decreased $1.3 million to $3.8 million, from $5.1 million for the nine months ended September 30, 2005. These decreases were primarily due to provisions recorded and/or decreases in the recovery of the valuation allowance for the impairment of MSR and decreases in the net gain on sales of loans, partially offset by decreases in amortization of MSR.

38

We recorded a provision in the valuation allowance for the impairment of MSR of $495,000 for the three months ended September 30, 2006 and a recovery of $1.5 million for the nine months ended September 30, 2006. The provision recorded for the three months ended September 30, 2006 reflects the decrease in medium- and long-term interest rates during the quarter ended September 30, 2006. The recovery recorded for the nine months ended September 30, 2006 was primarily due to a decrease in projected loan prepayment speeds as of September 30, 2006, which was a result of the increase in interest rates at September 30, 2006 compared to December 31, 2005. We recorded recoveries in the valuation allowance for the impairment of MSR of $2.7 million for the three months ended September 30, 2005 and $2.6 million for the nine months ended September 30, 2005. The recoveries recorded for the three and nine months ended September 30, 2005 were primarily due to a decrease in projected loan prepayment speeds as of September 30, 2005, which was a result of the increase in interest rates at September 30, 2005 compared to both June 30, 2005 and December 31, 2004.

Net gain on sales of loans decreased $646,000 to $468,000 for the three months ended September 30, 2006, from $1.1 million for the three months ended September 30, 2005 and $1.0 million to $1.7 million for the nine months ended September 30, 2006, from $2.7 million for the nine months ended September 30, 2005, primarily due to a reduction in the volume of loans sold. Amortization of MSR decreased $464,000 to $865,000 for the three months ended September 30, 2006, from $1.3 million for the three months ended September 30, 2005 and $1.4 million to $2.7 million for the nine months ended September 30, 2006, from $4.1 million for the nine months ended September 30, 2005, primarily due to the increase in interest rates from the prior year resulting in lower levels of mortgage refinance activity in 2006. For additional information on our MSR, see “Critical Accounting Policies.”

Other loan fees decreased $414,000 to $983,000 for the three months ended September 30, 2006, from $1.4 million for the three months ended September 30, 2005, and decreased $888,000 to $2.8 million for the nine months ended September 30, 2006, from $3.6 million for the nine months ended September 30, 2005. These decreases were primarily related to the outsourcing of our mortgage loan servicing activities effective December 1, 2005.

Customer service fees decreased $1.6 million to $16.2 million for the three months ended September 30, 2006, from $17.8 million for the three months ended September 30, 2005, primarily due to decreases in insufficient fund fees related to transaction accounts, ATM fees and other checking charges.

Other non-interest income decreased $5.8 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to a $5.5 million charge for the termination of our interest rate swap agreements in the 2006 first quarter.

Non-Interest Expense

Non-interest expense decreased $4.6 million to $53.3 million for the three months ended September 30, 2006, from $57.9 million for the three months ended September 30, 2005, primarily due to decreases in compensation and benefits expense and other expense. For the nine months ended September 30, 2006, non-interest expense decreased $11.2 million to $164.8 million, from $176.0 million for the nine months ended September 30, 2005, primarily due to decreases in compensation and benefits expense, other expense and advertising expense, partially offset by an increase in occupancy, equipment and systems expense.

Compensation and benefits expense decreased $3.5 million, to $27.6 million for the three months ended September 30, 2006, from $31.1 million for the three months ended September

39

30, 2005, and decreased $5.4 million to $86.4 million for the nine months ended September 30, 2006, from $91.8 million for the nine months ended September 30, 2005. These decreases were primarily due to decreases in salary expense and estimated corporate bonuses, partially offset by stock-based compensation cost recognized in 2006, reflecting our adoption of SFAS No. 123(R) effective January 1, 2006. The decrease in salary expense is primarily due to the combined effect of costs of $1.3 million incurred during the 2005 third quarter associated with the outsourcing of our mortgage loan servicing activities and the resulting cost savings realized during 2006, partially offset by normal performance increases during 2006 for officers and staff. During 2006, we recognized stock-based compensation cost related to restricted stock and stock options granted to select officers in December 2005 and stock options granted to outside directors in January 2006. See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements (Unaudited),” for further discussion of the impact of our adoption of SFAS No. 123(R).

Other expense decreased $1.3 million to $7.4 million for the three months ended September 30, 2006, from $8.7 million for the three months ended September 30, 2005, and decreased $5.2 million to $22.3 million for the nine months ended September 30, 2006, from $27.5 million for the nine months ended September 30, 2005. These decreases were primarily due to decreased legal fees and various one-time charges totaling $581,000 in the 2005 third quarter related to the previously discussed outsourcing of our mortgage loan servicing activities. The decrease in legal fees was primarily the result of the completion of the trial phase of the LISB goodwill litigation in the first half of 2005, coupled with a reimbursement of $850,000 for certain legal fees in the 2006 third quarter related to the New York State Attorney General’s investigation related to Independent Financial Marketing Group, Inc., or IFMG, and its related entities. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements (Unaudited),” for further discussion of the goodwill litigation and see Part II, Item 1, “Legal Proceedings,” for further discussion of the New York State Attorney General’s investigation related to IFMG and its related entities.

Advertising expense decreased $1.8 million to $5.7 million for the nine months ended September 30, 2006, from $7.5 million for the nine months ended September 30, 2005, primarily due to the introduction of a business banking marketing campaign in the 2005 first quarter, which was not repeated in 2006. Occupancy, equipment and systems expense increased $1.4 million to $49.2 million for the nine months ended September 30, 2006, from $47.8 million for the nine months ended September 30, 2005, primarily due to an increase in data processing charges resulting from the outsourcing of our mortgage loan servicing activities.

Our percentage of general and administrative expense to average assets was 0.98% for the three months ended September 30, 2006 and 1.00% for the nine months ended September 30, 2006, compared to 1.02% for the three and nine months ended September 30, 2005. The efficiency ratio, which represents general and administrative expense divided by the sum of net interest income plus non-interest income, was 46.96% for the three months ended September 30, 2006 and 44.43% for the nine months ended September 30, 2006, compared to 39.42% for the three months ended September 30, 2005 and 39.93% for the nine months ended September 30, 2005. The increases in the efficiency ratios for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, were primarily due to the decreases in net interest income and non-interest income, partially offset by the decreases in general and administrative expense, previously discussed.

40

Income Tax Expense

Income tax expense totaled $19.1 million for the three months ended September 30, 2006, representing an effective tax rate of 31.8%, and $68.4 million for the nine months ended September 30, 2006, representing an effective tax rate of 33.2%. Income tax expense totaled $29.8 million for the three months ended September 30, 2005 and $88.7 million for the nine months ended September 30, 2005, representing an effective tax rate of 33.5% for the three and nine months ended September 30, 2005. The decrease in the effective tax rate for the three months ended September 30, 2006 was primarily the result of a decrease in pre-tax book income without any significant change in the level of tax-exempt income.

Asset Quality

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 and the maintenance of sound credit standards for new loan originations have resulted in our maintaining a low level of non-performing assets relative to the size of our loan portfolio. Through a variety of strategies, including, but not limited to, aggressive collection efforts and marketing of non-performing loans and foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped to maintain the strength of our financial condition.

Non-Performing Assets

The following table sets forth information regarding non-performing assets at the dates indicated.

	At September 30,				At December 31,
(Dollars in Thousands)	2006				2005
Non-accrual delinquent mortgage loans (1)		$	53,672			$	64,351
Non-accrual delinquent consumer and other loans			889				500
Mortgage loans delinquent 90 days or more and still accruing interest (2)			502				176
Total non-performing loans			55,063				65,027
Real estate owned, net (3)			425				1,066
Total non-performing assets		$	55,488			$	66,093
Non-performing loans to total loans			0.37	%			0.45	%
Non-performing loans to total assets			0.25				0.29
Non-performing assets to total assets			0.26				0.30
Allowance for loan losses to non-performing loans			145.16				124.81
Allowance for loan losses to total loans			0.54				0.56

(1)	Includes multi-family and commercial real estate loans totaling $14.1 million at September 30, 2006 and $28.6 million at December 31, 2005.
(2)	Mortgage loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest due.
(3)	Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value, less estimated selling costs.

Non-performing loans, the most significant component of non-performing assets, decreased $9.9 million to $55.1 million at September 30, 2006, from $65.0 million at December 31, 2005. As previously discussed, this decrease was primarily due to a reduction in non-

41

performing multi-family mortgage loans as five such loans, totaling $11.7 million, were brought current by the borrowers during the 2006 first quarter and returned to performing status, coupled with the sale of certain non-performing loans during the three months ended September 30, 2006 totaling $10.1 million. At September 30, 2006, non-performing multi-family loans totaled $11.6 million and non-performing one-to-four family mortgage loans totaled $39.6 million. Our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. The ratio of non-performing loans to total loans decreased to 0.37% at September 30, 2006, from 0.45% at December 31, 2005. Our ratio of non-performing assets to total assets decreased to 0.26% at September 30, 2006, from 0.30% at December 31, 2005.

We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. At September 30, 2006, $19.8 million of mortgage loans classified as non-performing had missed only two payments, compared to $28.1 million at December 31, 2005. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted.

If all non-accrual loans at September 30, 2006 and 2005 had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $2.5 million for the nine months ended September 30, 2006 and $1.8 million for the nine months ended September 30, 2005. This compares to actual payments recorded as interest income, with respect to such loans, of $1.1 million for the nine months ended September 30, 2006 and $903,000 for the nine months ended September 30, 2005.

In addition to the non-performing loans, we had $815,000 of potential problem loans at September 30, 2006, compared to $813,000 at December 31, 2005. Such loans are 60-89 days delinquent as shown in the following table.

Delinquent Loans

The following table shows a comparison of delinquent loans at the dates indicated.

	At September 30, 2006										At December 31, 2005
	60-89 Days					90 Days or More					60-89 Days					90 Days or More
(Dollars in Thousands)	Number of Loans		Amount			Number of Loans		Amount			Number of Loans		Amount			Number of Loans		Amount
Mortgage loans:
One-to-four family		2	$	224			153	$	39,603			6	$	174			152	$	35,727
Multi-family		—		—			16		11,595			1		101			26		26,256
Commercial real estate		—		—			6		2,976			—		—			6		2,544
Consumer and other loans		32		591			37		889			47		538			47		500
Total delinquent loans		34	$	815			212	$	55,063			54	$	813			231	$	65,027
Delinquent loans to total loans				0.01	%				0.37	%				0.01	%				0.45	%

42

Allowance for Loan Losses

The following table sets forth the change in our allowance for losses on loans for the nine months ended September 30, 2006.

		(In Thousands)
Balance at December 31, 2005	$	81,159
Provision charged to operations		—
Charge-offs:
One-to-four family		(78	)
Multi-family		(967	)
Commercial real estate		(197	)
Consumer and other loans		(263	)
Total charge-offs		(1,505	)
Recoveries:
One-to-four family		28
Consumer and other loans		248
Total recoveries		276
Net charge-offs		(1,229	)
Balance at September 30, 2006	$	79,930

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As a financial institution, the primary component of our market risk is interest rate risk, or IRR. The objective of our IRR management policy is to maintain an appropriate mix and level of assets, liabilities and off-balance sheet items to enable us to meet our earnings and/or growth objectives, while maintaining specified minimum capital levels as required by the OTS, in the case of Astoria Federal, and as established by our Board of Directors. We use a variety of analyses to monitor, control and adjust our asset and liability positions, primarily interest rate sensitivity gap analysis, or gap analysis, and net interest income sensitivity, or NII sensitivity, analysis. Additional IRR modeling is done by Astoria Federal in conformity with OTS requirements.

Gap Analysis

Gap analysis measures the difference between the amount of interest-earning assets anticipated to mature or reprice within specific time periods and the amount of interest-bearing liabilities anticipated to mature or reprice within the same time periods. The following table, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2006 that we anticipate will reprice or mature in each of the future time periods shown using certain assumptions based on our historical experience and other market-based data available to us. As indicated in the Gap Table, our one-year cumulative gap at September 30, 2006 was negative 16.79%. This compares to a one-year cumulative gap of negative 6.79% at December 31, 2005. The change in our one-year cumulative gap is primarily attributable to an increase in Liquid CDs and certificates of deposit, coupled with a decrease in projected securities prepayments.

The Gap Table does not indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities will differ from our estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. We have $2.53 billion of borrowings which are callable within the next twelve months and at various times thereafter. In the Gap Table, callable borrowings are classified according to their maturity dates, which is reflective of our experience through September 30, 2006.

43

	At September 30, 2006
(Dollars in Thousands)	One Year or Less			More than One Year to Three Years			More than Three Years to Five Years			More than Five Years			Total
Interest-earning assets:
Mortgage loans (1)	$	4,184,989		$	5,457,421		$	4,126,550		$	390,767		$	14,159,727
Consumer and other loans (1)		419,039			21,987			9,011			—			450,037
Repurchase agreements		54,660			—			—			—			54,660
Securities available-for-sale		196,516			672,879			631,184			195,864			1,696,443
Securities held-to-maturity		1,047,324			2,012,829			925,917			1,919			3,987,989
FHLB-NY stock		—			—			—			139,349			139,349
Total interest-earning assets		5,902,528			8,165,116			5,692,662			727,899			20,488,205
Net unamortized purchase premiums and deferred costs (2)		27,806			30,816			24,145			2,185			84,952
Net interest-earning assets (3)		5,930,334			8,195,932			5,716,807			730,084			20,573,157
Interest-bearing liabilities:
Savings		281,642			469,446			469,446			989,001			2,209,535
Money market		211,846			131,256			131,256			4,574			478,932
NOW and demand deposit		102,367			204,738			204,738			954,882			1,466,725
Liquid CDs		1,402,562			—			—			—			1,402,562
Certificates of deposit		4,811,573			2,274,170			514,624			18,885			7,619,252
Borrowings, net		2,747,855			3,398,773			99,237			578,494			6,824,359
Total interest-bearing liabilities		9,557,845			6,478,383			1,419,301			2,545,836			20,001,365
Interest sensitivity gap		(3,627,511	)		1,717,549			4,297,506			(1,815,752	)	$	571,792
Cumulative interest sensitivity gap	$	(3,627,511	)	$	(1,909,962	)	$	2,387,544		$	571,792
Cumulative interest sensitivity gap as a percentage of total assets		(16.79	)%		(8.84	)%		11.05	%		2.65	%
Cumulative net interest-earning assets as a percentage of interest-bearing liabilities		62.05	%		88.09	%		113.68	%		102.86	%

(1)	Mortgage loans and consumer and other loans include loans held-for-sale and exclude non-performing loans and the allowance for loan losses.
(2)	Net unamortized purchase premiums and deferred costs are prorated.
(3)	Includes securities available-for-sale at amortized cost.

NII Sensitivity Analysis

In managing IRR, we also use an internal income simulation model for our NII sensitivity analyses. These analyses measure changes in projected net interest income over various time periods resulting from hypothetical changes in interest rates. The interest rate scenarios most commonly analyzed reflect gradual and reasonable changes over a specified time period, which is typically one year. The base net interest income projection utilizes similar assumptions as those reflected in the Gap Table, assumes that cash flows are reinvested in similar assets and liabilities and that interest rates as of the reporting date remain constant over the projection period. For each alternative interest rate scenario, corresponding changes in the cash flow and repricing assumptions of each financial instrument are made to determine the impact on net interest income.

Assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points and remain at that level thereafter, our projected net interest income for the twelve month period beginning October 1, 2006 would decrease by approximately 9.20% from the base projection. At December 31, 2005, in the up 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2006 would have decreased by approximately 5.94% from the base projection.

44

Assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points, and remain at that level thereafter, our projected net interest income for the twelve month period beginning October 1, 2006 would increase by approximately 4.92% from the base projection. At December 31, 2005, in the down 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2006 would have increased by approximately 2.12% from the base projection. As previously discussed, we have $2.53 billion of borrowings which are callable within the next twelve months and at various times thereafter. In the September 30, 2006 NII sensitivity analysis, we have assumed in the up 200 basis point scenario that these borrowings will be called and refinanced, whereas in the comparable December 31, 2005 analysis we assumed that these borrowings would not be called.

Various shortcomings are inherent in both the Gap Table and NII sensitivity analyses. Certain assumptions may not reflect the manner in which actual yields and costs respond to market changes. Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in interest rates may also affect our operating environment and operating strategies as well as those of our competitors. In addition, certain adjustable rate assets have limitations on the magnitude of rate changes over specified periods of time. Accordingly, although our NII sensitivity analyses may provide an indication of our IRR exposure, such analyses are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and our actual results will differ. Additionally, certain assets, liabilities and items of income and expense which may be affected by changes in interest rates, albeit to a much lesser degree, and which do not affect net interest income, are excluded from this analysis. These include income from bank owned life insurance and changes in the fair value of MSR. With respect to these items alone, and assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points, and remain at that level thereafter, our projected net income for the twelve month period beginning October 1, 2006 would increase by approximately $4.0 million. Conversely, assuming the entire yield curve was to decrease 200 basis points, through quarterly parallel decrements of 50 basis points, and remain at that level thereafter, our projected net income for the twelve month period beginning October 1, 2006 would decrease by approximately $8.7 million with respect to these items alone.

For further information regarding our market risk and the limitations of our gap analysis and NII sensitivity analysis, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2005 Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

George L. Engelke, Jr., our Chairman, President and Chief Executive Officer, and Monte N. Redman, our Executive Vice President and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2006. Based upon their evaluation, they each found that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

45

There were no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

In the ordinary course of our business, we are routinely made defendant in or a party to a number of pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity.

As previously discussed, we are a party to two actions pending against the United States, involving assisted acquisitions made in the early 1980’s and supervisory goodwill accounting utilized in connection therewith, which could result in a gain.

On September 15, 2005, the Court rendered a decision in the LISB goodwill litigation awarding us $435.8 million in damages from the U.S. government. On December 14, 2005, the United States filed an appeal of such award. The appeal is currently pending in the United States Court of Appeals for the Federal Circuit. Oral arguments for the appeal were completed in October 2006. No assurance can be given as to the timing, content or ultimate outcome of any such appeal. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements (Unaudited),” for further discussion of the LISB goodwill litigation.

The other action is entitledAstoria Federal Savings and Loan Association vs. United States. The Court, on August 22, 2006, denied the U.S. government’s motion for summary judgment related to damages. The Court has scheduled the trial of this action to commence on April 19, 2007.

The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation.

On or about February 24, 2005, the Attorney General of the State of New York, or the Attorney General, served on Astoria Federal a subpoenaduces tecum, or the Subpoena, seeking documents and information concerning, among other things, our contractual relationship with IFMG, IFMG Securities, Inc. and IFS Agencies, Inc., and the marketing and sale of Alternative Investment Products (i.e., financial products that are not bank instruments insured by the Federal Deposit Insurance Corporation). On several occasions thereafter in 2005 and 2006, the Attorney General supplemented the Subpoena with requests for additional documents and information.

On July 13, 2006, the SEC issued an order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order against IFMG Securities, Inc. for failing to disclose adequately material information to its customers in the offer and sale of mutual fund shares and variable insurance products. The SEC simultaneously accepted IFMG Securities, Inc.’s offer of settlement, in which IFMG Securities, Inc. consented to the entry of the order without admitting or denying the findings contained therein.

46

Our contractual arrangements with IFMG and its related entities impose on them compliance, disclosure and oversight-related obligations in connection with their sale of Alternative Investment Products to our customers at our branch locations. In this regard, we believe we are in full compliance with the Interagency Statement on Retail Sales of Nondeposit Investment Products issued by the federal bank regulatory authorities and Part 536 of the OTS Regulations regarding Consumer Protection in the Sale of Insurance. As a result of the contractual agreements we have with IFMG and its related entities, we believe we will be entitled to indemnification from IFMG, IFMG Securities, Inc. and/or IFS Agencies, Inc. should proceedings be commenced against us with respect to these matters. During the quarter ended September 30, 2006, in connection with our extension and renegotiation of our relationship with IFMG and its related entities, IFMG reimbursed us for $850,000 in legal fees and costs incurred by us to date in connection with the Attorney General’s investigation.

Neither the Company nor Astoria Federal was contacted by the SEC in connection with its investigation of or settlement with IFMG Securities, Inc. We are cooperating with the Attorney General’s inquiry. No charges of wrongdoing on our part in connection with the sale of Alternative Investment Products have been filed by the Attorney General against us. Given the current status of the inquiry, no assurance can be given as to when the inquiry may be concluded, the ultimate result of the inquiry or any potential impact on our financial condition or results of operations.

In 2004, an action entitledDavid McAnaney and Carolyn McAnaney, individually and on behalf of all others similarly situated vs. Astoria Financial Corporation, et al. was commenced in the U.S. District Court for the Eastern District of New York. The action, commenced as a punitive class action, alleges that in connection with the satisfaction of certain mortgage loans made by Astoria Federal, The Long Island Savings Bank, FSB, which was acquired by Astoria Federal in 1998, and their related entities, customers were charged attorney document preparation fees, recording fees and facsimile fees allegedly in violation of the federal Truth in Lending Act, the Real Estate Settlement Procedures Act, or RESPA, the Fair Debt Collection Act, or FDCA, the New York State Deceptive Practices Act, and alleging unjust enrichment and common law fraud.

Astoria Federal previously moved to dismiss the amended complaint, which motion was granted in part and denied in part, dismissing claims based on violations of RESPA and FDCA. The Court further determined that class certification would be considered prior to considering summary judgment. The Court, on September 19, 2006, granted the plaintiff’s motion for class certification. Astoria Federal has denied the claims set forth in the complaint. We currently do not believe this action will likely have a material adverse impact on our financial condition or results of operations. However, no assurance can be given at this time that this litigation will be resolved amicably, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material.

ITEM 1A. Risk Factors

Changes in interest rates may reduce our net income.

Our earnings depend largely on the relationship between the yield on our interest-earning assets, primarily our mortgage loans and mortgage-backed securities, and the cost of our deposits and borrowings. This relationship, known as the interest rate spread, is subject to

47

fluctuation and is affected by economic and competitive factors which influence market interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Fluctuations in market interest rates affect customer demand for our products and services. We are subject to interest rate risk to the degree that our interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest-earning assets.

In addition, the actual amount of time before mortgage loans and mortgage-backed securities are repaid can be significantly impacted by changes in mortgage prepayment rates and market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition.

Some of our borrowings contain features that would allow them to be called prior to their contractual maturity. This would generally occur during periods of rising interest rates. If this were to occur, we would need to either renew the borrowings at a potentially higher rate of interest, which would negatively impact our net interest income, or repay such borrowings. If we sell securities to fund the repayment of such borrowings, any decline in estimated market value with respect to the securities sold would be realized and could result in a loss upon such sale.

The FOMC’s policy of monetary tightening through seventeen consecutive Federal Funds rate increases from June 2004 through June 2006, resulted in a significant flattening of the U.S. Treasury yield curve in 2005 and a flat-to-inverted yield curve throughout 2006. The pause in Federal Funds rate hikes since June 2006 has reversed the trend of rising U.S. Treasury yields and resulted in a further inversion of the yield curve throughout the quarter ended September 30, 2006. This continued pattern of interest yield curve inversion limits our growth opportunities and continues to put pressure on our net interest margin. As a result, we have continued to pursue our strategy of shrinking the balance sheet through a reduction in the securities and borrowings portfolios through normal cash flow, while emphasizing deposit and loan growth.

We expect the operating environment to remain very challenging as a result of the prolonged flat-to-inverted U.S. Treasury yield curve that continues to negatively impact our net interest margin and earnings and limits opportunities for profitable growth. We anticipate continued margin compression for the fourth quarter, although the magnitude of the compression should be less than the current quarter. Based on the external economic forecasting model we utilize, which as of October 2006 projected three 25 basis point reductions by the Federal Reserve in 2007 and a gradual flattening of the yield curve, we anticipate our net interest margin should remain relatively stable in 2007. We will, as a result, continue our strategy of shrinking the balance sheet through reductions in the securities and borrowings portfolios through normal cash flow, while we emphasize deposit and loan growth, all of which should continue to improve both the quality of the balance sheet and earnings. While growth opportunities remain limited, we will continue to focus on the repurchase of our stock as a desirable use of capital. These strategies should better position us to take advantage of more profitable asset growth opportunities when the yield curve steepens.

48

Interest rates do and will continue to fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that will cause rates to change. Accordingly, no assurance can be given that the yield curve will not remain inverted and that our net interest margin and net interest income will not remain under pressure in 2007.

Our results of operations are affected by economic conditions in the New York metropolitan area and other areas.

Our retail banking and a significant portion of our lending business (approximately 47% of our one-to-four family and 93% of our multi-family and commercial real estate mortgage loan portfolios at September 30, 2006) are concentrated in the New York metropolitan area, which includes New York, New Jersey and Connecticut. As a result of this geographic concentration, our results of operations largely depend upon economic conditions in this area as well as other areas.

Decreases in real estate values could adversely affect the value of property used as collateral for our loans. The average loan-to-value ratio of our mortgage loan portfolio is less than 65% based on current principal balances and original appraised values. However, no assurance can be given that the original appraised values are reflective of current market conditions. Adverse changes in the economy caused by inflation, recession, unemployment or other factors beyond our control may also have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. Consequently, a deterioration in economic conditions, particularly in the New York metropolitan area, could have a material adverse impact on the quality of our loan portfolio, which could result in an increase in delinquencies, causing a decrease in our interest income as well as an adverse impact on our loan loss experience, causing an increase in our allowance for loan losses. Such a deterioration also could adversely impact the demand for our products and services, and, accordingly, our results of operations.

During the first half of 2006, the national and local real estate markets, although somewhat weaker than a year ago, continued to support new and existing home sales at reduced levels. There has been a slowdown in the housing market, particularly during the 2006 third quarter, both nationally and locally, as evidenced by reports of reduced levels of new and existing home sales, increasing inventories of houses on the market, stagnant to declining property values and an increase in the length of time houses remain on the market.

No assurance can be given that these conditions will improve or will not worsen or that such conditions will not result in a decrease in our interest income or an adverse impact on our loan losses.

We operate in a highly regulated industry, which limits the manner and scope of our business activities.

We are subject to extensive supervision, regulation and examination by the OTS and by the FDIC. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the deposit insurance funds and our depositors, and not to benefit our stockholders. This 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 capital levels, the

49

timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, we must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.

On October 4, 2006, the OTS and other federal bank regulatory authorities published the Interagency Guidance on Nontraditional Mortgage Product Risks, or the Guidance. The Guidance describes sound practices for managing risk, as well as marketing, originating and servicing nontraditional mortgage products, which include, among other things, interest only loans. The Guidance sets forth supervisory expectations with respect to loan terms and underwriting standards, portfolio and risk management practices and consumer protection. For example, the Guidance indicates that originating interest only loans with reduced documentation is considered a layering of risk and that institutions are expected to demonstrate mitigating factors to support their underwriting decision and the borrower’s repayment capacity. Specifically, the Guidance indicates that a lender may accept a borrower’s statement as to the borrower’s income without obtaining verification only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity and that, for many borrowers, institutions should be able to readily document income.

Currently, we originate both interest only and interest only reduced documentation loans. We do not originate negative amortization or payment option loans. Reduced documentation loans include stated income, full asset, or SIFA, loans; stated income, stated asset, or SISA, loans; and Super Streamline loans. SIFA and SISA loans require a prospective borrower to complete a standard mortgage loan application while the Super Streamline product requires the completion of an abbreviated application and is in effect considered a “no documentation” loan. Each of these products requires the receipt of an appraisal of the real estate used as collateral for the mortgage loan and a credit report on the prospective borrower. The loans are priced according to our internal risk assessment of the loan giving consideration to the loan-to-value ratio, the potential borrower’s credit scores and various other credit criteria. SIFA loans require the verification of a potential borrower’s asset information on the loan application, but not the income information provided.

During the nine months ended September 30, 2006, originations of interest only loans totaled $1.47 billion, of which $1.28 billion were one-to-four family loans and $185.8 million were multi-family and commercial real estate loans. Included in the interest only one-to-four family loan originations for the nine months ended September 30, 2006 were $735.9 million of interest only reduced documentation loans. At September 30, 2006, our mortgage loan portfolio included $5.72 billion of one-to-four family interest only loans and $538.6 million of multi-family and commercial real estate interest only loans. Non-performing interest only loans totaled $8.8 million at September 30, 2006.

We are currently evaluating the Guidance to determine our compliance and whether or not we need to modify our risk management practices, underwriting guidelines or practices relating to communications with consumers. Therefore, at this time, we cannot predict the impact the Guidance may have, if any, on our loan origination volumes or our underwriting procedures in future periods.

50

For a summary of other risk factors relevant to our operations, see Part I, Item 1A, “Risk Factors,” in our 2005 Annual Report on Form 10-K. There are no other material changes in risk factors relevant to our operations since December 31, 2005 except as discussed above.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the repurchases of our common stock by month during the three months ended September 30, 2006.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1, 2006 through July 31, 2006	540,000	$	29.94	540,000	5,027,300
August 1, 2006 through August 31, 2006	680,000	$	30.20	680,000	4,347,300
September 1, 2006 through September 30, 2006	600,000	$	31.07	600,000	3,747,300
Total	1,820,000	$	30.41	1,820,000

All of the shares repurchased during the three months ended September 30, 2006 were repurchased under our eleventh stock repurchase plan, approved by our Board of Directors on December 21, 2005, which authorized the purchase, at management’s discretion, of 10,000,000 shares, or approximately 10% of our common stock outstanding, over a two year period in open-market or privately negotiated transactions.

ITEM 3.Defaults Upon Senior Securities

Not applicable.

ITEM 4.Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.Other Information

Not applicable.

51

ITEM 6.Exhibits

Exhibit No.	Identification of Exhibit
31.1	Certifications of Chief Executive Officer.
31.2	Certifications of Chief Financial Officer.
32.1	Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.
32.2	Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Astoria Financial Corporation
Dated: November 7, 2006	By:	/s/	Monte N. Redman
			Monte N. Redman
			Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

52

Exhibit Index

Exhibit No.	Identification of Exhibit
31.1	Certifications of Chief Executive Officer.
31.2	Certifications of Chief Financial Officer.
32.1	Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.
32.2	Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section.

53