UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 001-11967
ASTORIA FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3170868
- ------------------------------ ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
One Astoria Federal Plaza,
Lake Success, New York 11042 (516) 327-3000
- ------------------------------ -------------- --------------------------------
(Address of principal (Zip code) (Registrant's telephone number,
executive offices) including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
- ------------------------------ --------------------------------
Common Stock, par value $.01 New York Stock
per share, and related Exchange
preferred share purchase
rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [X] NO [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 30, 2005, based on the closing price for a share of the
registrant's Common Stock on that date as reported by the New York Stock
Exchange, was $2.96 billion.
The number of shares of the registrant's Common Stock outstanding as of February
15, 2006 was 104,060,924 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be utilized in connection with the
Annual Meeting of Stockholders to be held on May 17, 2006 and any adjournment
thereof, which will be filed with the Securities and Exchange Commission within
120 days from December 31, 2005, are incorporated by reference into Part III.
ASTORIA FINANCIAL CORPORATION
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. Business ....................................................................... 2
Item 1A. Risk Factors ................................................................... 29
Item 1B. Unresolved Staff Comments ...................................................... 32
Item 2. Properties ..................................................................... 32
Item 3. Legal Proceedings .............................................................. 32
Item 4. Submission of Matters to a Vote of Security Holders ............................ 33
Part II
Item 5. Market for Astoria Financial Corporation's Common
Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ........................................................ 34
Item 6. Selected Financial Data ........................................................ 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 38
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ..................... 67
Item 8. Financial Statements and Supplementary Data .................................... 69
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................................... 69
Item 9A. Controls and Procedures ........................................................ 70
Item 9B. Other Information .............................................................. 70
Part III
Item 10. Directors and Executive Officers of Astoria Financial Corporation............... 70
Item 11. Executive Compensation ......................................................... 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters .............................. 71
Item 13. Certain Relationships and Related Transactions ................................. 72
Item 14. Principal Accountant Fees and Services ......................................... 73
Part IV
Item 15. Exhibits and Financial Statement Schedules ..................................... 73
SIGNATURES ................................................................................ 74
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These statements may be identified by the use of
the words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "outlook," "plan," "potential," "predict," "project," "should," "will,"
"would" and similar terms and phrases, including references to assumptions.
Forward-looking statements are based on various assumptions and analyses made by
us in light of our management's experience and its perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate under the circumstances. These statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors (many of which are beyond our control) that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. These factors include, without limitation, the
following:
o the timing and occurrence or non-occurrence of events may be subject
to circumstances beyond our control;
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins
or affect the value of our investments;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
o general economic conditions, either nationally or locally in some or
all areas in which we do business, or conditions in the securities
markets or the banking industry may be less favorable than we
currently anticipate;
o legislative or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than we
anticipate;
o success or consummation of new business initiatives may be more
difficult or expensive than we anticipate; or
o litigation or other matters before regulatory agencies, whether
currently existing or commencing in the future, may delay the
occurrence or non-occurrence of events longer than we anticipate.
We have no obligation to update any forward-looking statements to reflect events
or circumstances after the date of this document.
1
PART I
As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial
Corporation and its consolidated subsidiaries, principally Astoria Federal
Savings and Loan Association.
ITEM 1. BUSINESS
General
We are a Delaware corporation organized in 1993 as the unitary savings and loan
association holding company of Astoria Federal Savings and Loan Association and
its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake
Success, New York and our principal business is the operation of our
wholly-owned subsidiary, Astoria Federal. Astoria Federal's primary business is
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, principal repayments on loans and
securities and borrowings, primarily in one-to-four family mortgage loans,
multi-family mortgage loans, commercial real estate loans and mortgage-backed
securities. To a lesser degree, Astoria Federal also invests in construction
loans and consumer and other loans, U.S. government, government agency and
government-sponsored enterprise, or GSE, securities and other investments
permitted by federal laws and regulations.
Our results of operations are dependent primarily on our net interest income,
which is the difference between the interest earned on our assets, primarily our
loan and securities portfolios, and our cost of funds, which consists of the
interest paid on our deposits and borrowings. Our net income is also affected by
our provision for loan losses, non-interest income, general and administrative
expense, other non-interest expense and income tax expense. Non-interest income
generally includes customer service fees; other loan fees; net gain on sales of
securities; mortgage banking income, net; income from bank owned life insurance,
or BOLI; and other non-interest income. General and administrative expense
consists of compensation and benefits expense; occupancy, equipment and systems
expense; federal deposit insurance premiums; advertising expense; and other
operating expenses. Our earnings are significantly affected by general economic
and competitive conditions, particularly changes in market interest rates and
U.S. Treasury yield curves, government policies and actions of regulatory
authorities.
In addition to Astoria Federal, Astoria Financial Corporation has two other
subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF
Insurance Agency, Inc. is a life insurance and property and casualty insurance
agency. Through contractual agreements with various third party marketing
organizations, AF Insurance Agency, Inc. makes insurance products available
primarily to the customers of Astoria Federal. AF Insurance Agency, Inc. is a
wholly-owned subsidiary which is consolidated with Astoria Financial Corporation
for financial reporting purposes. Our other subsidiary, Astoria Capital Trust I,
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," or FIN 46(R). 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 the only voting securities of
Astoria Capital Trust I), which are 100% owned by Astoria Financial Corporation,
and using the proceeds to acquire Junior Subordinated Debentures issued by
Astoria Financial Corporation. 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.
We have acquired, and may continue to acquire or organize either directly or
indirectly through Astoria Federal, other subsidiaries and financial
institutions. We continue to evaluate merger and acquisition activity as part of
our strategic objective for long term growth.
2
Available Information
Our internet website address is www.astoriafederal.com. Financial information,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, can be obtained
free of charge from our investor relations website at
http://ir.astoriafederal.com. The above reports are available on our website
immediately after they are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC. Such reports are also available on
the SEC's website at www.sec.gov.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans, most of which are
secured by one-to-four family properties and, to a lesser extent, multi-family
properties and commercial real estate. The remainder of the loan portfolio
consists of a variety of construction and consumer and other loans. At December
31, 2005, our net loan portfolio totaled $14.31 billion, or 63.9% of total
assets.
We originate mortgage loans either directly through our banking and loan
production offices in the New York metropolitan area or indirectly through
brokers and our third party loan origination program. Mortgage loan originations
and purchases totaled $4.32 billion for the year ended December 31, 2005 and
$4.35 billion for the year ended December 31, 2004. Mortgage loan originations
include originations of loans held-for-sale totaling $361.5 million for the year
ended December 31, 2005 and $323.2 million for the year ended December 31, 2004.
Our retail loan origination program accounted for $1.59 billion of originations
during 2005 and $1.83 billion of originations during 2004. We also have an
extensive broker network covering twenty-four states: New York, New Jersey,
Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio, Virginia,
North Carolina, South Carolina, Georgia, Illinois, California, Florida,
Michigan, New Hampshire, Rhode Island, Missouri, Tennessee, Indiana, Kentucky,
Colorado and Alabama; and the District of Columbia. Our broker loan origination
program consists of relationships with mortgage brokers and accounted for $1.86
billion of originations during 2005 and $1.36 billion of originations during
2004. Our third party loan origination program includes relationships with other
financial institutions and mortgage bankers covering forty-four states and the
District of Columbia and accounted for purchases of $874.5 million during 2005
and $1.16 billion during 2004. Mortgage loans purchased through our third party
loan origination program are subject to the same underwriting standards as our
retail and broker originations. Our broker and third party loan origination
programs provide efficient and diverse delivery channels for deployment of our
cash flows. Additionally, they provide geographic diversification, reducing our
exposure to concentrations of credit risk. At December 31, 2005, $8.06 billion,
or 58.4%, of our total mortgage loan portfolio was secured by properties located
in 43 states, other than New York, and the District of Columbia. We have a
concentration of greater than 5.0% of our total mortgage loan portfolio in six
states: 41.6% in New York, 12.5% in New Jersey, 8.9% in Connecticut, 6.6% in
Virginia, 6.4% in Illinois and 5.5% in Maryland. See the "Loan Portfolio
Composition" table on page 7 and the "Loan Maturity, Repricing and Activity"
tables on pages 8 and 9.
Effective December 1, 2005, Dovenmuehle Mortgage, Inc., or DMI, has undertaken
the servicing of our mortgage loan portfolio, including our portfolio of
mortgage loans serviced for other investors. For a further discussion of the
outsourcing of our mortgage servicing, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," or "MD&A."
One-to-Four Family Mortgage Lending
Our primary lending emphasis is on the origination and purchase of first
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. To a much lesser degree, we make loans secured
by non-owner occupied one-to-four family properties acquired as an investment
3
by the borrower. We also originate a limited number of second mortgage loans
which are underwritten according to the same standards as first mortgage loans.
At December 31, 2005, $9.76 billion, or 68.2%, of our total loan portfolio
consisted of one-to-four family mortgage loans, of which $9.20 billion, or
94.3%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio
consists primarily of hybrid and interest only ARM loans. We currently offer
hybrid ARM loans which initially have a fixed rate for one, three, five, seven
or ten years and convert into one year ARM loans at the end of the initial fixed
rate period. The one, three, five and seven year hybrid ARM loans have terms of
up to forty years and the ten year hybrid ARM loans have terms of up to thirty
years. Our hybrid ARM loans require the borrower to make principal and interest
payments during the entire loan term. We also offer interest only ARM loans,
generally with thirty year terms, which have an initial fixed rate for three,
five or seven years and convert into one year interest only ARM loans at the end
of the initial fixed rate period. Interest only ARM loans require the borrower
to pay interest only during the first ten years of the loan term. After the
tenth anniversary of the loan, principal and interest payments are required to
amortize the loan over the remaining loan term. The market for interest only ARM
loans has expanded rapidly over the past several years to meet consumer mortgage
demand. Our portfolio of interest only ARM loans totaled $4.97 billion, or 54.0%
of our ARM loans, at December 31, 2005 and $3.13 billion, or 37.2% of our ARM
loans, at December 31, 2004. We do not originate negative amortization or
payment option ARM loans.
All ARM loans we offer have annual and lifetime interest rate ceilings and
floors. ARM loans may be offered with an initial interest rate which is less
than the fully indexed rate for the loan at the time of origination. We
determine the initial discounted rate in accordance with market and competitive
factors. To recognize the credit risks associated with ARM loans initially
offered below their fully-indexed rates, we generally underwrite our one-year
ARM loans assuming a rate equal to 200 basis points over the initial discounted
rate, but not less than 7.00%. For ARM loans with longer adjustment periods, and
therefore less credit risk due to the longer period for the borrower's income to
adjust to anticipated higher future payments, we underwrite the loans using the
initial rate, which may be a discounted rate. We use the same underwriting
standards for our retail, broker and third party mortgage loan originations.
Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of
the appraised value of the property securing the loan. Generally, for mortgage
loans which have a loan-to-value ratio of greater than 80%, we require the
mortgagor to obtain private mortgage insurance. In addition, we offer a variety
of proprietary products which allow the borrower to obtain financing of up to
90% loan-to-value without private mortgage insurance. This type of financing
does not comprise a significant portion of our portfolio.
ARM loans pose credit risks somewhat greater than the risks posed by fixed rate
loans primarily because, as interest rates rise, the underlying payments of the
borrower increase when the loan is beyond its initial fixed rate period,
increasing the potential for default. Interest only ARM loans have an additional
potential risk element when the loan terms are eventually recast to include
principal payments and the underlying payments increase further. We continue to
prudently manage the greater risk posed by ARM loans through the application of
sound underwriting practices and strong risk management systems.
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various GSEs or other investors with servicing
either retained or released. The sale of such loans is generally arranged
through a master commitment either on a mandatory delivery or best efforts
basis. Loans serviced for others totaled $1.50 billion at December 31, 2005.
One-to-four family loan originations and purchases totaled $3.25 billion in 2005
and $3.20 billion in 2004. One-to-four family loan originations include
originations of loans held-for-sale totaling $361.5 million in 2005 and $323.2
million in 2004.
4
Multi-Family and Commercial Real Estate Lending
While we continue to primarily be a one-to-four family mortgage lender, over the
past several years we have increased our emphasis on multi-family and commercial
real estate loan originations. At December 31, 2005, our total loan portfolio
contained $2.83 billion, or 19.8%, of multi-family mortgage loans and $1.08
billion, or 7.5%, of commercial real estate loans. During 2005, we originated
$952.9 million of multi-family, commercial real estate and mixed use loans
compared to $1.05 billion in 2004. Mixed use loans are secured by properties
which are intended for both residential and business use and are classified as
multi-family or commercial real estate based on the greater number of
residential versus commercial units.
The multi-family and commercial real estate loans in our portfolio consist of
both fixed rate and adjustable rate loans which were originated at prevailing
market rates. Multi-family and commercial real estate loans are generally five
to fifteen year term balloon loans amortized over fifteen to thirty years.
During 2005, we began originating interest only multi-family and commercial real
estate loans to qualified borrowers. The interest only loans do not comprise a
significant portion of our multi-family and commercial real estate loan
portfolio at December 31, 2005. Our policy generally has been to originate
multi-family and commercial real estate loans in the New York metropolitan area,
although we also originate loans throughout New York State and in various other
states, including New Jersey, Connecticut, Florida, Pennsylvania, Maryland,
Illinois and West Virginia, and the District of Columbia. Originations in states
other than New York represented 34.6% of our total originations of multi-family
and commercial real estate loans in 2005, of which 85.9% were originated in New
Jersey, Connecticut and Florida. We are authorized by our Board of Directors to
further expand the areas in which we originate multi-family and commercial real
estate loans. In making such loans, we primarily consider the ability of the net
operating income generated by the real estate to support the debt service, the
financial resources, income level and managerial expertise of the borrower, the
marketability of the property and our lending experience with the borrower. Our
current policy is to require a minimum debt service coverage ratio of 1.20 times
for multi-family and commercial real estate loans. Additionally, on multi-family
loans, our current policy is to finance up to 80% of the lesser of the purchase
price or appraised value of the property securing the loan on purchases or 80%
of the appraised value on refinances. On commercial real estate loans, our
current policy is to finance up to 75% of the lesser of the purchase price or
appraised value of the property securing the loans on purchases or 75% of the
appraised value on refinances.
The majority of the multi-family loans in our portfolio are secured by six- to
fifty-unit apartment buildings and mixed use properties (more residential than
business units). As of December 31, 2005, our single largest multi-family loan
had an outstanding balance of $9.9 million and was current and secured by a
275-unit apartment complex in Staten Island, New York. At December 31, 2005, the
average balance of loans in our multi-family portfolio was approximately
$800,000.
Commercial real estate loans are typically secured by retail stores, office
buildings and mixed use properties (more business than residential units). As of
December 31, 2005, our single largest commercial real estate loan had an
outstanding principal balance of $7.5 million and was current and secured by a
multi-story office building in Mineola, New York. At December 31, 2005, the
average balance of loans in our commercial real estate portfolio was
approximately $1.1 million.
Historically, multi-family and commercial real estate loans generally involve a
greater degree of credit risk than one-to-four family loans because they
typically have larger balances and are more affected by adverse conditions in
the economy. As such, these loans require more ongoing evaluation and
monitoring. Because payments on loans secured by multi-family properties and
commercial real estate often depend upon the successful operation and management
of the properties and the businesses which operate from within them, repayment
of such loans may be affected by factors outside the borrower's control, such as
adverse conditions in the real estate market or the economy or changes in
government regulation.
5
Construction Loans
At December 31, 2005, $137.0 million, or 1.0%, of our total loan portfolio
consisted of construction loans. We offer construction loans for all types of
residential properties and certain commercial real estate properties. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. We generally offer construction
loans up to a maximum of $10.0 million. As of December 31, 2005, our average
construction loan commitment was approximately $3.2 million and the average
outstanding balance of loans in our construction loan portfolio was
approximately $1.7 million.
Construction lending involves additional credit risk to the lender as compared
with other types of mortgage lending. This additional credit risk is
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Construction loans are funded monthly, based on the work completed,
and are generally monitored by a professional construction engineer and our
commercial real estate lending department. To a lesser extent, qualified bank
appraisers and certified home inspectors are utilized to monitor less complex
projects.
Consumer and Other Loans
At December 31, 2005, $502.5 million, or 3.5%, of our total loan portfolio
consisted of consumer and other loans which were primarily home equity lines of
credit. We also offer overdraft protection, lines of credit, commercial loans,
passbook loans and student loans. Consumer and other loans, with the exception
of home equity and commercial lines of credit, are offered primarily on a fixed
rate, short-term basis. The underwriting standards we employ for consumer and
other loans include a determination of the borrower's payment history on other
debts and an assessment of the borrower's ability to make payments on the
proposed loan and other indebtedness. In addition to the creditworthiness of the
borrower, the underwriting process also includes a review of the value of the
collateral, if any, in relation to the proposed loan amount. Our consumer and
other loans tend to have higher interest rates, shorter maturities and are
considered to entail a greater risk of default than one-to-four family mortgage
loans.
Our home equity lines of credit are originated on one-to-four family
owner-occupied properties. These lines of credit are generally limited to
aggregate outstanding indebtedness secured by up to 90% of the appraised value
of the property. Such lines of credit are underwritten based on our evaluation
of the borrower's ability to repay the debt. Home equity lines of credit are
adjustable rate loans which are indexed to the prime rate and generally reset
monthly.
Included in consumer and other loans were $24.6 million of commercial business
loans at December 31, 2005. These loans are underwritten based upon the earnings
of the borrower and the value of the collateral securing such loans, if any.
Loan Approval Procedures and Authority
Except for individual loans in excess of $15.0 million or when the overall
lending relationship exceeds $60.0 million (unless the Board of Directors has
set a higher limit with respect to a particular borrower), mortgage loan
approval authority has been delegated by the Board of Directors to our
underwriters and Loan Committee, which consists of certain members of executive
management and other Astoria Federal officers. For loans between $10.0 million
and $15.0 million, the approval of two non-officer directors is also required.
For mortgage loans secured by one-to-four family properties, upon receipt of a
completed application from a prospective borrower, we generally order a credit
report, verify income and other information and, if necessary, obtain additional
financial or credit related information. For mortgage loans secured by
multi-family properties and commercial real estate, we obtain financial
information concerning the operation of the property. Personal guarantees are
generally not obtained with respect to such loans. An appraisal of the real
estate used as collateral for mortgage loans is also obtained as part of the
6
underwriting process. All appraisals are performed by licensed or certified
appraisers, the majority of which are licensed independent third party
appraisers. We have an internal appraisal review process to monitor third party
appraisals. The Board of Directors annually reviews and approves our appraisal
policy.
We also offer several other one-to-four family mortgage loan application
alternatives. We offer stated income, full asset, or SIFA, loans; stated income,
stated asset, or SISA, loans; and Super Streamline loans, which were introduced
in 2005. 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. SIFA loans comprised
approximately 30% of our one-to-four family loan originations in 2005 and had an
average loan-to-value ratio at origination of 61.6%. The SISA and Super
Streamline loans were not a significant portion of our 2005 originations.
Loan Portfolio Composition
The following table sets forth the composition of our loans receivable portfolio
in dollar amounts and in percentages of the portfolio at the dates indicated.
At December 31,
--------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------
Percent Percent Percent
of of of
(Dollars in Thousands) Amount Total Amount Total Amount Total
- --------------------------------------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 9,757,920 68.24% $ 9,054,747 68.68% $ 8,971,048 71.13%
Multi-family 2,826,807 19.77 2,558,935 19.41 2,230,414 17.69
Commercial real estate 1,075,914 7.52 944,859 7.17 880,296 6.98
Construction 137,012 0.96 117,766 0.89 99,046 0.79
- --------------------------------------------------------------------------------------------------------------
Total mortgage loans 13,797,653 96.49 12,676,307 96.15 12,180,804 96.59
- --------------------------------------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 460,064 3.22 466,087 3.53 386,846 3.07
Commercial 24,644 0.17 21,819 0.17 21,937 0.17
Lines of credit, overdraft 10,680 0.07 11,835 0.09 12,963 0.10
Other 7,116 0.05 7,547 0.06 8,400 0.07
- --------------------------------------------------------------------------------------------------------------
Total consumer and other loans 502,504 3.51 507,288 3.85 430,146 3.41
- --------------------------------------------------------------------------------------------------------------
Total loans (gross) 14,300,157 100.00% 13,183,595 100.00% 12,610,950 100.00%
Net unamortized premiums
and deferred loan costs 92,136 79,684 76,037
- --------------------------------------------------------------------------------------------------------------
Total loans 14,392,293 13,263,279 12,686,987
Allowance for loan losses (81,159) (82,758) (83,121)
- --------------------------------------------------------------------------------------------------------------
Total loans, net $14,311,134 $13,180,521 $12,603,866
==============================================================================================================
At December 31,
-------------------------------------------------
2002 2001
-------------------------------------------------
Percent Percent
of of
(Dollars in Thousands) Amount Total Amount Total
- -------------------------------------------------------------------------------------
Mortgage loans (gross):
One-to-four family $ 9,209,360 76.86% $10,105,063 83.59%
Multi-family 1,599,985 13.35 1,094,312 9.05
Commercial real estate 744,623 6.21 598,334 4.95
Construction 56,475 0.47 50,739 0.42
- -------------------------------------------------------------------------------------
Total mortgage loans 11,610,443 96.89 11,848,448 98.01
- -------------------------------------------------------------------------------------
Consumer and other loans (gross):
Home equity 323,494 2.70 189,259 1.57
Commercial 22,569 0.19 18,124 0.15
Lines of credit, overdraft 15,475 0.13 18,046 0.15
Other 11,100 0.09 14,765 0.12
- -------------------------------------------------------------------------------------
Total consumer and other loans 372,638 3.11 240,194 1.99
- -------------------------------------------------------------------------------------
Total loans (gross) 11,983,081 100.00% 12,088,642 100.00%
Net unamortized premiums
and deferred loan costs 76,280 78,619
- -------------------------------------------------------------------------------------
Total loans 12,059,361 12,167,261
Allowance for loan losses (83,546) (82,285)
- -------------------------------------------------------------------------------------
Total loans, net $11,975,815 $12,084,976
=====================================================================================
7
Loan Maturity, Repricing and Activity
The following table shows the contractual maturities of our loans receivable at
December 31, 2005 and does not reflect the effect of prepayments or scheduled
principal amortization.
At December 31, 2005
------------------------------------------------------------------------------------
One-to- Consumer
Four Multi- Commercial and Total Loans
(In Thousands) Family Family Real Estate Construction Other Receivable
- ---------------------------------------------------------------------------------------------------------------------
Amount due:
Within one year $ 5,984 $ 1,890 $ 724 $ 80,881 $ 22,788 $ 112,267
After one year:
One to three years 15,708 16,684 13,244 51,523 13,022 110,181
Three to five years 39,692 23,888 17,760 4,608 6,163 92,111
Five to ten years 376,940 1,300,887 605,438 - 9,683 2,292,948
Ten to twenty years 339,769 1,170,588 407,033 - 8,953 1,926,343
Over twenty years 8,979,827 312,870 31,715 - 441,895 9,766,307
- ---------------------------------------------------------------------------------------------------------------------
Total due after one year 9,751,936 2,824,917 1,075,190 56,131 479,716 14,187,890
- ---------------------------------------------------------------------------------------------------------------------
Total amount due $9,757,920 $ 2,826,807 $ 1,075,914 $ 137,012 $502,504 $14,300,157
Net unamortized premiums and
deferred loan costs 92,136
Allowance for loan losses (81,159)
- ---------------------------------------------------------------------------------------------------------------------
Loans receivable, net $14,311,134
=====================================================================================================================
The following table sets forth at December 31, 2005, the dollar amount of our
loans receivable contractually maturing after December 31, 2006, and whether
such loans have fixed interest rates or adjustable interest rates. Our hybrid
and interest only ARM loans are classified as adjustable rate loans.
Maturing After December 31, 2006
------------------------------------------------
(In Thousands) Fixed Adjustable Total
- ----------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 550,483 $ 9,201,453 $ 9,751,936
Multi-family 388,770 2,436,147 2,824,917
Commercial real estate 124,221 950,969 1,075,190
Construction - 56,131 56,131
Consumer and other loans 13,917 465,799 479,716
- ----------------------------------------------------------------------------
Total $ 1,077,391 $ 13,110,499 $ 14,187,890
============================================================================
8
The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31,
---------------------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------------------
Mortgage loans (gross) (1):
At beginning of year $12,698,725 $12,202,231 $11,671,567
Mortgage loans originated:
One-to-four family 2,380,388 2,043,538 4,036,573
Multi-family 683,643 798,120 1,231,944
Commercial real estate 269,269 256,183 418,107
Construction 114,507 91,704 64,300
- --------------------------------------------------------------------------------------------
Total mortgage loans originated 3,447,807 3,189,545 5,750,924
- --------------------------------------------------------------------------------------------
Purchases of mortgage loans (2) 874,529 1,160,118 1,536,139
Principal repayments (2,820,437) (3,517,383) (6,126,919)
Sales of mortgage loans (361,579) (322,079) (645,908)
Originations (in excess of) less than
advances on construction loans (15,285) (12,189) 18,519
Transfer of loans to real estate owned (2,107) (1,365) (2,028)
Net loans charged off (1,225) (153) (63)
- --------------------------------------------------------------------------------------------
At end of year $13,820,428 $12,698,725 $12,202,231
============================================================================================
Consumer and other loans (gross) (3):
At beginning of year $ 508,691 $ 431,792 $ 374,183
Consumer and other loans originated 295,495 333,393 286,238
Principal repayments (297,843) (253,156) (225,113)
Sales of consumer and other loans (2,458) (3,128) (3,154)
Net loans charged off (374) (210) (362)
- --------------------------------------------------------------------------------------------
At end of year $ 503,511 $ 508,691 $ 431,792
============================================================================================
(1) Includes loans classified as held-for-sale totaling $22.8 million, $22.4
million and $21.4 million at December 31, 2005, 2004 and 2003,
respectively.
(2) Purchases of mortgage loans represent third party loan originations and
are predominantly secured by one-to-four family properties.
(3) Includes loans classified as held-for-sale totaling $1.0 million, $1.4
million and $1.6 million at December 31, 2005, 2004 and 2003,
respectively.
Asset Quality
General
One of our key operating objectives has been and continues to be to maintain a
high level of asset quality. Our concentration on one-to-four family mortgage
lending, the maintenance of sound credit standards for new loan originations and
a strong real estate market have resulted in our maintaining a 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 foreclosed properties, we have been proactive in
addressing problem and non-performing assets which, in turn, has helped to
strengthen our financial condition.
The underlying credit quality of our loan portfolio is dependent primarily on
each borrower's ability to continue to make required loan payments and, in the
event a borrower is unable to continue to do so, the value of the collateral
securing the loan, if any. A borrower's ability to pay typically is dependent,
in the case of one-to-four family mortgage loans and consumer loans, primarily
on employment and other sources of income, and in the case of multi-family and
commercial real estate loans, on the cash flow generated by the property, which
in turn is impacted by general economic conditions. Other factors, such as
unanticipated expenditures or changes in the financial markets, may also impact
a borrower's ability to pay. Collateral values, particularly real estate values,
are also impacted by a variety of factors including general economic conditions,
demographics, maintenance and collection or foreclosure delays.
9
Non-performing Assets
Non-performing assets include non-accrual loans, mortgage loans delinquent 90
days or more and still accruing interest and real estate owned, or REO. Total
non-performing assets increased to $66.1 million at December 31, 2005, from
$33.5 million at December 31, 2004. Non-performing loans, the most significant
component of non-performing assets, increased $32.4 million to $65.0 million at
December 31, 2005, from $32.6 million at December 31, 2004. These increases were
primarily due to increases in non-performing multi-family and one-to-four family
mortgage loans. The increase in non-performing multi-family mortgage loans is
primarily attributable to two large loans to unrelated borrowers. The first is a
$5.4 million loan involving fraud. We have notified the applicable title
insurance company of the existence of this fraud. They are defending our
interest subject to a reservation of rights. The second is a $5.3 million loan
where the borrower has become delinquent as a result of a large increase in his
real estate taxes. The increase in non-performing one-to-four family mortgage
loans is partially the result of an $11.5 million increase in loans which are
classified as non-performing although they have only missed two payments, as
discussed further below. At December 31, 2005, non-performing multi-family loans
totaled $26.3 million and had an average loan-to-value ratio of 69.1% and an
average debt service coverage ratio of 1.77 times. At December 31, 2005,
non-performing one-to-four family mortgage loans totaled $35.7 million and had
an average loan-to-value ratio of 64.9%. Loan-to-value ratios are based on
current principal balance and original appraised value. While our non-performing
loans at December 31, 2005 have increased from December 31, 2004, our
non-performing loans continue to remain at low levels in relation to the size of
our loan portfolio. The ratio of non-performing loans to total loans increased
to 0.45% at December 31, 2005, from 0.25% at December 31, 2004. Our ratio of
non-performing assets to total assets increased to 0.30% at December 31, 2005,
from 0.14% at December 31, 2004. The allowance for loan losses as a percentage
of total non-performing loans decreased to 124.81% at December 31, 2005, from
254.02% at December 31, 2004. For a further discussion of the allowance for loan
losses and non-performing assets and loans, see Item 7, "MD&A."
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. As of December 31, 2005, $28.1 million of
mortgage loans classified as non-performing had missed only two payments,
compared to $12.3 million at December 31, 2004. 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. In
some circumstances, we continue to accrue interest on mortgage loans delinquent
90 days or more as to their maturity date, but not their interest due. In
general, 90 days prior to a loan's maturity, the borrower is reminded of the
maturity date. Where the borrower has continued to make monthly payments to us
and where we do not have a reason to believe that any loss will be incurred on
the loan, we have treated these loans as current and have continued to accrue
interest. Such loans totaled $176,000 at December 31, 2005 and $573,000 at
December 31, 2004.
The net carrying value of our REO totaled $1.1 million at December 31, 2005 and
$920,000 at December 31, 2004 and consisted of one-to-four family properties.
REO is carried net of allowances for losses at the lower of cost or fair value
less estimated selling costs.
Classified Assets
Our Asset Review Department reviews and classifies our assets and independently
reports the results of its reviews to our Board of Directors quarterly. Our
Asset Classification Committee establishes policy relating to the internal
classification of loans and also provides input to the Asset Review Department
in its review of our assets.
Federal regulations and our policy require the classification of loans and
other assets, such as debt and equity securities considered to be of lesser
quality, as special mention, substandard, doubtful or loss. An asset classified
as special mention has potential weaknesses, which, if uncorrected, may result
in the deterioration of the repayment prospects or in our credit position at
some future date. An asset classified
10
as substandard is inadequately protected by the current net worth and paying
capacity of the obligor or the collateral pledged, if any. Substandard assets
include those characterized by the distinct possibility that we will sustain
some loss if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses present make collection or liquidation
in full satisfaction of the loan amount, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable. Assets
classified as loss are those considered uncollectible and of such little value
that their continuance as assets without the establishment of a specific loss
reserve is not warranted. Those assets classified as substandard, doubtful or
loss are considered adversely classified. See the table on page 64 for
additional information on our classified assets.
If a loan is classified, an estimated value of the property securing the loan,
if any, is determined through an appraisal, where possible. In instances where
we have not taken possession of the property or do not otherwise have access to
the premises and, therefore, cannot obtain a complete appraisal, a real estate
broker's opinion as to the value of the property is obtained based primarily on
a drive-by inspection and a comparison of the property securing the loan with
similar properties in the area. In circumstances for which we have determined
that repayment of the loan will be based solely on the collateral and the unpaid
balance of the loan is greater than the estimated fair value of such collateral,
a specific valuation allowance is established for the difference between the
carrying value and the fair value less estimated selling costs.
Impaired Loans
A loan is normally deemed impaired when it is probable we will be unable to
collect both principal and interest due according to the contractual terms of
the loan agreement. A valuation allowance is established when the fair value of
the property that collateralizes the impaired loan, if any, is less than the
recorded investment in the loan. Our impaired loans at December 31, 2005, net of
their related allowance for loan losses of $6.9 million, totaled $31.5 million.
Interest income recognized on impaired loans amounted to $1.3 million for the
year ended December 31, 2005. For further detail on our impaired loans, see Note
4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data."
Allowance for Loan Losses
For a discussion of our accounting policy related to the allowance for loan
losses, see "Critical Accounting Policies" in Item 7, "MD&A."
In addition to the requirements of U.S. generally accepted accounting
principles, or GAAP, related to loss contingencies, a federally chartered
savings association's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the Office of
Thrift Supervision, or OTS. The OTS, in conjunction with the other federal
banking agencies, provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of valuation allowances. It is required that all institutions have
effective systems and controls to identify, monitor and address asset quality
problems, analyze all significant factors that affect the collectibility of the
portfolio in a reasonable manner and establish acceptable allowance evaluation
processes that meet the objectives of the federal regulatory agencies. While we
believe that the allowance for loan losses has been established and maintained
at adequate levels, future adjustments may be necessary if economic or other
conditions differ substantially from the conditions used in making the initial
determinations. In addition, there can be no assurance that the OTS or other
regulators, as a result of reviewing our loan portfolio and/or allowance, will
not request that we alter our allowance for loan losses, thereby affecting our
financial condition and earnings.
11
Investment Activities
General
Our investment policy is designed to complement our lending activities, generate
a favorable return without incurring undue interest rate and credit risk, enable
us to manage the interest rate sensitivity of our overall assets and liabilities
and provide and maintain liquidity, primarily through cash flow. In establishing
our investment strategies, we consider our business and growth plans, the
economic environment, our interest rate sensitivity position, the types of
securities held and other factors. At December 31, 2005, our securities
portfolio totaled $6.57 billion, or 29.4% of total assets.
Federally chartered savings associations have authority to invest in various
types of assets, including U.S. Treasury obligations; securities of government
agencies and GSEs; mortgage-backed securities, including collateralized mortgage
obligations, or CMOs, and real estate mortgage investment conduits, or REMICs;
certain certificates of deposit of insured banks and federally chartered savings
associations; certain bankers acceptances; and, subject to certain limits,
corporate securities, commercial paper and mutual funds. Our investment policy
also permits us to invest in certain derivative financial instruments. We do not
use derivatives for trading purposes. See Note 1 and Note 10 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data," for further discussion of such derivative financial
instruments.
Securities
Our securities portfolio is comprised primarily of mortgage-backed securities.
At December 31, 2005, our mortgage-backed securities totaled $6.43 billion, or
97.8% of total securities, of which $6.33 billion, or 96.3% of total securities,
were REMIC and CMO securities, substantially all of which had fixed rates. These
securities provide liquidity, collateral for borrowings and minimal credit risk
while providing appropriate returns and are an attractive alternative to other
investments due to the wide variety of maturity and repayment options available.
Of the REMIC and CMO securities portfolio, $5.91 billion, or 93.5%, are
guaranteed by Fannie Mae, or FNMA, Freddie Mac, or FHLMC, or Ginnie Mae, or
GNMA, as issuer. The balance of this portfolio is comprised of privately issued
securities, substantially all of which have a credit rating of AAA. In addition
to our REMIC and CMO securities, at December 31, 2005, we had $98.9 million, or
1.5% of total securities, in mortgage-backed pass-through certificates
guaranteed by either FNMA, FHLMC or GNMA.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit enhancements
that reduce credit risk. However, mortgage-backed securities are more liquid
than individual mortgage loans and more easily used to collateralize our
borrowings. In general, our mortgage-backed securities are weighted at no more
than 20% for OTS risk-based capital purposes, compared to the 50% risk weighting
assigned to most non-securitized one-to-four family mortgage loans. While
mortgage-backed securities carry a reduced credit risk as compared to whole
loans, they, along with whole loans, remain subject to the risk of a fluctuating
interest rate environment. Changes in interest rates affect both the prepayment
rate and estimated fair value of mortgage-backed securities and mortgage loans.
In addition to mortgage-backed securities, we have $147.2 million of other
securities which consist of FNMA and FHLMC preferred stock, obligations of
states and political subdivisions and corporate debt and other securities, some
of which, by their terms, may be called by the issuer, typically after the
passage of a fixed period of time. As of December 31, 2005, the amortized cost
of callable securities totaled $124.1 million. No securities were called during
the year ended December 31, 2005.
At December 31, 2005, our securities available-for-sale totaled $1.84 billion
and our securities held-to-maturity totaled $4.73 billion. For a further
discussion of our securities portfolio, see the tables on pages 13 and 14, Item
7, "MD&A," and Note 1 and Note 3 of Notes to Consolidated Financial Statements
in Item 8, "Financial Statements and Supplementary Data."
12
As a member of the Federal Home Loan Bank, or FHLB, of New York, or FHLB-NY,
Astoria Federal is required to maintain a specified investment in the capital
stock of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank
System."
Repurchase Agreements
We invest in various money market instruments, including repurchase agreements
(securities purchased under agreements to resell) and overnight and term federal
funds, although at December 31, 2005 and 2004 we had no investments in federal
funds sold. Money market instruments are used to invest our available funds
resulting from cash flow and to help satisfy liquidity needs. For a further
discussion of our repurchase agreements, see Item 7, "MD&A" and Note 1 and Note
2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data."
Securities Portfolio
The following table sets forth the composition of our available-for-sale and
held-to-maturity securities portfolios at their respective carrying values in
dollar amounts and in percentages of the portfolios at the dates indicated. Our
available-for-sale securities portfolio is carried at estimated fair value and
our held-to-maturity securities portfolio is carried at amortized cost.
At December 31,
------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------
Percent Percent Percent
(Dollars in Thousands) Amount of Total Amount of Total Amount of Total
- --------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 1,567,312 85.12% $ 2,077,902 86.33% $ 2,227,851 83.90%
Non-GSE issuance 57,938 3.15 75,715 3.15 103,740 3.91
GSE pass-through certificates 93,124 5.06 126,570 5.26 166,724 6.28
FNMA and FHLMC preferred stock 120,495 6.54 123,548 5.13 131,361 4.95
Other securities 2,482 0.13 3,148 0.13 25,316 0.96
- --------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 1,841,351 100.00% $ 2,406,883 100.00% $ 2,654,992 100.00%
==========================================================================================================================
Securities held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 4,346,631 91.88% $ 5,772,676 91.58% $ 4,958,633 85.60%
Non-GSE issuance 354,395 7.49 480,053 7.62 772,728 13.34
GSE pass-through certificates 5,737 0.12 9,154 0.15 14,345 0.25
Obligations of states and political
subdivisions and corporate debt securities 24,190 0.51 41,053 0.65 47,021 0.81
- --------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 4,730,953 100.00% $ 6,302,936 100.00% $ 5,792,727 100.00%
==========================================================================================================================
The following table sets forth the aggregate amortized cost and estimated fair
value of our securities, substantially all of which are mortgage-backed
securities, where the aggregate amortized cost of securities from a single
issuer exceeds ten percent of our stockholders' equity at December 31, 2005.
Amortized Estimated
(In Thousands) Cost Fair Value
--------------------------------------------------------------------------
FHLMC $3,814,508 $ 3,720,479
FNMA 2,189,651 2,113,636
FHLB-NY (1) 145,749 145,738
- ----------
(1) Comprised primarily of FHLB-NY stock.
13
The table below sets forth certain information regarding the amortized costs,
estimated fair values, weighted average yields and contractual maturities of our
repurchase agreements, FHLB-NY stock and securities available-for-sale and
held-to-maturity portfolios at December 31, 2005 and does not reflect the effect
of prepayments or scheduled principal amortization on our REMICs, CMOs and
pass-through certificates.
Within One to Five to
One Year Five Years Ten Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield
- --------------------------------------------------------------------------------------------------------------------
Repurchase agreements $ 182,803 4.10% $ - -% $ - -%
====================================================================================================================
FHLB-NY stock (1)(2) $ - -% $ - -% $ - -%
====================================================================================================================
Securities available-for-sale:
REMICs and CMOs:
GSE issuance $ - -% $ 173 6.55% $ - -%
Non-GSE issuance - - - - - -
GSE pass-through certificates 20 6.83 277 6.48 14,007 6.87
FNMA and FHLMC preferred
stock (1) - - - - - -
Other securities 1,753 5.09 750 3.85 - -
- --------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 1,773 5.11% $ 1,200 4.85% $ 14,007 6.87%
====================================================================================================================
Securities held-to-maturity:
REMICs and CMOs:
GSE issuance $ - -% $ - -% $ - -%
Non-GSE issuance - - - - - -
GSE pass-through certificates 6 9.22 996 8.47 1,921 6.55
Obligations of states and political
subdivisions and corporate debt securities - - 9,992 5.80 - -
- --------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 6 9.22% $ 10,988 6.04% $ 1,921 6.55%
====================================================================================================================
Over
Ten Years Total Securities
---------------------- -------------------------------------
Weighted Estimated Weighted
Amortized Average Amortized Fair Average
(Dollars in Thousands) Cost Yield Cost Value Yield
- ---------------------------------------------------------------------------------------------------------------
Repurchase agreements $ - -% $ 182,803 $ 182,803 4.10%
===============================================================================================================
FHLB-NY stock (1)(2) $ 145,247 5.25% $ 145,247 $ 145,247 5.25%
===============================================================================================================
Securities available-for-sale:
REMICs and CMOs:
GSE issuance $ 1,645,788 3.96% $ 1,645,961 $ 1,567,312 3.96%
Non-GSE issuance 61,735 3.54 61,735 57,938 3.54
GSE pass-through certificates 76,907 5.66 91,211 93,124 5.85
FNMA and FHLMC preferred
stock (1) 123,495 5.47 123,495 120,495 5.47
Other securities - - 2,503 2,482 4.72
- ---------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 1,907,925 4.11% $ 1,924,905 $ 1,841,351 4.13%
===============================================================================================================
Securities held-to-maturity:
REMICs and CMOs:
GSE issuance $ 4,346,631 4.49% $ 4,346,631 $ 4,250,726 4.49%
Non-GSE issuance 354,395 4.45 354,395 346,099 4.45
GSE pass-through certificates 2,814 8.25 5,737 5,926 7.72
Obligations of states and political
subdivisions and corporate debt securities 14,198 6.56 24,190 24,262 6.24
- ---------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 4,718,038 4.50% $ 4,730,953 $ 4,627,013 4.50%
===============================================================================================================
(1) As equity securities have no maturities, they are classified in the over
ten years category.
(2) The carrying amount of FHLB-NY stock equals cost.
14
Sources of Funds
General
Our primary source of funds is the cash flow provided by our investing
activities, including principal and interest payments on loans and securities.
Our other sources of funds are provided by operating activities (primarily net
income) and financing activities, including deposits and borrowings.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms.
We presently offer passbook and statement savings accounts, money market
accounts, NOW and demand deposit accounts, Liquid certificates of deposit, or
Liquid CDs, and certificates of deposit, which include all time deposits other
than Liquid CDs. Liquid CDs were introduced in January 2005 and 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. 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. At December 31, 2005, our deposits totaled $12.81
billion. Of the total deposit balance, $1.52 billion, or 11.8%, represent
Individual Retirement Accounts. We held no brokered deposits at December 31,
2005.
The flow of deposits is influenced significantly by general economic conditions,
changes in prevailing interest rates, pricing of deposits and competition. Our
deposits are primarily obtained from areas surrounding our banking offices. We
rely primarily on our sales and marketing efforts, including print advertising,
competitive rates, quality service, our PEAK Process, new products and
long-standing customer relationships to attract and retain these deposits. When
we determine the levels of our deposit rates, consideration is given to local
competition, yields of U.S. Treasury securities and the rates charged for other
sources of funds. We continue to experience intense competition for deposits.
However, we continue to maintain a strong level of core deposits, which has
contributed to our low cost of funds. Core deposits represented 41.8% of total
deposits at December 31, 2005.
For a further discussion of our deposits, see the tables below and on page 16,
Item 7, "MD&A," and Note 7 of Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data."
The following table presents our deposit activity for the years indicated.
For the Year Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------
Opening balance $ 12,323,257 $ 11,186,594 $ 11,067,196
Net deposits (withdrawals) 205,799 899,234 (105,853)
Interest credited 281,399 237,429 225,251
- --------------------------------------------------------------------------------
Ending balance $ 12,810,455 $ 12,323,257 $ 11,186,594
================================================================================
Net increase $ 487,198 $ 1,136,663 $ 119,398
================================================================================
Percentage increase 3.95% 10.16% 1.08%
================================================================================
The following table sets forth the maturity periods of our certificates of
deposit and Liquid CDs in amounts of $100,000 or more at December 31, 2005.
(In Thousands) Amount
-----------------------------------------------------------------------
Within three months $ 724,000
Three to six months 462,122
Six to twelve months 403,488
Over twelve months 725,141
-----------------------------------------------------------------------
Total $ 2,314,751
=======================================================================
15
The following table sets forth the distribution of our average deposit balances
for the periods indicated and the weighted average nominal interest rates for
each category of deposit presented.
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Average Percent Nominal Average Percent Nominal Average Percent Nominal
(Dollars in Thousands) Balance of Total Rate Balance of Total Rate Balance of Total Rate
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 2,742,417 21.74% 0.40% $ 2,973,054 25.18% 0.40% $ 2,907,541 25.96% 0.45%
Money market 804,855 6.38 0.93 1,088,915 9.22 0.58 1,403,363 12.53 0.71
NOW 936,848 7.43 0.10 927,632 7.86 0.10 851,723 7.60 0.18
Non-interest bearing NOW
and demand deposit 632,571 5.01 - 607,190 5.14 - 618,082 5.52 -
Liquid CDs 350,923 2.78 3.01 - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,467,614 43.34 0.55 5,596,791 47.40 0.34 5,780,709 51.61 0.43
- -------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit (1):
Within one year 809,136 6.41 2.35 955,919 8.10 1.26 1,424,825 12.72 1.55
One to three years 3,191,691 25.32 2.98 2,340,879 19.82 2.80 1,688,220 15.07 3.51
Three to five years 2,760,364 21.88 4.32 2,645,262 22.40 4.82 2,071,864 18.51 5.22
Over five years 54,856 0.43 4.53 126,132 1.07 4.95 86,749 0.77 4.95
Jumbo 330,617 2.62 3.25 142,822 1.21 1.65 148,067 1.32 1.74
- -------------------------------------------------------------------------------------------------------------------------------
Total 7,146,664 56.66 3.45 6,211,014 52.60 3.44 5,419,725 48.39 3.62
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $12,614,278 100.00% 2.19% $11,807,805 100.00% 1.97% $11,200,434 100.00% 1.97%
===============================================================================================================================
(1) Terms indicated are original, not term remaining to maturity.
The following table presents, by rate categories, the remaining periods to
maturity of our certificates of deposit and Liquid CDs outstanding at December
31, 2005 and the balances of our certificates of deposit and Liquid CDs
outstanding at December 31, 2005, 2004 and 2003.
Period to maturity from December 31, 2005 At December 31,
----------------------------------------------------- ----------------------------------------
Within One to two Two to three Over three
(In Thousands) one year years years years 2005 2004 2003
- ----------------------------------------------------------------------------------- ----------------------------------------
Certificates of deposit and
Liquid CDs:
1.99% or less $ 295,831 $ 6,965 $ - $ - $ 302,796 $ 982,159 $ 1,446,137
2.00% to 2.99% 1,169,390 127,240 5,757 2,949 1,305,336 2,204,981 797,506
3.00% to 3.99% 2,644,568 929,932 441,300 61,148 4,076,948 1,901,075 1,268,117
4.00% to 4.99% 494,997 263,409 472,787 579,664 1,810,857 699,936 611,975
5.00% to 5.99% 235,682 302,102 - 313 538,097 589,044 678,556
6.00% and over 46,935 - - - 46,935 470,940 699,107
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 4,887,403 $ 1,629,648 $ 919,844 $ 644,074 $ 8,080,969 $ 6,848,135 $ 5,501,398
==============================================================================================================================
Borrowings
Borrowings are used as a complement to deposit generation as a funding source
for asset growth and are an integral part of our interest rate risk management
strategy. We enter into reverse repurchase agreements (securities sold under
agreements to repurchase) with nationally recognized primary securities dealers
and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings
and are secured by the securities sold under the agreements. We also obtain
advances from the FHLB-NY which are generally secured by a blanket lien against,
among other things, our one-to-four family mortgage loan portfolio and our
investment in FHLB-NY stock. The maximum amount that the FHLB-NY will advance,
for purposes other than for meeting withdrawals, fluctuates from time to time in
accordance with the policies of the FHLB-NY. See "Regulation and Supervision -
Federal Home Loan Bank System." Occasionally, we will obtain funds through the
issuance of unsecured debt obligations. These obligations are classified as
other borrowings in our consolidated statement of financial condition. At
December 31, 2005, borrowings totaled $7.94 billion.
In addition, at December 31, 2005, we had a 12-month commitment for overnight
and one month lines of credit with the FHLB-NY totaling $200.0 million, of which
$40.0 million was outstanding under the
16
overnight and $50.0 million was outstanding under the one-month line of credit,
which are included in total borrowings. Both lines of credit are priced at the
federal funds rate plus a spread (generally between 10 and 15 basis points) and
reprice daily.
Included in our borrowings are various obligations which, by their terms, may be
called by the securities dealers and the FHLB-NY. At December 31, 2005, we had
$2.18 billion of borrowings which are callable within one year and at various
times thereafter which have contractual remaining maturities of up to three
years. We also have $500.0 million of borrowings, due in 2015, which are
callable in 2007 and at various times thereafter.
For further information regarding our borrowings, including our borrowings
outstanding, average borrowings, maximum borrowings and weighted average
interest rates at and for each of the years ended December 31, 2005, 2004 and
2003, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data."
Non-interest Revenue
We have continued to focus on building sources of non-interest revenue,
including expanding our checking account base to generate additional fees and by
making mutual funds, deferred annuities and insurance products available to our
customers through our wholly-owned subsidiaries. See "Subsidiary Activities."
Market Area and Competition
Astoria Federal has been, and continues to be, a community-oriented federally
chartered savings association offering a variety of financial services to meet
the needs of the communities it serves. Our retail banking network includes
multiple delivery channels including full service banking offices, automated
teller machines, or ATMs, and telephone and internet banking capabilities. We
consider our strong retail banking network, together with our reputation for
financial strength and customer service, as our major strengths in attracting
and retaining customers in our market areas.
Astoria Federal's deposit gathering sources are primarily concentrated in the
communities surrounding Astoria Federal's banking offices in Queens, Kings
(Brooklyn), Nassau, Suffolk and Westchester counties in the New York
metropolitan area. At December 31, 2005, Astoria Federal ranked fourth in
deposit market share, with an 8.3% market share, in the Long Island market,
which includes the counties of Queens, Brooklyn, Nassau and Suffolk, based on
the Federal Deposit Insurance Corporation, or FDIC, "Summary of Deposits -
Market Share Report" dated June 30, 2005.
Astoria Federal originates mortgage loans through its banking and loan
production offices in the New York metropolitan area, through an extensive
broker network covering twenty-four states and the District of Columbia and
through a third party loan origination program covering forty-four states and
the District of Columbia. Our broker and third party loan origination programs
provide efficient and diverse delivery channels for deployment of our cash
flows. Additionally, they provide geographic diversification, reducing our
exposure to concentrations of credit risk.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past several years, various large
out-of-state financial institutions have entered the New York metropolitan area
market. All are our competitors to varying degrees. Our competition for loans,
both locally and in the aggregate, comes principally from mortgage banking
companies, commercial banks, savings banks and savings and loan associations. We
have experienced continued intense competition for deposits, particularly money
market and checking accounts. Our most direct competition for deposits comes
from commercial banks, savings banks, savings and loan associations and credit
unions. We also face intense competition for deposits from money market mutual
funds and other corporate and government securities funds as well as from other
financial intermediaries such as brokerage firms and insurance companies.
17
Subsidiary Activities
We have two direct wholly-owned subsidiaries, Astoria Federal and AF Insurance
Agency, Inc., which are reported on a consolidated basis at December 31, 2005.
AF Insurance Agency, Inc. is a life insurance and property and casualty
insurance agency. Through contractual agreements with various third party
marketing organizations, AF Insurance Agency, Inc. makes insurance products
available primarily to the customers of Astoria Federal.
We have one other direct subsidiary, Astoria Capital Trust I, which is not
consolidated with Astoria Financial Corporation for financial reporting purposes
in accordance with FIN 46(R). Astoria Capital Trust I was formed in 1999 for the
purpose of issuing $125.0 million of Capital Securities and $3.9 million of
common securities and using the proceeds to acquire $128.9 million of Junior
Subordinated Debentures issued by us. The Junior Subordinated Debentures total
$128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and
are the sole assets of Astoria Capital Trust I. The Junior Subordinated
Debentures are prepayable, in whole or in part, at our option on or after
November 1, 2009 at declining premiums to November 1, 2019, after which the
Junior Subordinated Debentures are prepayable at par value. The Capital
Securities have the same prepayment provisions as the Junior Subordinated
Debentures. See Note 1 and Note 8 of Notes to Consolidated Financial Statements
in Item 8, "Financial Statements and Supplementary Data" for further discussion
of Astoria Capital Trust I, the Capital Securities and the Junior Subordinated
Debentures.
At December 31, 2005, the following were wholly-owned subsidiaries of Astoria
Federal and are reported on a consolidated basis:
AF Agency, Inc. was formed in 1990 to make tax-deferred annuities and a variety
of mutual funds available to the customers of Astoria Federal through an
unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and
administrative services it provides to AF Agency, Inc. Fees generated by AF
Agency, Inc. totaled $8.4 million for the year ended December 31, 2005, which
represented 8.2% of non-interest income.
Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed
in November 2000 in connection with the establishment of a BOLI program by
Astoria Federal. Premiums paid to purchase BOLI in 2000 and 2002 totaled $350.0
million. The carrying amount of our investment in BOLI was $382.6 million, or
1.7% of total assets, at December 31, 2005. See Note 1 of Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data"
for further discussion of BOLI.
Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria
Federal engages in lending activities outside the State of New York.
Star Preferred Holding Corporation, or Star Preferred, was incorporated in the
State of New Jersey in November 1999 to function as a holding company for
Astoria Preferred Funding Corporation, or APFC, which qualified as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. During
2005, substantially all of the mortgage loans held by APFC were transferred to
Fidata Service Corp., or Fidata, a previously inactive subsidiary of Astoria
Federal. The remaining assets of both APFC and Star Preferred were transferred
to Astoria Federal. Star Preferred and APFC have no assets or operations at
December 31, 2005 and are in the process of being dissolved.
Fidata was incorporated in the State of New York in November 1982 and qualifies
for alternative tax treatment under Article 9A of the New York State Tax Law.
Prior to 2005, Fidata was inactive. During 2005, Fidata was reorganized to
qualify as a Connecticut passive investment company, or PIC. Fidata maintains
offices in Norwalk, Connecticut and invests in loans secured by real property
which qualify as intangible investments permitted to be held by a Connecticut
PIC. Fidata mortgage loans totaled $6.76 billion at December 31, 2005.
Suffco Service Corporation, or Suffco, serves as document custodian for the
loans of Astoria Federal and Fidata and certain loans being serviced for FNMA
and other investors.
18
Entrust Holding Corp. is the owner of a fifty percent membership interest in
Entrust Title Agency, LLC, which sells title insurance.
Astoria Federal has two subsidiaries which may qualify for alternative tax
treatment under Article 9A of the New York State Tax Law and therefore, although
inactive, are retained by Astoria Federal.
Astoria Federal has four additional subsidiaries, two of which are single
purpose entities that have interests in real estate investments, which are not
material to our financial condition, and one of which has no assets or
operations but may be used to acquire interests in real estate in the future.
The fourth such subsidiary serves as a holding company for one of the other
three.
Astoria Federal has three additional subsidiaries which are inactive, two of
which Astoria Federal intends to dissolve.
Personnel
As of December 31, 2005, we had 1,545 full-time employees and 225 part-time
employees, or 1,658 full time equivalents. The employees are not represented by
a collective bargaining unit and we consider our relationship with our employees
to be good.
Regulation and Supervision
General
Astoria Federal is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer.
We, as a unitary savings and loan holding company, are regulated, examined and
supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its
deposit accounts are insured up to applicable limits by the FDIC under the
Savings Association Insurance Fund, or SAIF, except for those deposits acquired
from The Greater New York Savings Bank, which are insured by the FDIC under the
Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the
OTS concerning our activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other financial institutions. The OTS
periodically performs safety and soundness examinations of Astoria Federal and
us and tests our compliance with various regulatory requirements. The FDIC
reserves the right to do so as well. The OTS has primary enforcement
responsibility over federally chartered savings associations and has substantial
discretion to impose enforcement action on an institution that fails to comply
with applicable regulatory requirements, particularly with respect to its
capital requirements. In addition, the FDIC has the authority to recommend to
the Director of the OTS that enforcement action be taken with respect to a
particular federally chartered savings association and, if action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances.
This regulation and supervision establishes a comprehensive framework to
regulate and control the activities in which we can engage and is intended
primarily for the protection of the deposit insurance funds and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OTS, FDIC or Congress, could have a
material adverse impact on Astoria Federal and us and our respective operations.
The description of statutory provisions and regulations applicable to federally
chartered savings associations and their holding companies and of tax matters
set forth in this document does not purport to be a complete description of all
such statutes and regulations and their effects on Astoria Federal and us.
19
Federally Chartered Savings Association Regulation
Business Activities
Astoria Federal derives its lending and investment powers from the Home Owners'
Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations, Astoria Federal may invest in mortgage loans secured
by residential and non-residential real estate, commercial and consumer loans,
certain types of debt securities and certain other assets. Astoria Federal may
also establish service corporations that may engage in activities not otherwise
permissible for Astoria Federal, including certain real estate equity
investments and securities and insurance brokerage activities. These investment
powers are subject to various limitations, including (1) a prohibition against
the acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (2) a limit of 400% of an association's capital
on the aggregate amount of loans secured by non-residential real estate
property, (3) a limit of 20% of an association's assets on commercial loans,
with the amount of commercial loans in excess of 10% of assets being limited to
small business loans, (4) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt securities,
(5) a limit of 5% of assets on non-conforming loans (loans in excess of the
specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or
an association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Capital Requirements
The OTS capital regulations require federally chartered savings associations to
meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4% leverage
(core) capital ratio and an 8% total risk-based capital ratio. In assessing an
institution's capital adequacy, the OTS takes into consideration not only these
numeric factors but also qualitative factors as well, and has the authority to
establish higher capital requirements for individual institutions where
necessary. Astoria Federal, as a matter of prudent management, targets as its
goal the maintenance of capital ratios which exceed these minimum requirements
and that are consistent with Astoria Federal's risk profile. At December 31,
2005, Astoria Federal exceeded each of its capital requirements with a tangible
capital ratio of 6.53%, leverage capital ratio of 6.53% and total risk-based
capital ratio of 12.53%.
The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS regulations do not include a specific IRR
component of the risk-based capital requirement. However, the OTS monitors the
IRR of individual institutions through a variety of means, including an analysis
of the change in net portfolio value, or NPV. NPV is defined as the net present
value of the expected future cash flows of an entity's assets and liabilities
and, therefore, hypothetically represents the value of an institution's net
worth. The OTS has also used this NPV analysis as part of its evaluation of
certain applications or notices submitted by thrift institutions. In addition,
OTS Thrift Bulletin 13a provides guidance on the management of IRR and the
responsibility of boards of directors in that area. The OTS, through its general
oversight of the safety and soundness of savings associations, retains the right
to impose minimum capital requirements on individual institutions to the extent
the institution is not in compliance with certain written guidelines established
by the OTS regarding NPV analysis. The OTS has not imposed any such requirements
on Astoria Federal.
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain, and authorized to take other, supervisory actions
against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized," the severity of which depends upon
20
the institution's degree of capitalization. Generally, a capital restoration
plan must be filed with the OTS within 45 days of the date an association
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to the institution, including restrictions
on growth of assets and other forms of expansion. Under the OTS regulations,
generally, a federally chartered savings association is treated as well
capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1
risk-based capital ratio is 6% or greater and its leverage ratio is 5% or
greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 2005, Astoria Federal was considered
"well capitalized" by the OTS, with a total risk-based capital ratio of 12.53%,
Tier 1 risk-based capital ratio of 11.86% and leverage ratio of 6.53%.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the
risk-based assessment system, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of its
most recent quarterly financial report filed with the applicable bank regulatory
agency prior to the commencement of the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's deposit insurance assessment rate
depends on the capital category and supervisory subcategory to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied, ranging from 0 to 27 basis
points. The assessment rates for our BIF-assessable and SAIF-assessable deposits
since 1997 were each 0 basis points. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. SAIF-assessable deposits
are also subject to assessments for payments on the bonds issued in the late
1980s by the Financing Corporation, or FICO, to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. Our total expense in 2005 for
the assessment for the FICO payments was $1.8 million.
On February 8, 2006, President Bush signed the "Federal Deposit Insurance Reform
Act of 2005," or the 2005 Deposit Act, into law. The 2005 Deposit Act contains
provisions designed to reform and modernize the Federal deposit insurance
system. Among other things, the 2005 Deposit Act will merge the BIF and SAIF
into a new Deposit Insurance Fund; index the current $100,000 deposit insurance
limit to inflation beginning in 2010 and every succeeding five years; and
increase the deposit insurance limit for certain retirement accounts to $250,000
and index that limit to inflation.
Loans to One Borrower
Under the HOLA, savings associations are generally subject to the national bank
limits on loans to one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of the institution's unimpaired capital and surplus. Additional amounts may be
loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are secured by readily-marketable collateral. Astoria
Federal is in compliance with applicable loans to one borrower limitations. At
December 31, 2005, Astoria Federal's largest aggregate amount of loans to one
borrower totaled $67.1 million. All of the loans for the largest borrower were
performing in accordance with their terms and the borrower had no affiliation
with Astoria Federal.
21
Qualified Thrift Lender, or QTL, Test
The HOLA requires savings associations to meet a QTL test. Under the QTL test, a
savings association is required to maintain at least 65% of its "portfolio
assets" (total assets less (1) specified liquid assets up to 20% of total
assets, (2) intangibles, including goodwill, and (3) the value of property used
to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, credit card loans, student loans, and small business loans) on a
monthly basis during at least 9 out of every 12 months. As of December 31, 2005,
Astoria Federal maintained in excess of 92% of its portfolio assets in qualified
thrift investments and had more than 65% of its portfolio assets in qualified
thrift investments for each of the 12 months in the year ended December 31,
2005. Therefore, Astoria Federal qualified under the QTL test.
A savings association that fails the QTL test and does not convert to a bank
charter generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the association's home state. In
addition, if the association does not requalify under the QTL test within three
years after failing the test, the association would be prohibited from engaging
in any activity not permissible for a national bank and would have to repay any
outstanding advances from the FHLB as promptly as possible.
Limitation on Capital Distributions
The OTS regulations impose limitations upon certain capital distributions by
savings associations, such as certain cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital.
The OTS regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. As the subsidiary of a savings
and loan holding company, Astoria Federal currently must file a notice with the
OTS at least 30 days prior to each capital distribution. However, if the total
amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus the retained net income for the preceding two years, then Astoria
Federal must file an application to receive the approval of the OTS for a
proposed capital distribution.
Our ability to pay dividends, service our debt obligations and repurchase our
common stock is dependent primarily upon receipt of dividend payments from
Astoria Federal. Astoria Federal may not pay dividends to us if, after paying
those dividends, it would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified Astoria Federal that it was in need of
more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA,
an insured depository institution such as Astoria Federal is prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institution would become "undercapitalized" (as
such term is used in the FDIA). Payment of dividends by Astoria Federal also may
be restricted at any time at the discretion of the appropriate regulator if it
deems the payment to constitute an unsafe and unsound banking practice.
Liquidity
Astoria Federal maintains sufficient liquidity to ensure its safe and sound
operation, in accordance with OTS regulations.
Assessments
The OTS charges assessments to recover the costs of examining savings
associations and their affiliates. These assessments are based on three
components: the size of the association, on which the basic assessment is based;
the association's supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite
22
rating of 3, 4 or 5 in its most recent safety and soundness examination; and the
complexity of the association's operations, which results in an additional
assessment based on a percentage of the basic assessment for any savings
association that managed over $1.00 billion in trust assets, serviced for others
loans aggregating more than $1.00 billion, or had certain off-balance sheet
assets aggregating more than $1.00 billion. Effective July 1, 2004, the OTS
adopted a final rule replacing examination fees for savings and loan holding
companies with semi-annual assessments. The OTS has phased in the assessments at
a rate of 25% of the first semi-annual assessment on July 1, 2004, 50% of the
second semi-annual assessment on January 1, 2005 and 100% of the third
semi-annual assessment on July 1, 2005. For the year ended December 31, 2005, we
paid $2.9 million in assessments.
Branching
The OTS regulations authorize federally chartered savings associations to branch
nationwide to the extent allowed by federal statute. This permits federal
savings and loan associations with interstate networks to more easily diversify
their loan portfolios and lines of business geographically. OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
Community Reinvestment
Under the Community Reinvestment Act, or CRA, as implemented by the OTS
regulations, a federally chartered savings association has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
areas. The CRA does not establish specific lending requirements or programs for
financial institutions, nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community. The CRA requires the OTS, in connection with its
examination of a federally chartered savings association, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The assessment focuses on three tests: (1) a lending test, to
evaluate the institution's record of making loans, including community
development loans, in its designated assessment areas; (2) an investment test,
to evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and areas and small businesses; and (3) a service test, to evaluate
the institution's delivery of banking services throughout its CRA assessment
area, including low and moderate income areas. The CRA also requires all
institutions to make public disclosure of their CRA ratings. Astoria Federal has
been rated as "outstanding" over its last five CRA examinations. Regulations
require that we publicly disclose certain agreements that are in fulfillment of
CRA. We have no such agreements in place at this time.
Transactions with Related Parties
Astoria Federal is subject to the affiliate and insider transaction rules set
forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA,
Regulation W issued by the Federal Reserve Board, or FRB, as well as additional
limitations as adopted by the Director of the OTS. OTS regulations regarding
transactions with affiliates conform to Regulation W. These provisions, among
other things, prohibit, limit or place restrictions upon a savings institution
extending credit to, or entering into certain transactions with, its affiliates
(which for Astoria Federal would include us and our non-federally chartered
savings association subsidiaries, if any), principal stockholders, directors and
executive officers. In addition, the OTS regulations include additional
restrictions on savings associations under Section 11 of HOLA, including
provisions prohibiting a savings association from making a loan to an affiliate
that is engaged in non-bank holding company activities and provisions
prohibiting a savings association from purchasing or investing in securities
issued by an affiliate that is not a subsidiary. The OTS regulations also
include certain specific exemptions from these prohibitions. The FRB and the OTS
require each depository institution that is subject to Sections 23A and 23B to
implement policies and procedures to ensure compliance with Regulation W and the
OTS regulations regarding transactions with affiliates.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition,
23
however, does not apply to mortgages advanced by an insured depository
institution, such as Astoria Federal, that is subject to the insider lending
restrictions of Section 22(h) of the FRA.
Standards for Safety and Soundness
Pursuant to the requirements of FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the OTS, together with the
other federal bank regulatory agencies, adopted guidelines establishing general
standards relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, earnings, compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In addition, the OTS
adopted regulations pursuant to FDICIA to require a savings association that is
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the OTS. If, after being so
notified, a savings association fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance plan, the OTS
must issue an order directing corrective actions and may issue an order
directing other actions of the types to which a significantly undercapitalized
institution is subject under the "prompt corrective action" provisions of
FDICIA. If a savings association fails to comply with such an order, the OTS may
seek to enforce such order in judicial proceedings and to impose civil money
penalties. For further discussion, see "Regulation and Supervision - Federally
Chartered Savings Association Regulation - Prompt Corrective Regulatory Action."
Insurance Activities
Astoria Federal is generally permitted to engage in certain insurance activities
through its subsidiaries. However, Astoria Federal is subject to regulations
prohibiting depository institutions from conditioning the extension of credit to
individuals upon either the purchase of an insurance product or annuity or an
agreement by the consumer not to purchase an insurance product or annuity from
an entity that is not affiliated with the depository institution. The
regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
Privacy Protection
Astoria Federal is subject to OTS regulations implementing the privacy
protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These
regulations require Astoria Federal to disclose its privacy policy, including
identifying with whom it shares "nonpublic personal information," to customers
at the time of establishing the customer relationship and annually thereafter.
The regulations also require Astoria Federal to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, to the extent its sharing of such information is not
exempted, Astoria Federal is required to provide its customers with the ability
to "opt-out" of having Astoria Federal share their nonpublic personal
information with unaffiliated third parties.
Astoria Federal is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies' expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to ensure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.
24
Anti-Money Laundering and Customer Identification
Astoria Federal is subject to OTS regulations implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act
gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act and the related OTS
regulations impose the following requirements with respect to financial
institutions:
o Establishment of anti-money laundering programs.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable
period of time.
o Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering.
o Prohibition on correspondent accounts for foreign shell banks and
compliance with recordkeeping obligations with respect to
correspondent accounts of foreign banks.
In addition, bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on FRA and Bank Merger
Act applications.
Federal Home Loan Bank System
Astoria Federal is a member of the FHLB System which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Astoria Federal, as a member of the FHLB-NY, is currently required
to acquire and hold shares of capital stock in the FHLB-NY. Effective December
1, 2005, the FHLB-NY implemented a new capital plan. The new capital plan
resulted in an automatic exchange of shares of FHLB-NY stock held by members for
shares of FHLB-NY Class B stock and changed the members' minimum stock
investment requirements. The Class B stock has a par value of $100 per share and
is redeemable upon five years notice, subject to certain conditions. The Class B
stock has two subclasses, one for membership stock purchase requirements and the
other for activity-based stock purchase requirements. The minimum stock
investment requirement in the FHLB-NY Class B stock is the sum of the membership
stock purchase requirement, determined on an annual basis at the end of each
calendar year, and the activity-based stock purchase requirement, determined on
a daily basis. For Astoria Federal, the membership stock purchase requirement is
0.2% of the Mortgage-Related Assets, as defined by the FHLB-NY, which consists
principally of residential mortgage loans and mortgage-backed securities
including CMOs and REMICs, held by Astoria Federal. The activity-based stock
purchase requirement for Astoria Federal is equal to the sum of: (1) 4.5% of
outstanding borrowings from the FHLB-NY; (2) 4.5% of the outstanding principal
balance of Acquired Member Assets, as defined by the FHLB-NY, and delivery
commitments for Acquired Member Assets; (3) a specified dollar amount related to
certain off-balance sheet items, which for Astoria Federal is zero; and (4) a
specified percentage ranging from 0 to 5% of the carrying value on the FHLB-NY's
balance sheet of derivative contracts between the FHLB-NY and its members, which
for Astoria Federal is also zero. The FHLB-NY can adjust the specified
percentages and dollar amount from time to time within the ranges established by
the FHLB-NY capital plan. Prior to December 1, 2005, Astoria Federal was
required to acquire and hold shares of capital stock in the FHLB-NY in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 5% of
its outstanding borrowings from the FHLB-NY, whichever was greater.
25
Astoria Federal was in compliance with the FHLB-NY minimum stock investment
requirements with an investment in FHLB-NY stock at December 31, 2005 of $145.2
million. Dividends from the FHLB-NY to Astoria Federal amounted to $6.0 million
for the year ended December 31, 2005, $3.5 million for the year ended December
31, 2004 and $10.6 million for the year ended December 31, 2003.
Federal Reserve System
FRB regulations require federally chartered savings associations to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $7.8 million and $48.3 million (subject
to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the
FRB between 8% and 14%) against that portion of total transaction accounts in
excess of $48.3 million. The first $7.8 million of otherwise reservable balances
(subject to adjustment by the FRB) is exempt from the reserve requirements.
Astoria Federal is in compliance with the foregoing requirements. Since required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce
Astoria Federal's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation
We are a unitary savings and loan association holding company within the meaning
of the HOLA. As such, we are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over us and our savings association
subsidiary. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan association holding
companies that are "grandfathered," i.e., unitary savings and loan association
holding companies in existence or with applications filed with the OTS on or
before May 4, 1999, such as us, retain their authority under the prior law. All
other unitary savings and loan association holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies
from acquiring grandfathered unitary savings and loan association holding
companies.
The HOLA prohibits a savings and loan association holding company (directly or
indirectly, or through one or more subsidiaries) from acquiring another savings
association or holding company thereof without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
Federal Securities Laws
We are subject to the periodic reporting, proxy solicitation, tender offer,
insider trading restrictions and other requirements under the Exchange Act.
Delaware Corporation Law
We are incorporated under the laws of the State of Delaware. Thus, we are
subject to regulation by the State of Delaware and the rights of our
shareholders are governed by the Delaware General Corporation Law.
26
Federal Taxation
General
We report our income on a calendar year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations.
Corporate Alternative Minimum Tax
In addition to the regular income tax, corporations (including savings and loan
associations) generally are subject to an alternative minimum tax, or AMT, in an
amount equal to 20% of alternative minimum taxable income to the extent the AMT
exceeds the corporation's regular tax. The AMT is available as a credit against
future regular income tax. We do not expect to be subject to the AMT.
Tax Bad Debt Reserves
Effective 1996, federal tax legislation modified the methods by which a thrift
computes its bad debt deduction. As a result, Astoria Federal is required to
claim a deduction equal to its actual loss experience, and the "reserve method"
is no longer available. Any cumulative reserve additions (i.e., bad debt
deductions) in excess of actual loss experience for tax years 1988 through 1995
were recaptured over a six year period. Generally, reserve balances as of
December 31, 1987 will only be subject to recapture upon distribution of such
reserves to shareholders. For a further discussion of bad debt reserves, see
"Distributions."
Distributions
To the extent that Astoria Federal makes "nondividend distributions" to
shareholders, such distributions will be considered to result in distributions
from Astoria Federal's "base year reserve," (i.e., its reserve as of December
31, 1987), to the extent thereof, and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in Astoria Federal's taxable income. Nondividend distributions include
distributions in excess of Astoria Federal's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Astoria Federal's current or accumulated earnings
and profits will not constitute nondividend distributions and, therefore, will
not be included in Astoria Federal's taxable income.
The amount of additional taxable income created from a nondividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the nondividend distribution would be includable in gross income for federal
income tax purposes, assuming a 35% federal corporate income tax rate.
Dividends Received Deduction and Other Matters
We may exclude from our income 100% of dividends received from Astoria Federal
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which we will not file a consolidated tax
return, except that if we own more than 20% of the stock of a corporation
distributing a dividend, 80% of any dividends received may be deducted.
State and Local Taxation
New York State Taxation
New York State imposes an annual franchise tax on banking corporations, based on
net income allocable to New York State, at a rate of 7.5%. If, however, the
application of an alternative minimum tax (based on taxable assets allocated to
New York, "alternative" net income, or a flat minimum fee)
27
results in a greater tax, an alternative minimum tax will be imposed. In
addition, New York State imposes a tax surcharge of 17.0% of the New York State
Franchise Tax, calculated using an annual franchise tax rate of 9.0% (which
represents the 2000 annual franchise tax rate), allocable to business activities
carried on in the Metropolitan Commuter Transportation District. These taxes
apply to us, Astoria Federal and certain of Astoria Federal's subsidiaries.
Certain other subsidiaries are subject to a general business corporation tax in
lieu of the tax on banking corporations or are subject to taxes of other
jurisdictions. The rules regarding the determination of net income allocated to
New York State and alternative minimum taxes differ for these subsidiaries.
Bad Debt Deduction
New York State passed legislation that incorporated the former provisions of
Internal Revenue Code, or IRC, Section 593 into New York State tax law. The
impact of this legislation enabled Astoria Federal to defer the recapture of the
New York State tax bad debt reserves that would have otherwise occurred as a
result of the federal amendment to IRC 593. The legislation also enabled Astoria
Federal to continue to utilize the reserve method for computing its bad debt
deduction. Astoria Federal must meet certain definitional tests, primarily
relating to its assets and the nature of its business to be a qualifying thrift
and would then be permitted to establish a reserve for bad debts and to make
annual additions thereto, which additions may, within specified formula limits,
be deducted in arriving at its taxable income. Astoria Federal will be a
qualifying thrift if, among other requirements, at least 60% of its assets are
assets described in Section 1453(h)(1) of the New York State tax law, or the 60%
Test.
Astoria Federal presently satisfies the 60% Test. Although there can be no
assurance that Astoria Federal will satisfy the 60% Test in the future, we
believe that this level of qualifying assets can be maintained by Astoria
Federal. Astoria Federal's deduction for additions to its bad debt reserve with
respect to qualifying loans may be computed using the experience method or a
percentage equal to 32% of Astoria Federal's taxable income, computed with
certain modifications, without regard to Astoria Federal's actual loss
experience, and reduced by the amount of any addition permitted to the reserve
for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria
Federal's deduction with respect to non-qualifying loans must be computed under
the experience method which is based on its actual loss experience.
Under the experience method, the amount of a reasonable addition, in general,
equals the amount necessary to increase the balance of the bad debt reserve at
the close of the taxable year to the greater of (1) the amount that bears the
same ratio to loans outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five preceding taxable years
bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the base year (assuming
that the loans outstanding have not declined since then). The "base year" for
these purposes is the last taxable year beginning before the NYS Percentage of
Taxable Income Method bad debt deduction was taken. Any deduction for the
addition to the reserve for non-qualifying loans reduces the addition to the
reserve for qualifying real property loans calculated under the NYS Percentage
of Taxable Income Method. Each year Astoria Federal reviews the most favorable
way to calculate the deduction attributable to an addition to the bad debt
reserve.
The amount of the addition to the reserve for losses on qualifying real property
loans under the NYS Percentage of Taxable Income Method cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then
the qualifying thrift's aggregate addition to its reserve for losses on
qualifying real property loans cannot, when added to the addition to the reserve
for losses on non-qualifying loans, exceed the amount by which 12% of the amount
that the total deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeded the sum of the qualifying
thrift's surplus, undivided profits and reserves at the beginning of such year.
28
New York City Taxation
Astoria Federal is also subject to the New York City Financial Corporation Tax
calculated, subject to a New York City income and expense allocation, on a
similar basis as the New York State Franchise Tax. New York City has enacted
legislation regarding the use and treatment of tax bad debt reserves that is
substantially similar to the New York State legislation described above. A
significant portion of Astoria Federal's entire net income for New York City
purposes is allocated outside the jurisdiction which has the effect of
significantly reducing the New York City taxable income of Astoria Federal.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, we are exempt from
Delaware corporate income tax but are required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
ITEM 1A. RISK FACTORS
The following is a summary of risk factors relevant to our operations which
should be carefully reviewed. These risk factors do not necessarily appear in
the order of importance.
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 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.
During 2005, the Federal Open Market Committee, or FOMC, raised the federal
funds rate eight times (a total of 200 basis points). As a result, U.S. Treasury
yields at December 31, 2005 have increased from December 31, 2004, with the
exception of the thirty year U.S. Treasury yield, which has decreased. Although
U.S. Treasury yields have risen, yields on the longer end of the U.S. Treasury
yield curve have not risen to the same degree as shorter term yields. This has
resulted in a significant flattening of the U.S. Treasury yield curve, which
began in the latter half of 2004 and continued during 2005. Our short-term
borrowings, as well as our deposits, are generally priced relative to short-term
U.S. Treasury yields whereas our mortgage loans and mortgage-backed securities
are generally priced relative to medium-term (two to five years) U.S. Treasury
yields. The flattening of the yield curve reduces the spread between the yield
on our interest-earning assets and the cost of our deposits and borrowings,
thereby reducing our net income.
29
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.
Changes in interest rates may reduce our stockholders' equity.
At December 31, 2005, $1.84 billion of our securities were classified as
available-for-sale. The estimated fair value of our available-for-sale
securities portfolio may increase or decrease depending on changes in interest
rates. In general, as interest rates rise, the estimated fair value of our fixed
rate securities portfolio will decrease. Our securities portfolio is comprised
primarily of fixed rate securities. We increase or decrease stockholders' equity
by the amount of the change in estimated fair value of our available-for-sale
securities portfolio, net of the related tax benefit, under the category of
accumulated other comprehensive income/loss. Therefore, a decline in the
estimated fair value of this portfolio will result in a decline in reported
stockholders' equity, as well as book value per common share and tangible book
value per common share. This decrease will occur even though the securities are
not sold. If these securities are never sold, the decrease will be recovered
over the life of the securities.
Our results of operations are affected by economic conditions in the New York
metropolitan area.
Our retail banking and a significant portion of our lending business (41.6% of
our mortgage loan portfolio at December 31, 2005) are concentrated in the New
York metropolitan area. As a result of this geographic concentration, our
results of operations largely depend upon economic conditions in this area.
Decreases in real estate values could adversely affect the value of property
used as collateral for our loans. 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 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, on
our results of operations.
Strong competition within our market areas could hurt our profits and slow
growth.
The New York metropolitan area has a high density of financial institutions, a
number of which are significantly larger and have greater financial resources
than we have. Additionally over the past several years, various large
out-of-state financial institutions have entered the New York metropolitan area
market. All are our competitors to varying degrees.
We face intense competition both in making loans and attracting deposits. Our
competition for loans, both locally and in the aggregate, comes principally from
mortgage banking companies, commercial banks, savings banks and savings and loan
associations. Our most direct competition for deposits comes from commercial
banks, savings banks, savings and loan associations and credit unions. We also
face competition for deposits from money market mutual funds and other corporate
and government securities funds as well as from other financial intermediaries
such as brokerage firms and insurance companies. Price competition for loans and
deposits might result in us earning less on our loans and paying more on our
deposits, which would reduce our net interest income. Competition also makes it
more difficult to grow our loan and deposit balances. Our profitability depends
upon our continued ability to compete successfully in our market areas.
Our increased emphasis on multi-family and commercial real estate lending may
expose us to increased lending risks.
At December 31, 2005, $3.90 billion, or 27.3%, of our total loan portfolio
consisted of multi-family and commercial real estate loans. While we continue to
primarily be a one-to-four family mortgage lender, over the past several years
we have increased our emphasis on multi-family and commercial real estate
30
loan originations and intend to continue to emphasize this type of lending.
Multi-family and commercial real estate loans generally involve a greater degree
of credit risk than one-to-four family loans because they typically have larger
balances and are more affected by adverse conditions in the economy. Because
payments on loans secured by multi-family properties and commercial real estate
often depend upon the successful operation and management of the properties and
the businesses which operate from within them, repayment of such loans may be
affected by factors outside the borrower's control, such as adverse conditions
in the real estate market or the economy or changes in government regulation.
As a result of our efforts to continue to grow the multi-family and commercial
real estate loan portfolios, we have increased our emphasis on originations of
multi-family and commercial real estate loans in states other than New York.
Originations in states other than New York represented 34.6% of our total
originations of multi-family and commercial real estate loans in 2005, of which
85.9% were originated in New Jersey, Connecticut and Florida. We could be
subject to additional risks with respect to multi-family and commercial real
estate lending in states other than New York as we have less experience in these
areas with this type of lending and less direct oversight of the borrowers.
Astoria Federal's ability to pay dividends or lend funds to us is subject to
regulatory limitations which, to the extent we need but are not able to access
such funds, may prevent us from making future dividend payments or principal and
interest payments due on our debt obligations.
We are a unitary savings and loan association holding company regulated by the
OTS and almost all of our operating assets are owned by Astoria Federal. We rely
primarily on dividends from Astoria Federal to pay cash dividends to our
stockholders, to engage in share repurchase programs and to pay principal and
interest on our debt obligations. The OTS regulates all capital distributions by
Astoria Federal directly or indirectly to us, including dividend payments. As
the subsidiary of a savings and loan association holding company, Astoria
Federal must file a notice with the OTS at least 30 days prior to each capital
distribution. However, if the total amount of all capital distributions
(including each proposed capital distribution) for the applicable calendar year
exceeds net income for that year to date plus the retained net income for the
preceding two years, then Astoria Federal must file an application to receive
the approval of the OTS for a proposed capital distribution.
In addition, Astoria Federal may not pay dividends to us if, after paying those
dividends, it would fail to meet the required minimum levels under risk-based
capital guidelines and the minimum leverage and tangible capital ratio
requirements or the OTS notified Astoria Federal that it was in need of more
than normal supervision. Under the prompt corrective action provisions of the
FDIA, an insured depository institution such as Astoria Federal is prohibited
from making a capital distribution, including the payment of dividends, if,
after making such distribution, the institution would become "undercapitalized"
(as such term is used in the FDIA). Based on Astoria Federal's current financial
condition, we do not expect that this provision will have any impact on our
ability to obtain dividends from Astoria Federal. Payment of dividends by
Astoria Federal also may be restricted at any time at the discretion of the
appropriate regulator if it deems the payment to constitute an unsafe or unsound
banking practice.
There can be no assurance that Astoria Federal will be able to pay dividends at
past levels, or at all, in the future.
In addition to regulatory restrictions on the payment of dividends, Astoria
Federal is subject to certain restrictions imposed by federal law on any
extensions of credit it makes to its affiliates and on investments in stock or
other securities of its affiliates. We are considered an affiliate of Astoria
Federal. These restrictions prevent affiliates of Astoria Federal, including us,
from borrowing from Astoria Federal, unless various types of collateral secure
the loans. Federal law limits the aggregate amount of loans to and investments
in any single affiliate to 10% of Astoria Federal's capital stock and surplus
and also limits the aggregate amount of loans to and investments in all
affiliates to 20% of Astoria Federal's capital stock and surplus.
31
If we do not receive sufficient cash dividends or borrowings from Astoria
Federal, then we may not have sufficient funds to pay dividends, repurchase our
common stock or service our debt obligations.
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
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.
Changes in laws, government regulation and monetary policy may have a material
effect on our results of operations.
Financial institution regulation has been the subject of significant legislation
and may be the subject of further significant legislation in the future, none of
which is in our control. Significant new laws or changes in, or repeals of,
existing laws, including with respect to federal and state taxation, may cause
our results of operations to differ materially. In addition, cost of compliance
could adversely affect our ability to operate profitably. Further, federal
monetary policy significantly affects credit conditions for Astoria Federal,
particularly as implemented through the Federal Reserve System, primarily
through open market operations in U.S. government securities, the discount rate
for bank borrowings and reserve requirements. A material change in any of these
conditions would have a material impact on Astoria Federal, and therefore on our
results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We operate 86 full-service banking offices, of which 50 are owned and 36 are
leased. We own our principal executive office and the office for our mortgage
operations, both located in Lake Success, New York. We also lease office
facilities for our wholly-owned subsidiaries Fidata in Norwalk, Connecticut, and
Suffco in Farmingdale, New York. We believe such facilities are suitable and
adequate for our operational needs.
We are obligated under a lease commitment through 2017 for our previous mortgage
operating facility in Mineola, New York which we no longer occupy. At December
31, 2005 this facility was fully sublet.
For further information regarding our lease obligations, see Item 7, "MD&A" and
Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data."
ITEM 3. 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.
32
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, or
goodwill litigation, which could result in a gain.
The trial in one of the actions, which is entitled The Long Island Savings Bank,
FSB et al vs. The United States, or the LISB goodwill litigation, commenced on
January 18, 2005 and concluded on July 7, 2005. We asked the court to award
damages totaling $594.0 million from the U.S. government for breach of contract
in connection with a 1983 Assistance Agreement between the Long Island Savings
Bank, FSB, which was acquired by us in 1998, and the Federal Savings and Loan
Insurance Corporation. The Court rendered a decision on September 15, 2005
awarding us $435.8 million in damages from the U.S. government in this action.
On December 14, 2005, the United States filed a notice of appeal. 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, entitled Astoria Federal Savings and Loan Association vs.
United States, has not yet been scheduled for trial. The Court is currently
considering a summary judgment motion filed by the U.S. government.
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 subpoena duces tecum, or the
Subpoena, seeking documents and information concerning, among other things, our
contractual relationship with Independent Financial Marketing Group, Inc., or
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 FDIC). On several occasions thereafter in 2005, and
again in January 2006, the Attorney General supplemented the Subpoena with
requests for additional documents and information.
Our arrangements with IFMG impose on IFMG 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ended December 31, 2005 to a vote of
our security holders through the solicitation of proxies or otherwise.
33
PART II
ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange, or NYSE, under the
symbol "AF." The table below shows the high and low sale prices reported on the
NYSE for our common stock during the periods indicated.
2005 2004
--------------------------------------
High Low High Low
- -------------------------------------------------------
First Quarter $27.20 $ 24.30 $28.37 $23.63
Second Quarter 28.85 23.80 25.73 22.17
Third Quarter 30.20 25.70 24.82 22.21
Fourth Quarter 30.35 24.43 27.81 23.15
As of February 15, 2006, we had approximately 3,700 shareholders of record. As
of December 31, 2005, there were 104,967,280 shares of common stock outstanding.
The following schedule summarizes the cash dividends paid per common share for
2005 and 2004.
2005 2004
--------------------------------------------------------------------
First Quarter $0.20 $0.16
Second Quarter 0.20 0.17
Third Quarter 0.20 0.17
Fourth Quarter 0.20 0.17
In addition to cash dividends, on March 1, 2005, stockholders received one
additional share of our common stock for every two shares owned pursuant to a
three-for-two common stock split declared on January 19, 2005 by our Board of
Directors.
On January 25, 2006, our Board of Directors declared a quarterly cash dividend
of $0.24 per common share, payable on March 1, 2006, to common stockholders of
record as of the close of business on February 15, 2006. Our Board of Directors
intends to review the payment of dividends quarterly and plans to continue to
maintain a regular quarterly dividend in the future, dependent upon our
earnings, financial condition and other factors.
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. We are also subject to certain financial covenants and
other limitations pursuant to the terms of various debt instruments that have
been issued by us, which could have an impact on our ability to pay dividends in
certain circumstances. See Item 7, "MD&A - Liquidity and Capital Resources" for
further discussion of such financial covenants and other limitations. Our
payment of dividends is dependent, in large part, upon receipt of dividends from
Astoria Federal. Astoria Federal is subject to certain restrictions which may
limit its ability to pay us dividends. See Item 1, "Business - Regulation and
Supervision" and Note 9 of Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data" for an explanation of the impact
of regulatory capital requirements on Astoria Federal's ability to pay
dividends. See Item 1, "Business - Federal Taxation" and Note 12 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data" for an explanation of the tax impact of the unlikely event
that Astoria Federal (1) makes distributions in excess of current and
accumulated earnings and profits, as calculated for federal income tax purposes;
(2) redeems its stock; or (3) liquidates.
34
The following table sets forth the repurchases of our common stock by month
during the three months ended December 31, 2005.
Total Number Maximum
Total of Shares Number of Shares
Number of Average Purchased as Part that May Yet Be
Shares Price Paid of Publicly Purchased Under the
Period Purchased per Share Announced Plans Plans (1)
- -------------------------------------------------------------------------------------------
October 1, 2005 through
October 31, 2005 570,000 $26.68 570,000 2,192,300
November 1, 2005 through
November 30, 2005 1,120,000 $28.53 1,120,000 1,072,300
December 1, 2005 through
December 31, 2005 810,000 $29.32 810,000 262,300
- -------------------------------------------------------------------------------------------
Total 2,500,000 $28.37 2,500,000
===========================================================================================
(1) Excludes 10,000,000 shares that may yet be purchased under the eleventh
stock repurchase plan, approved by our Board of Directors on December 21,
2005, which commenced immediately following the completion of the tenth
stock repurchase plan on January 10, 2006.
All of the shares repurchased during the three months ended December 31, 2005
were repurchased under our tenth stock repurchase plan, approved by our Board of
Directors on May 19, 2004, which authorized the purchase, at management's
discretion, of 12,000,000 shares, or approximately 10% of our common stock then
outstanding, over a two year period in open-market or privately negotiated
transactions.
On June 10, 2005, our Chief Executive Officer, George L. Engelke, Jr., submitted
his annual certification to the NYSE indicating that he was not aware of any
violation by Astoria Financial Corporation of NYSE corporate governance listing
standards as of the June 10, 2005 certification date.
35
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are our selected consolidated financial and other data. This
financial data is derived in part from, and should be read in conjunction with,
our consolidated financial statements and related notes.
At December 31,
------------------------------------------------------------------------
(In Thousands) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Selected Financial Data:
Total assets $ 22,380,271 $ 23,415,869 $ 22,461,594 $ 21,701,758 $ 22,671,635
Federal funds sold and repurchase agreements 182,803 267,578 65,926 510,252 1,309,164
Securities available-for-sale 1,841,351 2,406,883 2,654,992 2,792,581 3,549,183
Securities held-to-maturity 4,730,953 6,302,936 5,792,727 5,041,257 4,463,928
Loans receivable, net 14,311,134 13,180,521 12,603,866 11,975,815 12,084,976
Deposits 12,810,455 12,323,257 11,186,594 11,067,196 10,903,693
Borrowings, net 7,937,526 9,469,835 9,632,037 8,825,046 9,825,661
Stockholders' equity 1,350,227 1,369,764 1,396,531 1,553,998 1,542,586
For the Year Ended December 31,
------------------------------------------------------------------------
(In Thousands, Except Per Share Data) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 1,082,987 $ 1,045,901 $ 1,057,291 $ 1,266,262 $ 1,438,563
Interest expense 604,207 575,335 677,753 801,838 981,605
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 478,780 470,566 379,538 464,424 456,958
Provision for loan losses - - - 2,307 4,028
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 478,780 470,566 379,538 462,117 452,930
Non interest income 102,199 80,084 119,561 107,407 90,105
Non interest expense:
General and administrative 228,734 225,011 205,877 195,827 178,767
Extinguishment of debt - - - 2,202 -
Amortization of goodwill - - - - 19,078
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 228,734 225,011 205,877 198,029 197,845
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of accounting change 352,245 325,639 293,222 371,495 345,190
Income tax expense 118,442 106,102 96,376 123,066 120,036
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 233,803 219,537 196,846 248,429 225,154
Cumulative effect of accounting change,
net of tax - - - - (2,294)
- -----------------------------------------------------------------------------------------------------------------------
Net income 233,803 219,537 196,846 248,429 222,860
Preferred dividends declared - - 4,500 6,000 6,000
- -----------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 233,803 $ 219,537 $ 192,346 $ 242,429 $ 216,860
=======================================================================================================================
Basic earnings per common share $ 2.30 $ 2.03 $ 1.68 $ 1.94 $ 1.60
Diluted earnings per common share $ 2.26 $ 2.00 $ 1.66 $ 1.90 $ 1.57
36
At or For the Year Ended December 31,
-------------------------------------------------------------------
2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 1.02% 0.97% 0.87% 1.12% 0.99%
Return on average stockholders' equity 17.06 15.81 13.26 15.87 14.13
Return on average tangible stockholders' equity (1) 19.72 18.25 15.15 18.00 16.12
Average stockholders' equity to average assets 5.99 6.12 6.54 7.07 7.00
Average tangible stockholders' equity
to average tangible assets (1)(2) 5.22 5.35 5.78 6.28 6.19
Stockholders' equity to total assets 6.03 5.85 6.22 7.16 6.80
Net interest rate spread 2.11 2.09 1.72 2.11 1.91
Net interest margin 2.19 2.17 1.78 2.23 2.12
Average interest-earning assets to average
interest-bearing liabilities 1.03x 1.03x 1.02x 1.03x 1.05x
General and administrative expense to average assets 1.00% 0.99% 0.91% 0.88% 0.79%
Efficiency ratio (3) 39.37 40.86 41.25 34.25 32.68
Cash dividends paid per common share $ 0.80 $ 0.67 $ 0.57 $ 0.51 $ 0.41
Dividend payout ratio 35.40% 33.50% 34.34% 26.84% 26.11%
Asset Quality Ratios:
Non-performing loans to total loans (4) 0.45 0.25 0.23 0.29 0.31
Non-performing loans to total assets (4) 0.29 0.14 0.13 0.16 0.16
Non-performing assets to total assets (4)(5) 0.30 0.14 0.14 0.16 0.18
Allowance for loan losses to non-performing loans (4) 124.81 254.02 280.10 242.04 221.70
Allowance for loan losses to non-accrual loans 125.15 258.57 285.51 249.53 229.60
Allowance for loan losses to total loans 0.56 0.62 0.66 0.69 0.68
Other Data:
Number of deposit accounts 953,998 975,155 963,120 990,873 985,473
Mortgage loans serviced for others (in thousands) $ 1,502,852 $ 1,670,062 $ 1,895,102 $ 2,671,085 $ 3,322,087
Full service banking offices 86 86 86 86 86
Regional lending offices 3 4 3 1 1
Full time equivalent employees 1,658 1,862 1,971 1,956 1,885
(1) Average tangible stockholders' equity represents average stockholders'
equity less average goodwill.
(2) Average tangible assets represents average assets less average goodwill.
(3) Efficiency ratio represents general and administrative expense divided by
the sum of net interest income plus non-interest income.
(4) Non-performing loans consist of all non-accrual loans and all mortgage
loans delinquent 90 days or more as to their maturity date but not their
interest due and exclude loans which have been restructured and are
accruing and performing in accordance with the restructured terms.
Restructured accruing loans totaled $1.6 million, $2.8 million, $3.9
million, $5.0 million and $5.4 million at December 31, 2005, 2004, 2003,
2002 and 2001, respectively.
(5) Non-performing assets consist of all non-performing loans and real estate
owned.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
Executive Summary
The following overview should be read in conjunction with our MD&A in its
entirety.
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 increased dividends and our stock
repurchases. We have been successful in achieving this goal over the past
several years and that trend has continued during 2005.
During the year ended December 31, 2005, the national and local real estate
markets remained strong and continued to support new and existing home sales.
The FOMC raised the federal funds rate eight times during 2005. As a result,
U.S. Treasury yields at December 31, 2005 have increased from December 31, 2004,
with the exception of the thirty year U.S. Treasury yield, which has decreased.
Although U.S. Treasury yields have risen, yields on the longer end of the U.S.
Treasury yield curve have not risen to the same degree as shorter term yields.
This has resulted in a significant flattening of the U.S. Treasury yield curve,
which began in the latter half of 2004 and continued during 2005. In addition,
changes in medium- and long-term yields within individual quarters have resulted
in variability in cash flows and refinance activity during 2005.
As a result of the U.S. Treasury yield curve environment that prevailed during
2005, we pursued a 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 year ended December 31, 2005. This
increase was a result of the increase in our mortgage loan portfolio due to the
overall reduction in repayment activity in 2005 as compared to 2004, coupled
with continued strong loan origination volume.
Total deposits increased during the year ended December 31, 2005. This increase
was primarily attributable to our certificates of deposit and our new Liquid CDs
as a result of the continued success of our marketing campaigns 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, 2004, which
is consistent with our strategy of reducing these portfolios through normal cash
flow in response to the continued flattening of the U.S. Treasury yield curve.
During the third quarter of 2005 we entered into a sub-servicing agreement with
DMI to outsource our mortgage loan servicing activities. Pursuant to this
sub-servicing agreement, effective December 1, 2005, DMI has undertaken the
servicing of our mortgage loan portfolio, including our portfolio of mortgage
loans serviced for other investors. The decision to take this action was driven
by economics as we continue to strive to increase operating efficiency in all
aspects of our operations. While our individual mortgage loan balances are
currently larger than in prior years, the number of loans we service has
decreased over the past several years, thereby lowering operating efficiency. In
addition, we implemented other company-wide cost saving initiatives in an effort
to improve future operating efficiency. Our results of operations for year ended
December 31, 2005 include $1.9 million, before tax,
38
in charges related to the outsourcing of our mortgage loan servicing activities
and other company-wide cost saving initiatives. These initiatives, which
resulted in staff reductions primarily in our mortgage servicing, retail banking
and loan origination areas, are expected to result in annual net expense savings
of approximately $5.0 million, before tax, beginning in 2006.
Net income for 2005 increased from the prior year. This increase was primarily
due to increases in net interest income and non-interest income. The increase in
net interest income is attributable to an increase in interest income, partially
offset by an increase in interest expense. The increase in interest income was
primarily due to the increase in the average balance of interest-earning assets,
coupled with a decrease in net premium amortization on our mortgage-backed
securities and mortgage loan portfolios. The decrease in net premium
amortization was primarily due to the reduction in repayment levels during 2005,
as well as the reduced amount of unamortized premium remaining in our
mortgage-backed securities portfolio. The increase in interest expense is
primarily due to an increase in interest expense on certificates of deposit and
Liquid CDs as a result of the increases in the average balances of these
deposits, partially offset by the decrease in interest expense on borrowings
primarily resulting from the decrease in the average balance of borrowings. The
increase in non-interest income relates primarily to the other-than-temporary
impairment write-down on our FHLMC perpetual preferred securities in the 2004
fourth quarter, coupled with an increase in customer service fees, partially
offset by the absence of gains on sales of securities in 2005.
We expect the operating environment to remain challenging throughout 2006 as
rising short-term interest rates and relatively stable medium- and long-term
interest rates exert further pressure on the net interest margin. As a result,
we expect to continue our strategy of shrinking the balance sheet through a
reduction 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. Overall, these
activities should result in a further reduction in the balance sheet similar to
the 2005 reduction. Additionally, we anticipate that the net interest margin
will be somewhat lower in 2006 as compared to 2005, but should not decline below
an average of 2.00% for the full year. As we continue to reduce the size of the
balance sheet during this challenging interest rate environment, we will
continue to focus on the repurchase of our stock as a very desirable use of
capital.
Critical Accounting Policies
Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data" contains a summary of our significant
accounting policies. Various elements of our accounting policies, by their
nature, are inherently subject to estimation techniques, valuation assumptions
and other subjective assessments. Our policies with respect to the methodologies
used to determine the allowance for loan losses, the valuation of MSR and
judgments regarding goodwill and securities impairment are our most critical
accounting policies because they are important to the presentation of our
financial condition and results of operations, involve a higher degree of
complexity and require management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters. The
use of different judgments, assumptions and estimates could result in material
differences in our results of operations or financial condition.
The following is a description of our critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical accounting policies and their application are reviewed quarterly with
the Audit Committee of our Board of Directors.
Allowance for Loan Losses
Our allowance for loan losses is established and maintained through a provision
for loan losses based on our evaluation of the risks inherent in our loan
portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The
allowance is comprised of both specific valuation allowances and general
valuation allowances.
Specific valuation allowances are established in connection with individual loan
reviews and the asset classification process including the procedures for
impairment recognition under Statement of Financial
39
Accounting Standards, or SFAS, No. 114, "Accounting by Creditors for Impairment
of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance.
Individual loan loss reviews are completed quarterly for all classified loans.
Individual loan loss reviews are generally completed annually for multi-family,
commercial real estate and construction loans in excess of $2.5 million,
commercial business loans in excess of $200,000, 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 and the level and direction of interest
rates and their combined effect on real estate values and the ability of
borrowers to service debt. We also review all regulatory notices, bulletins and
memoranda with the purpose of identifying upcoming changes in regulatory
conditions which may impact our calculation of specific valuation allowances.
The 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 growth in the portfolio as well as
our credit administration and asset management philosophies and procedures. In
addition, we evaluate and consider the impact that existing and projected
economic and market conditions may have on the portfolio as well as known and
inherent risks in the portfolio. We also evaluate and consider the allowance
ratios and coverage percentages of both peer group and regulatory agency data;
however, our focus is primarily on our historical loss experience and the impact
of current economic conditions. After evaluating these variables, we determine
appropriate allowance coverage percentages for each of our portfolio segments
and the appropriate level of our allowance for loan losses.
Our allowance coverage percentages are used to estimate the amount of probable
losses inherent in our loan portfolio in determining our general valuation
allowances. Our evaluations of general valuation allowances are inherently
subjective because, even though they are based on objective data, it is
management's interpretation of that data that determines the amount of the
appropriate allowance. Therefore, we 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
40
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 2005 has been consistent with our experience over the
past several years. Our 2005 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 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."
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. The
initial recognition of originated MSR is based upon an allocation of the total
cost of the related loans between the loans and the servicing rights based on
their relative estimated fair values. The fair value of MSR is estimated by
reference to quoted market prices of similar loans sold servicing released.
Impairment exists if the carrying value of MSR exceeds the estimated fair value.
We stratify our MSR by underlying loan type, primarily fixed and adjustable, and
further stratify the fixed rate loans by interest rate. Individual impairment
allowances for each stratum are established when necessary and then adjusted in
subsequent periods to reflect changes in impairment. The estimated fair values
of each MSR stratum are obtained through independent third party valuations
through an analysis of future cash flows, incorporating numerous market based
assumptions including market discount rates, prepayment speeds, servicing
income, servicing costs, default rates and other market driven data, including
the market's perception of future interest rate movements. All assumptions are
reviewed for reasonableness on a quarterly basis to ensure they reflect current
and anticipated market conditions.
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. At December 31,
2004, our MSR, net, had an estimated fair value of $16.8 million and were valued
based on expected future cash flows considering a weighted average discount rate
of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and
a weighted average life of 4.8 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. Thus, any
measurement of the fair value of our MSR is limited by the conditions existing
and the assumptions utilized as of a particular point in time, and those
assumptions may not be appropriate if they are applied at a different point in
time. Assuming an increase in interest rates of 100 basis points at December 31,
2005, the estimated fair value of our MSR would have been $3.9 million greater.
Assuming a decrease in interest rates of 100 basis points at December 31, 2005,
the estimated fair value of our MSR would have been $6.4 million lower.
41
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. For purposes of our
goodwill impairment testing, we have identified a single reporting unit. We use
the quoted market price of our common stock on our impairment testing date as
the basis for determining the fair value of our reporting unit. If the fair
value of our reporting unit exceeds its carrying amount, further evaluation is
not necessary. However, if the fair value of our reporting unit is less than its
carrying amount, further evaluation is required to compare the implied fair
value of the reporting unit's goodwill to its carrying amount to determine if a
write-down of goodwill is required.
On September 30, 2005, 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 $1.44 billion. 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. No events have occurred and no circumstances have changed since
our annual impairment test date 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.
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
December 31, 2005, 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 December 31, 2005, we had 228 securities with an
estimated fair value totaling $6.33 billion which had an unrealized loss
totaling $190.0 million. Of the securities in an unrealized loss position at
December 31, 2005, $3.37 billion, with an unrealized loss of $142.6 million,
have been in a continuous unrealized loss position for more than twelve months.
At December 31, 2005, 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 maturity. There were no other-than-temporary
impairment write-downs during the year ended December 31, 2005.
During the 2004 fourth quarter, we recorded a $16.5 million other-than-temporary
impairment write-down charge on $120.0 million face value of perpetual preferred
stock issued by FHLMC which is included as a component of non-interest income in
our 2004 results of operations. The FHLMC perpetual preferred securities are
investment grade securities, rated AA- by Standard & Poor's and Aa3 by Moody's
Investors Service, held in our available-for-sale securities portfolio. The
decision to recognize the other-than-temporary impairment charge was based on a
conservative interpretation of accounting literature. Similar to debt
securities, changes in the estimated fair value of these FHLMC perpetual
preferred securities are primarily attributable to changes in market interest
rates. However, as these securities are equity instruments with no stated
maturity date, they cannot be evaluated in the same manner as the changes in the
estimated fair value of debt instruments, according to authoritative literature.
While we believed the estimated fair value of these securities would have
increased back to their amortized cost in the future, we could not have
predicted with certainty at December 31, 2004 that such a recovery would
42
have occurred in the near term, particularly since a recovery would have been
predicated on a decline in market interest rates. The write-down does not change
our expectation of the long-term value of these investment grade securities.
In November 2005, the FASB issued Staff Position Nos. 115-1 and 124-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," or FSP No. 115-1, which addresses the determination of when an
investment is considered impaired, whether the impairment is
other-than-temporary and how to measure an impairment loss. FSP No. 115-1 is
effective for reporting periods beginning after December 15, 2005. We do not
expect our application of FSP No. 115-1 to have a material impact on our
financial condition or results of operations. For additional information, see
"Impact of Accounting Standards and Interpretations" and Note 3 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
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 mortgage refinance activity. As
mortgage interest rates increase, customers' refinance activities tend to
decelerate causing the cash flow from both our mortgage loan portfolio and our
mortgage-backed securities portfolio to decrease. When mortgage rates decrease,
the opposite tends to occur. Principal payments on loans and securities totaled
$5.40 billion for the year ended December 31, 2005 and $6.42 billion for the
year ended December 31, 2004. The decrease in loan and security repayments was
primarily the result of the lower levels of mortgage loan refinance activity we
experienced in 2005 as compared to 2004.
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 $271.6 million during the year ended December 31, 2005 and $277.4
million during the year ended December 31, 2004. Deposits increased $487.2
million during the year ended December 31, 2005 and $1.14 billion during the
year ended December 31, 2004. The net increases in deposits for the years ended
December 31, 2005 and 2004 reflect our continued emphasis on attracting customer
deposits through competitive rates, extensive product offerings and quality
service. As previously discussed, the net increase in deposits for the year
ended December 31, 2005 is primarily attributable to an increase in certificates
of deposit and our new Liquid CDs as a result of the success of our marketing
campaigns which have focused on attracting these types of deposits. During the
year ended December 31, 2005, $3.70 billion of certificates of deposit, with a
weighted average rate of 2.71% and a weighted average maturity at inception of
seventeen months, matured and $4.06 billion of certificates of deposit were
issued or repriced, with a weighted average rate of 3.45% and a weighted average
maturity at inception of thirteen months. See page 53 for further detail
regarding deposit activity.
Net borrowings decreased $1.53 billion during the year ended December 31, 2005
and decreased $162.2 million during the year ended December 31, 2004. The
decreases in net borrowings during the years ended December 31, 2005 and 2004
reflect our strategy of reducing the securities and borrowings portfolios
through normal cash flow in response to the continued flattening of the 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 year ended December 31,
2005 totaled $4.32 billion, of which $3.45 billion were originations and $874.5
million were purchases. This compares to gross mortgage loans originated and
purchased during the year ended December 31, 2004, totaling $4.35 billion, of
which $3.19 billion were originations and $1.16 billion were purchases. Total
mortgage loans originated include originations of loans held-for-sale totaling
$361.5 million during the year ended December 31, 2005 and $323.2 million during
the year ended December 31, 2004. Purchases of securities totaled $177.6 million
during the year ended December 31, 2005 and $3.07 billion during the year ended
December 31, 2004. The decrease in securities purchases during the year ended
December 31, 2005 reflects the previously discussed strategy of reducing the
securities and borrowings portfolios.
43
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 $352.0
million at December 31, 2005, compared to $406.4 million at December 31, 2004.
Borrowings maturing over the next twelve months total $2.24 billion with a
weighted average rate of 3.21%. We have the flexibility to either repay or
rollover these borrowings as they mature. In addition, we have $4.89 billion in
certificates of deposit and Liquid CDs with a weighted average rate of 3.48%
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 borrowing, certificate of deposit and Liquid CD
maturities and their weighted average rates as of December 31, 2005:
Certificates of Deposit
Borrowings and Liquid CDs
--------------------- ---------------------------
Weighted Weighted
Average Average
(Dollars in Millions) Amount Rate Amount Rate
- -------------------------------------------------- ---------------------------
Contractual Maturity:
2006 $ 2,244 (1) 3.21% $ 4,887 3.48%
2007 1,870 (2) 3.04 1,630 4.06
2008 2,650 (3) 5.01 920 4.12
2009 300 3.29 428 4.18
2010 - - 186 4.29
2011 and thereafter 879 (4) 4.95 30 4.25
----------------------------------------------------------------------------
Total $ 7,943 3.97% $ 8,081 3.73%
============================================================================
(1) Includes $820.0 million of overnight and other short-term
borrowings with a weighted average rate of 4.22%.
(2) Includes $50.0 million of borrowings, with a weighted average rate
of 5.62%, which are callable by the counterparty in 2006 and at
various times thereafter.
(3) Includes $2.13 billion of borrowings, with a weighted average rate
of 5.27%, which are callable by the counterparty in 2006 and at
various times thereafter.
(4) Includes $500.0 million of borrowings, with a weighted average rate
of 3.32%, which are callable by the counterparty in 2007 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 through our subsidiary, Astoria Capital Trust I, and
senior debt. Holding company debt obligations, which are included in other
borrowings, are further described below.
Our Junior Subordinated Debentures total $128.9 million, have an interest rate
of 9.75%, mature on November 1, 2029 and 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 terms of the Junior Subordinated Debentures limit our ability to pay
dividends or otherwise make distributions if we are in default or have elected
to defer interest payments otherwise due under the Junior Subordinated
Debentures. Such limitations do not apply, however, to dividends payable in our
common stock, or our dividend reinvestment plan, our stock option plans or our
stockholders rights plan. The Junior Subordinated Debentures were issued to
Astoria Capital Trust I as part of the transaction in which Astoria Capital
Trust I privately issued trust preferred securities.
We have $60.0 million of 7.67% senior unsecured notes, which were issued in a
private placement, mature in 2008 and require annual principal payments of $20.0
million, which began in 2004. The terms of these notes preclude a sale of more
than 30% of our deposit liabilities and preclude us from incurring long-term
debt, which excludes debt of Astoria Federal incurred in the ordinary course of
business, including FHLB-NY advances, in excess of 90% of our consolidated
stockholders' equity. The terms also require that we maintain a consolidated
capital to assets ratio of not less than 4.0%; a non-performing
44
asset ratio, net of our allowance for loan losses, of less than 3.5% of assets;
and a consolidated interest coverage ratio of at least 3.0 to 1.0. However, the
terms of our 7.67% senior unsecured notes do not preclude our merger or sale of
all or substantially all of our assets. As of December 31, 2005, we were in
compliance with each of these covenants, and we do not anticipate these
covenants will have a material effect on our operations.
We have $250.0 million of 5.75% senior unsecured notes which are due in 2012 and
are redeemable, in whole or in part, at any time at a "make-whole" redemption
price, together with accrued interest to the redemption date. The terms of our
$250.0 million 5.75% senior unsecured notes restrict our ability to sell,
transfer or pledge as collateral the shares of Astoria Federal or any other
significant subsidiary or of all, or substantially all, of the assets of Astoria
Federal or any other significant subsidiary, other than in connection with a
sale or transfer involving Astoria Financial Corporation.
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 Federal's ability to pay dividends
to Astoria Financial Corporation, our credit profile and ratings and our
business model. For further discussion of our debt obligations, see Note 8 of
Notes to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
We also continue to receive periodic capital distributions from Astoria Federal,
consistent with applicable laws and regulations. During 2005, Astoria Federal
paid dividends to Astoria Financial Corporation totaling $200.0 million,
amounting to 80.4% of Astoria Federal's net income for 2005. Astoria Financial
Corporation's primary uses of funds include the payment of dividends, payment of
principal and interest on its debt obligations and repurchases of common stock.
Astoria Financial Corporation paid principal and interest on its debt
obligations totaling $49.3 million in 2005. Our payment of dividends and
repurchases of our common stock, which are further discussed below, totaled
$262.1 million in 2005. 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. Additionally, all proposed
distributions from Astoria Federal must be submitted to the OTS for review. For
further discussion of limitations on capital distributions from Astoria Federal,
see "Regulation and Supervision" in Item 1, "Business."
We declared cash dividends on our common stock totaling $81.2 million during the
year ended December 31, 2005 and $72.0 million during the year ended December
31, 2004. In addition to cash dividends, on March 1, 2005, stockholders received
one additional share of our common stock for every two shares owned pursuant to
a three-for-two common stock split declared on January 19, 2005. On January 25,
2006, we declared a quarterly cash dividend of $0.24 per share on shares of our
common stock, payable on March 1, 2006, to stockholders of record as of the
close of business on February 15, 2006.
On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan
authorizing the purchase, at management's discretion, of 12,000,000 shares, or
approximately 10% of our common stock then outstanding, over a two year period
in open-market or privately negotiated transactions. During the year ended
December 31, 2005, we repurchased 6,582,500 shares of our common stock at an
aggregate cost of $180.9 million. In total, as of December 31, 2005, we
repurchased 11,737,700 shares of our common stock, at an aggregate cost of
$308.6 million, under our tenth stock repurchase plan. 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 the tenth
stock repurchase plan on January 10, 2006. For further information on our common
stock repurchases, see Item 5, "Market for Astoria Financial Corporation's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities."
See "Financial Condition" for a further discussion of the changes in
stockholders' equity.
45
At December 31, 2005, Astoria Federal's capital levels exceeded all of its
regulatory capital requirements with a tangible capital ratio of 6.53%, leverage
capital ratio of 6.53% and total risk-based capital ratio of 12.53%. The minimum
regulatory requirements are a tangible capital ratio of 1.50%, leverage capital
ratio of 4.00% and total risk-based capital ratio of 8.00%.
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the
normal course of our business in order to meet the financing needs of our
customers and in connection with our overall interest rate risk management
strategy. These instruments involve, to varying degrees, elements of credit,
interest rate and liquidity risk. In accordance with GAAP, these instruments are
either not recorded in the consolidated financial statements or are recorded in
amounts that differ from the notional amounts. Such instruments primarily
include lending commitments, lease commitments and derivative instruments as
described below.
Lending commitments include commitments to originate and purchase loans and
commitments to fund unused lines of credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum
exposure to credit risk is represented by the contractual amount of the
instruments.
In addition to our lending commitments, we have contractual obligations related
to operating lease commitments. Operating lease commitments are obligations
under various non-cancelable operating leases on buildings and land used for
office space and banking purposes.
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. We are exposed to credit risk in the event of
non-performance by counterparties to derivative instruments. In the event of
default by a counterparty, we would be subject to an economic loss that
corresponds to the cost to replace the agreement. We control the credit risk
associated with our derivative instruments by dealing only with counterparties
with the highest credit ratings, establishing counterparty exposure limits and
monitoring procedures.
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 $42.9
million at December 31, 2005 and represent obligations to sell loans either
servicing retained or servicing released on a mandatory delivery or best efforts
basis. We enter into commitments to sell loans as an economic hedge against our
pipeline of fixed rate loans which we originate primarily for sale into the
secondary market. The fair values of our mortgage banking derivative instruments
are immaterial to our financial condition and results of operations.
The following table details our contractual obligations at December 31, 2005.
Payments due by period
------------------------------------------------------------
Less than One to Three to More than
(In Thousands) Total One Year Three Years Five Years Five Years
- -------------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Borrowings with original terms greater than three months $7,122,866 $ 1,424,000 $ 4,520,000 $ 300,000 $ 878,866
Minimum rental payments due under non-cancelable
operating leases 74,800 7,267 13,628 10,142 43,763
Commitments to originate and purchase loans (1) 497,644 497,644 - - -
Commitments to fund unused lines of credit (2) 432,528 432,528 - - -
- -------------------------------------------------------------------------------------------------------------------------
Total $8,127,838 $ 2,361,439 $ 4,533,628 $ 310,142 $ 922,629
=========================================================================================================================
(1) Commitments to originate and purchase loans include commitments to
originate loans held-for-sale.
(2) Unused lines of credit relate primarily to home equity lines of credit.
46
In addition to the contractual obligations previously discussed, we have
contingent liabilities related to assets sold with recourse and standby letters
of credit. We are obligated under various recourse provisions associated with
certain first mortgage loans we sold in the secondary market. The principal
balance of loans sold with recourse amounted to $596.7 million at December 31,
2005. We estimate the liability for loans sold with recourse based on an
analysis of our loss experience related to similar loans sold with recourse. The
carrying amount of this liability was immaterial at December 31, 2005. We also
have a collateralized repurchase obligation due to the sale of certain long-term
fixed rate municipal revenue bonds to an investment trust fund for proceeds that
approximated par value. The trust fund has a put option that requires us to
repurchase the securities for specified amounts prior to maturity under certain
specified circumstances, as defined in the agreement. The outstanding option
balance on the agreement totaled $23.0 million at December 31, 2005.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$4.6 million at December 31, 2005.
See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data," for additional
information regarding our commitments, contingent liabilities and derivative
instruments.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2005 and 2004
Financial Condition
Total assets decreased $1.04 billion to $22.38 billion at December 31, 2005,
from $23.42 billion at December 31, 2004. The primary reason for the decrease in
total assets was a decrease in securities, partially offset by an increase in
loans receivable.
Mortgage loans, net, increased $1.13 billion to $13.88 billion at December 31,
2005, from $12.75 billion at December 31, 2004. This increase was due to
increases in each of our mortgage loan portfolios. Gross mortgage loans
originated and purchased during the year ended December 31, 2005 totaled $4.32
billion, of which $3.45 billion were originations and $874.5 million were
purchases. This compares to gross mortgage loans originated and purchased during
the year ended December 31, 2004 totaling $4.35 billion, of which $3.19 billion
were originations and $1.16 billion were purchases. Total mortgage loans
originated include originations of loans held-for-sale totaling $361.5 million
during the year ended December 31, 2005 and $323.2 million during the year ended
December 31, 2004. Mortgage loan repayments decreased to $2.82 billion for the
year ended December 31, 2005, from $3.52 billion for the year ended December 31,
2004, which reflects the lower levels of refinance activity previously
discussed.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. Our one-to-four
family mortgage loans increased $703.2 million to $9.76 billion at December 31,
2005, from $9.05 billion at December 31, 2004, and represented 68.2% of our
total loan portfolio at December 31, 2005. The lower levels of loan prepayments
and continued strength of the purchase mortgage market resulted in continued
one-to-four family mortgage loan portfolio growth, which began in the 2004
fourth quarter.
Our multi-family mortgage loan portfolio increased $267.9 million to $2.83
billion at December 31, 2005, from $2.56 billion at December 31, 2004. Our
commercial real estate loan portfolio increased $131.1 million to $1.08 billion
at December 31, 2005, from $944.9 million at December 31, 2004. These increases
were the result of continued strong origination volume, coupled with reduced
prepayment activity. Multi-family and commercial real estate loan originations
totaled $952.9 million for the year ended December 31, 2005 and $1.05 billion
for the year ended December 31, 2004. The average loan balance within our
combined multi-family and commercial real estate portfolio continues to be less
than
47
$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 $2.14 billion to $6.57 billion at December 31, 2005, from
$8.71 billion at December 31, 2004. This decrease was primarily the result of
principal payments received of $2.28 billion, slightly offset by purchases
during the 2005 first quarter totaling $177.6 million, and 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 amortized cost of our fixed rate REMICs and CMOs totaled $6.40
billion at December 31, 2005 and had a weighted average current coupon of 4.30%,
a weighted average collateral coupon of 5.75% and a weighted average life of 3.9
years.
Deposits increased $487.2 million to $12.81 billion at December 31, 2005, from
$12.32 billion at December 31, 2004, primarily due to increases in certificates
of deposit and Liquid CDs, partially offset by decreases in savings and money
market accounts. Certificates of deposit increased $613.1 million to $7.46
billion at December 31, 2005, from $6.85 billion at December 31, 2004. Our new
Liquid CDs totaled $619.8 million at December 31, 2005. Our certificates of
deposit and Liquid CDs increased primarily as a result of the continued success
of our marketing campaigns previously discussed. We continue to experience
intense competition for deposits. Savings accounts decreased $418.2 million
since December 31, 2004 to $2.51 billion at December 31, 2005. Money market
accounts decreased $316.6 million since December 31, 2004 to $648.7 million at
December 31, 2005.
Total borrowings, net, decreased $1.53 billion to $7.94 billion at December 31,
2005, from $9.47 billion at December 31, 2004, primarily due to decreases in
reverse repurchase agreements and FHLB-NY advances. The net decrease in total
borrowings reflects our previously discussed strategy of reducing the securities
and borrowings portfolios.
Stockholders' equity decreased to $1.35 billion at December 31, 2005, from $1.37
billion at December 31, 2004. The decrease in stockholders' equity was the
result of common stock repurchased of $180.9 million, dividends declared of
$81.2 million and an increase in accumulated other comprehensive loss, net of
tax, of $20.9 million, which was primarily due to the net decrease in the fair
value of our securities available-for-sale. These decreases were partially
offset by net income of $233.8 million, the effect of stock options exercised
and the acceleration of vesting of stock options and related tax benefit of
$20.5 million and amortization relating to the earned portion of restricted
stock and the allocation of shares held by the employee stock ownership plan, or
ESOP, of $9.3 million.
Results of Operations
General
Net income for the year ended December 31, 2005 increased $14.3 million to
$233.8 million, from $219.5 million for the year ended December 31, 2004.
Diluted earnings per common share increased to $2.26 per share for the year
ended December 31, 2005, from $2.00 per share for the year ended December 31,
2004. Return on average assets increased to 1.02% for the year ended December
31, 2005, from 0.97% for the year ended December 31, 2004. Return on average
stockholders' equity increased to 17.06% for the year ended December 31, 2005,
from 15.81% for the year ended December 31, 2004. Return on average tangible
stockholders' equity, which represents average stockholders' equity less average
goodwill, increased to 19.72% for the year ended December 31, 2005, from 18.25%
for the year ended December 31, 2004. The increases in the returns on average
assets, average stockholders' equity and average tangible stockholders' equity
for the year ended December 31, 2005, compared to the year ended December 31,
2004, were primarily due to the increase in net income.
As previously discussed, our results of operations for the year ended December
31, 2005 include $1.9 million, before tax ($1.3 million after tax), in charges
related to the outsourcing of our mortgage loan servicing activities and other
company-wide cost saving initiatives.
48
Our results of operations for the year ended December 31, 2004 include a $16.5
million, before tax ($9.6 million after tax), other-than-temporary impairment
write-down charge on $120.0 million face value of perpetual preferred stock
issued by FHLMC. This charge reduced diluted earnings per common share by $0.09
per share for the year ended December 31, 2004. This charge also reduced our
return on average assets by 4 basis points, return on average stockholders'
equity by 69 basis points, and return on average tangible stockholders' equity
by 79 basis points for the year ended December 31, 2004. For a further
discussion of the other-than-temporary impairment write-down, see "Critical
Accounting Policies - Securities Impairment."
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 7A,
"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 year ended December 31, 2005, net interest income increased $8.2 million
to $478.8 million, from $470.6 million for the year ended December 31, 2004. The
increase in net interest income for the year ended December 31, 2005 was the
result of an increase in interest income, partially offset by an increase in
interest expense. The increase in interest income was primarily due to an
increase in the average balance of mortgage loans, coupled with a decrease in
net premium amortization on our mortgage-backed securities and mortgage loan
portfolios. Net premium amortization on our mortgage-backed securities and
mortgage loan portfolios decreased $14.9 million to $17.1 million for the year
ended December 31, 2005, from $32.0 million for the year ended December 31,
2004. The decrease in net premium amortization was primarily due to the lower
repayment levels during 2005 as compared to 2004, as well as the reduced amount
of unamortized premium remaining in our mortgage-backed securities portfolio.
The increase in interest expense was primarily due to increases in the average
balances of our certificates of deposit and our new Liquid CDs, partially offset
by the decrease in the average balance of borrowings.
The net interest margin increased to 2.19% for the year ended December 31, 2005,
from 2.17% for the year ended December 31, 2004. The net interest rate spread
increased to 2.11% for the year ended December 31, 2005, from 2.09% for the year
ended December 31, 2004. The increases in the net interest margin and net
interest rate spread were primarily due to the increase in the average yield on
interest-earning assets, resulting primarily from the decrease in net premium
amortization on our mortgage-backed securities and mortgage loan portfolios,
previously discussed. The average balance of net interest-earning assets
increased slightly to $666.4 million for the year ended December 31, 2005, from
$665.7 million for the year ended December 31, 2004.
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."
49
Analysis of Net Interest Income
The following table sets forth certain information about the average balances of
our assets and liabilities and their related yields and costs for the years
ended December 31, 2005, 2004 and 2003. Average yields are derived by dividing
income by the average balance of the related assets and average costs are
derived by dividing expense by the average balance of the related liabilities,
for the periods shown. Average balances are derived from average daily balances.
The yields and costs include amortization of fees, costs, premiums and discounts
which are considered adjustments to interest rates.
For the Year Ended December 31,
---------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Mortgage loans (1):
One-to-four family $ 9,461,023 $ 459,929 4.86% $ 8,894,219 $ 428,229 4.81% $ 8,990,636 $ 466,544 5.19%
Multi-family,
commercial real
estate and
construction 3,862,281 239,119 6.19 3,419,369 220,703 6.45 2,757,481 203,785 7.39
Consumer and other loans (1) 526,071 31,160 5.92 478,195 21,312 4.46 410,095 19,247 4.69
----------- --------- ----------- --------- ----------- ---------
Total loans 13,849,375 730,208 5.27 12,791,783 670,244 5.24 12,158,212 689,576 5.67
Mortgage-backed and
other securities (2) 7,671,532 340,626 4.44 8,608,601 371,044 4.31 8,752,167 355,564 4.06
Federal funds sold and
repurchase agreements 195,863 6,123 3.13 86,625 1,140 1.32 136,272 1,538 1.13
FHLB-NY stock 130,759 6,030 4.61 171,419 3,473 2.03 268,533 10,613 3.95
----------- --------- ----------- --------- ----------- ---------
Total interest-earning assets 21,847,529 1,082,987 4.96 21,658,428 1,045,901 4.83 21,315,184 1,057,291 4.96
--------- --------- ---------
Goodwill 185,151 185,151 185,151
Other non-interest-earning
assets 852,475 848,106 1,176,908
----------- ----------- -----------
Total assets $22,885,155 $22,691,685 $22,677,243
=========== =========== ===========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Savings $ 2,742,417 11,015 0.40 $ 2,973,054 11,920 0.40 $ 2,907,541 13,198 0.45
Money market 804,855 7,513 0.93 1,088,915 6,379 0.59 1,403,363 9,934 0.71
NOW and demand deposit 1,569,419 928 0.06 1,534,822 921 0.06 1,469,805 1,526 0.10
Liquid CDs 350,923 10,708 3.05 - - - - - -
----------- --------- ----------- --------- ----------- ---------
Total core deposits 5,467,614 30,164 0.55 5,596,791 19,220 0.34 5,780,709 24,658 0.43
Certificates of deposit 7,146,664 251,235 3.52 6,211,014 218,209 3.51 5,419,725 200,593 3.70
----------- --------- ----------- --------- ----------- ---------
Total deposits 12,614,278 281,399 2.23 11,807,805 237,429 2.01 11,200,434 225,251 2.01
Borrowings 8,566,812 322,808 3.77 9,184,928 337,906 3.68 9,690,325 452,502 4.67
----------- --------- ----------- --------- ----------- ---------
Total interest-bearing
liabilities 21,181,090 604,207 2.85 20,992,733 575,335 2.74 20,890,759 677,753 3.24
--------- --------- ---------
Non-interest-bearing
liabilities 333,522 310,662 302,391
----------- ---------- -----------
Total liabilities 21,514,612 21,303,395 21,193,150
Stockholders' equity 1,370,543 1,388,290 1,484,093
----------- ----------- -----------
Total liabilities and
stockholders' equity $22,885,155 $22,691,685 $22,677,243
=========== =========== ===========
Net interest income/net
interest rate spread (3) $ 478,780 2.11% $ 470,566 2.09% $ 379,538 1.72%
========= ==== ========= ==== ========= ====
Net interest-earning assets/
net interest margin (4) $ 666,439 2.19% $ 665,695 2.17% $ 424,425 1.78%
=========== ==== =========== ==== =========== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 1.03x 1.03x 1.02x
===== ===== =====
(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 reported 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.
50
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.
Year Ended December 31, 2005 Year Ended December 31, 2004
Compared to Compared to
Year Ended December 31, 2004 Year Ended December 31, 2003
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
--------------------------------- ---------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- --------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans:
One-to-four family $ 27,254 $ 4,446 $ 31,700 $ (4,895) $ (33,420) $ (38,315)
Multi-family, commercial
real estate and construction 27,606 (9,190) 18,416 44,943 (28,025) 16,918
Consumer and other loans 2,306 7,542 9,848 3,050 (985) 2,065
Mortgage-backed and other
securities (41,344) 10,926 (30,418) (5,949) 21,429 15,480
Federal funds sold and
repurchase agreements 2,387 2,596 4,983 (627) 229 (398)
FHLB-NY stock (989) 3,546 2,557 (3,046) (4,094) (7,140)
- --------------------------------------------------------------------------------------------------------------
Total 17,220 19,866 37,086 33,476 (44,866) (11,390)
- --------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings (905) - (905) 275 (1,553) (1,278)
Money market (1,954) 3,088 1,134 (2,027) (1,528) (3,555)
NOW and demand deposit 7 - 7 57 (662) (605)
Liquid CDs 10,708 - 10,708 - - -
Certificates of deposit 32,413 613 33,026 28,268 (10,652) 17,616
Borrowings (23,200) 8,102 (15,098) (22,627) (91,969) (114,596)
- --------------------------------------------------------------------------------------------------------------
Total 17,069 11,803 28,872 3,946 (106,364) (102,418)
- --------------------------------------------------------------------------------------------------------------
Net change in net interest
income $ 151 $ 8,063 $ 8,214 $ 29,530 $ 61,498 $ 91,028
==============================================================================================================
Interest Income
Interest income for the year ended December 31, 2005 increased $37.1 million to
$1.08 billion, from $1.05 billion for the year ended December 31, 2004. This
increase was primarily the result of an increase in the average yield on
interest-earning assets to 4.96% for the year ended December 31, 2005, from
4.83% for the year ended December 31, 2004, coupled with an increase in the
average balance of interest-earning assets to $21.85 billion for the year ended
December 31, 2005, from $21.66 billion for the year ended December 31, 2004. The
increase in the average yield on interest-earning assets was primarily the
result of the decrease in net premium amortization on our mortgage-backed
securities and mortgage loan portfolios, previously discussed, coupled with
rising interest rates. The increase in the average balance of interest-earning
assets was primarily due to increases in the average balances of loans and
federal funds sold and repurchase agreements, partially offset by decreases in
the average balances of mortgage-backed and other securities and FHLB-NY stock.
Interest income on one-to-four family mortgage loans increased $31.7 million to
$459.9 million for the year ended December 31, 2005, from $428.2 million for the
year ended December 31, 2004, which was primarily the result of an increase of
$566.8 million in the average balance of such loans, coupled with an increase in
the average yield to 4.86% for the year ended December 31, 2005, from 4.81% for
the year ended December 31, 2004. The increase in the average balance of
one-to-four family mortgage loans is the result of the strong levels of
originations and purchases which have outpaced the levels of repayments over
51
the past year. The increase in the average yield on one-to-four family mortgage
loans is primarily due to the decrease in net premium amortization, previously
discussed.
Interest income on multi-family, commercial real estate and construction loans
increased $18.4 million to $239.1 million for the year ended December 31, 2005,
from $220.7 million for the year ended December 31, 2004, which was primarily
the result of an increase of $442.9 million in the average balance of such
loans, partially offset by a decrease in the average yield to 6.19% for the year
ended December 31, 2005, from 6.45% for the year ended December 31, 2004. The
increase in the average balance of multi-family, commercial real estate and
construction loans reflects the continued strong levels of originations, which
have outpaced the levels of repayments. Repayment activity within this portfolio
is generally not as significant as our one-to-four family mortgage loan
portfolio in part due to the prepayment penalties associated with these loans.
The decrease in the average yield on multi-family, commercial real estate and
construction loans reflects the significant growth in the portfolio in the
relatively low interest rate environment.
Interest income on consumer and other loans increased $9.9 million to $31.2
million for the year ended December 31, 2005, from $21.3 million for the year
ended December 31, 2004, primarily due to an increase in the average yield to
5.92% for the year ended December 31, 2005, from 4.46% for the year ended
December 31, 2004, coupled with an increase of $47.9 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 which generally
reset monthly and are indexed to the prime rate. The prime rate increased 125
basis points during the latter half of 2004 and 200 basis points during 2005.
The increase in the average balance of consumer and other loans was due to the
increase in home equity lines of credit during the year as a result of the
continued strong housing market and relatively low interest rate environment.
Home equity lines of credit represented 91.6% of this portfolio at December 31,
2005.
Interest income on mortgage-backed and other securities decreased $30.4 million
to $340.6 million for the year ended December 31, 2005, from $371.0 million for
the year ended December 31, 2004. This decrease was primarily the result of a
decrease of $937.1 million in the average balance of the portfolio, partially
offset by an increase in the average yield to 4.44% for the year ended December
31, 2005, from 4.31% for the year ended December 31, 2004. The decrease in the
average balance of mortgage-backed and other securities reflects our previously
discussed strategy of reducing the securities and borrowings portfolios. The
increase in the average yield on mortgage-backed and other securities reflects
the previously discussed reduction in net premium amortization. Premium
amortization and discount accretion on mortgage-backed and other securities
changed by $9.5 million to net discount accretion of $1.4 million for the year
ended December 31, 2005, from net premium amortization of $8.1 million for the
year ended December 31, 2004.
Interest income on federal funds sold and repurchase agreements increased $5.0
million to $6.1 million for the year ended December 31, 2005, as a result of an
increase in the average yield to 3.13% for the year ended December 31, 2005,
from 1.32% for the year ended December 31, 2004, coupled with an increase of
$109.2 million in the average balance of the portfolio. The increase in the
average yield reflects the FOMC federal funds rate increases totaling 125 basis
points during the latter half of 2004 and 200 basis points during 2005. Dividend
income on FHLB-NY stock increased $2.6 million to $6.0 million for the year
ended December 31, 2005, primarily as a result of increases in the dividend
rates paid by the FHLB-NY.
Interest Expense
Interest expense for the year ended December 31, 2005 increased $28.9 million to
$604.2 million, from $575.3 million for the year ended December 31, 2004. This
increase was primarily the result of an increase of $188.4 million in the
average balance of interest-bearing liabilities to $21.18 billion for the year
ended December 31, 2005, from $20.99 billion for the year ended December 31,
2004, coupled with an increase in the average cost of total interest-bearing
liabilities to 2.85% for the year ended December 31, 2005, from 2.74% for the
year ended December 31, 2004. The increase in the average balance of
interest-bearing liabilities was due to an increase in the average balance of
deposits, partially offset by a decrease in the average balance of borrowings.
The increase in the average cost of total interest-bearing liabilities was
52
primarily due to the impact of the significant increases in the average balances
of certificates of deposit and Liquid CDs, which have a higher average cost than
our other deposit products, and the impact of the increase in short-term
interest rates, which began in the latter half of 2004, on our short-term
borrowings.
Interest expense on deposits increased $44.0 million to $281.4 million for the
year ended December 31, 2005, from $237.4 million for the year ended December
31, 2004, primarily due to an increase of $806.5 million in the average balance
of total deposits. The increase in the average balance of total deposits was
primarily the result of increases in the average balances of certificates of
deposit and Liquid CDs, partially offset by decreases in the average balances of
money market and savings accounts, primarily as a result of continued intense
competition for these types of deposits. The average cost of total deposits
increased to 2.23% for the year ended December 31, 2005, from 2.01% for the year
ended December 31, 2004, primarily due to the previously discussed significant
increases in the average balances of certificates of deposit and Liquid CDs.
Interest expense on certificates of deposit increased $33.0 million to $251.2
million for the year ended December 31, 2005, from $218.2 million for the year
ended December 31, 2004, primarily due to an increase of $935.7 million in the
average balance. The average cost of certificates of deposit increased slightly
to 3.52% for the year ended December 31, 2005, from 3.51% for the year ended
December 31, 2004. During the year ended December 31, 2005, $3.70 billion of
certificates of deposit, with a weighted average rate of 2.71% and a weighted
average maturity at inception of seventeen months, matured and $4.06 billion of
certificates of deposit were issued or repriced, with a weighted average rate of
3.45% and a weighted average maturity at inception of thirteen months. Interest
expense on Liquid CDs totaled $10.7 million for the year ended December 31,
2005. Our new Liquid CDs had an average balance of $350.9 million and an average
cost of 3.05% for the year ended December 31, 2005. The increases in the average
balances of certificates of deposit and Liquid CDs were primarily a result of
the success of our marketing campaigns 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.
Interest expense on borrowings for the year ended December 31, 2005 decreased
$15.1 million to $322.8 million, from $337.9 million for the year ended December
31, 2004, resulting from a decrease of $618.1 million in the average balance,
partially offset by an increase in the average cost to 3.77% for the year ended
December 31, 2005, from 3.68% for the year ended December 31, 2004. 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 short-term interest rates over the past year on our short-term borrowings.
Provision for Loan Losses
During the years ended December 31, 2005 and 2004, no provision for loan losses
was recorded. We review our allowance for loan losses on a quarterly basis.
Our 2005 analyses did not indicate that a change in our allowance for loan
losses was warranted. Our net charge-off experience during the year ended
December 31, 2005 was one basis point of average loans outstanding, compared to
less than one basis point of average loans outstanding for the year ended
December 31, 2004. We believe our current allowance for loan losses is adequate
to reflect the risks inherent in our loan portfolio.
The allowance for loan losses totaled $81.2 million at December 31, 2005 and
$82.8 million at December 31, 2004. Net loan charge-offs totaled $1.6 million
for the year ended December 31, 2005 compared to $363,000 for the year ended
December 31, 2004. Non-performing loans increased $32.4 million to $65.0 million
at December 31, 2005, from $32.6 million at December 31, 2004. The allowance for
loan losses as a percentage of non-performing loans decreased to 124.81% at
December 31, 2005, from 254.02% at December 31, 2004, primarily due to the
increase in non-performing loans from December 31, 2004 to December 31, 2005.
The allowance for loan losses as a percentage of total loans was 0.56% at
December 31, 2005 and 0.62% at December 31, 2004. For further discussion of
non-performing loans and the allowance for loan losses, see "Critical Accounting
Policies" and "Asset Quality."
53
Non-Interest Income
Non-interest income for the year ended December 31, 2005 increased $22.1 million
to $102.2 million, from $80.1 million for the year ended December 31, 2004. This
increase was primarily due to the $16.5 million other-than-temporary impairment
write-down of securities charge recorded in the 2004 fourth quarter, previously
discussed under "Critical Accounting Policies - Securities Impairment," coupled
with increases in customer service fees, other non-interest income and mortgage
banking income, net, for the year ended December 31, 2005. These increases were
partially offset by the absence of gains on sales of securities for the year
ended December 31, 2005.
Customer service fees increased $7.8 million to $66.3 million for the year ended
December 31, 2005, from $58.5 million for the year ended December 31, 2004. The
increase was primarily due to an increase in insufficient fund fees related to
transaction accounts resulting from the implementation of an enhanced overdraft
protection program in the 2005 first quarter.
Other non-interest income increased $1.7 million to $8.5 million for the year
ended December 31, 2005, from $6.8 million for the year ended December 31, 2004,
primarily due to gains recognized in the 2005 second quarter in a trust account
previously established for certain former directors, a gain recognized in the
2005 second quarter on the sale of an inactive subsidiary and a gain recognized
in the 2005 fourth quarter on the settlement of an insurance claim related to
the fire at our Oakdale banking office in December 2004.
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, increased $1.3 million to $6.0 million for the year ended
December 31, 2005, from $4.7 million for the year ended December 31, 2004. This
increase was primarily due to a decrease in amortization of MSR attributable to
the reduction in the level of mortgage loan repayments.
There were no sales of securities during the year ended December 31, 2005.
During 2004, we sold securities with an amortized cost of $165.5 million for a
net gain of $4.7 million.
Non-Interest Expense
Non-interest expense increased $3.7 million to $228.7 million for the year ended
December 31, 2005, from $225.0 million for the year ended December 31, 2004.
This increase was primarily due to increases in advertising expense and other
expense.
Advertising expense increased $2.2 million to $8.8 million for the year ended
December 31, 2005, from $6.6 million for the year ended December 31, 2004,
primarily due to increased advertising related to, among other things, the
introduction of a business banking marketing campaign in the 2005 first quarter.
Other expense increased $1.6 million to $35.0 million for the year ended
December 31, 2005, from $33.4 million for the year ended December 31, 2004,
primarily due to, among other things, increased legal fees and other costs in
the first half of 2005 as a result of the completion of the trial phase of the
LISB goodwill litigation, various one-time charges of $581,000 associated with
the outsourcing of our mortgage servicing and other company-wide cost saving
initiatives, previously discussed, an increase in recruiting expenses and
increased charitable contributions. See Item 3, "Legal Proceedings," for further
discussion of goodwill litigation. The increase in charitable contributions was
the result of contributions to benefit the Gulf Coast victims of Hurricane
Katrina and to support the tsunami disaster relief efforts in South Asia. These
increases were partially offset by a $3.2 million arbitration award settlement
in the 2004 third quarter.
Compensation and benefits expense increased slightly for the year ended December
31, 2005, compared to the year ended December 31, 2004, primarily due to costs
of $1.3 million associated with the outsourcing of our mortgage loan servicing
activities and other company-wide cost saving initiatives, previously discussed.
Compensation and benefits expense also includes certain stock-based compensation
costs in 2005. 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
54
straight line basis over the vesting period of approximately three years. Also
in December 2005, we accelerated the vesting of certain outstanding unvested
stock options in anticipation of our adoption of revised SFAS No. 123,
"Share-Based Payment," or SFAS No. 123(R), effective January 1, 2006.
Compensation costs related to the acceleration of vesting totaled $111,000 in
2005. See "Impact of Accounting Standards and Interpretations" for a further
discussion of the accelerated vesting and the impact of our adoption of SFAS No.
123(R).
Our percentage of general and administrative expense to average assets was 1.00%
for the year ended December 31, 2005, compared to 0.99% for the year ended
December 31, 2004. Our efficiency ratio, which represents general and
administrative expense divided by the sum of net interest income plus
non-interest income, decreased to 39.37% for the year ended December 31, 2005,
from 40.86% for the year ended December 31, 2004, primarily due to the
previously discussed increases in non-interest income and net interest income.
Income Tax Expense
For the year ended December 31, 2005, income tax expense totaled $118.4 million,
representing an effective tax rate of 33.6%, compared to $106.1 million,
representing an effective tax rate of 32.6%, for the year ended December 31,
2004.
Comparison of Financial Condition and Operating Results for the Years Ended
December 31, 2004 and 2003
Financial Condition
Total assets increased $954.3 million to $23.42 billion at December 31, 2004,
from $22.46 billion at December 31, 2003. The primary reasons for the increase
in total assets were the increases in loans receivable and mortgage-backed
securities. This growth was funded primarily through an increase in deposits.
Mortgage loans, net, increased $497.4 million to $12.75 billion at December 31,
2004, from $12.25 billion at December 31, 2003. This increase was primarily due
to an increase in our multi-family mortgage loan portfolio. Gross mortgage loans
originated and purchased during the year ended December 31, 2004 totaled $4.35
billion, of which $3.19 billion were originations and $1.16 billion were
purchases. This compares to gross mortgage loans originated and purchased during
the year ended December 31, 2003 totaling $7.29 billion, of which $5.75 billion
were originations and $1.54 billion were purchases. Total mortgage loans
originated include originations of loans held-for-sale totaling $323.2 million
during the year ended December 31, 2004 and $613.3 million during the year ended
December 31, 2003. Mortgage loan repayments decreased to $3.52 billion for the
year ended December 31, 2004, from $6.11 billion for the year ended December 31,
2003. The decreases in the levels of mortgage loan originations, purchases and
repayments reflect the decline in refinance activity in 2004 compared to 2003.
Our mortgage loan portfolio, as well as our originations and purchases, continue
to consist primarily of one-to-four family mortgage loans. During 2004, the
reduction in repayment activity and continued strong loan origination volume,
primarily in the fourth quarter, resulted in a modest increase in our
one-to-four family loan portfolio from December 31, 2003. Our one-to-four family
mortgage loans increased $83.7 million to $9.05 billion at December 31, 2004,
from $8.97 billion at December 31, 2003, and represented 68.7% of our total loan
portfolio at December 31, 2004. The strong growth we experienced in the fourth
quarter of 2004 offset the impact of repayments outpacing originations during
the first nine months of 2004.
While we continue to be primarily a one-to-four family mortgage lender, we have
increased our emphasis on multi-family and commercial real estate loan
originations over the past several years. Our multi-family mortgage loan
portfolio increased $328.5 million to $2.56 billion at December 31, 2004, from
$2.23 billion at December 31, 2003. Our commercial real estate loan portfolio
increased $64.6 million to $944.9 million at December 31, 2004, from $880.3
million at December 31, 2003. Multi-family and commercial real estate loan
originations totaled $1.05 billion for the year ended December 31, 2004 and
$1.65 billion for the
55
year ended December 31, 2003. As of December 31, 2004, 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%. Prepayment activity within our multi-family and commercial real estate
loan portfolio is generally not as significant as that which we have experienced
in our one-to-four family mortgage loan portfolio due in part to the prepayment
penalties associated with these loans. Consumer and other loans, net, increased
$78.9 million to $517.1 million at December 31, 2004, from $438.2 million at
December 31, 2003. This increase is primarily in home equity lines of credit as
a result of the continued strong housing market and low interest rate
environment.
Securities increased $262.1 million to $8.71 billion at December 31, 2004, from
$8.45 billion at December 31, 2003. This increase was primarily the result of
purchases of fixed rate REMICs and CMOs totaling $3.07 billion, partially offset
by principal payments received of $2.65 billion, sales of $165.5 million and the
$16.5 million other-than-temporary impairment write-down on our FHLMC perpetual
preferred securities, previously discussed. During 2004, we continued to
purchase mortgage-backed securities to effectively redeploy our securities and
excess mortgage cash flows in addition to cash flows from deposit growth. At
December 31, 2004, our securities portfolio is comprised primarily of fixed rate
REMIC and CMO securities. The amortized cost of our fixed rate REMICs and CMOs
totaled $8.44 billion at December 31, 2004. Included in this total is $1.49
billion of securities which have a remaining gross premium of $12.2 million, a
weighted average current coupon of 4.94%, a weighted average collateral coupon
of 6.00% and a weighted average life of 2.2 years. The remaining $6.95 billion
of these securities have a remaining gross discount of $25.8 million, a weighted
average current coupon of 4.20%, a weighted average collateral coupon of 5.73%
and a weighted average life of 3.3 years. Included in the totals for discount
securities are $819.8 million of securities at par.
Deposits increased $1.13 billion to $12.32 billion at December 31, 2004, from
$11.19 billion at December 31, 2003. The increase in deposits was primarily due
to an increase of $1.35 billion in certificates of deposit to $6.85 billion at
December 31, 2004 and an increase of $87.3 million in NOW and demand deposit
accounts to $1.58 billion at December 31, 2004, partially offset by a decrease
of $267.5 million in our money market accounts to $965.3 million at December 31,
2004. The increase in our certificates of deposit was primarily the result of
the success of our marketing campaigns. The decrease in our money market
accounts is attributable to continued intense competition for these accounts.
Certain local competitors have continued to offer premium rates for money market
and checking accounts. We have not offered premium rates on these accounts
because we do not consider it a cost effective strategy. However, despite
continued intense competition for checking accounts, we have been successful in
increasing our total NOW and demand deposit account balances during the year
ended December 31, 2004, including our business checking deposits, due in large
part to our concerted sales and marketing efforts, including our PEAK sales
process.
Total borrowings, net, decreased $162.2 million to $9.47 billion at December 31,
2004, from $9.63 billion at December 31, 2003. This decrease is primarily the
result of a $155.0 million decrease in reverse repurchase agreements. The net
decrease in total borrowings reflects the repayment of certain high cost
borrowings that matured.
Stockholders' equity decreased to $1.37 billion at December 31, 2004, from $1.40
billion at December 31, 2003. The decrease in stockholders' equity was the
result of common stock repurchased of $225.1 million and dividends declared of
$72.0 million. These decreases were partially offset by net income of $219.5
million, the effect of stock options exercised and related tax benefit of $24.1
million, a decrease in accumulated other comprehensive loss, net of tax, of
$17.9 million, which was primarily due to the increase in the fair value of our
securities available-for-sale, and the amortization of the allocated portion of
shares held by the ESOP of $8.7 million.
56
Results of Operations
General
Net income for the year ended December 31, 2004 increased $22.7 million to
$219.5 million, from $196.8 million for the year ended December 31, 2003.
Diluted earnings per common share totaled $2.00 per share for the year ended
December 31, 2004 and $1.66 per share for the year ended December 31, 2003.
Return on average assets increased to 0.97% for the year ended December 31,
2004, from 0.87% for the year ended December 31, 2003. Return on average
stockholders' equity increased to 15.81% for the year ended December 31, 2004,
from 13.26% for the year ended December 31, 2003. Return on average tangible
stockholders' equity increased to 18.25% for the year ended December 31, 2004,
from 15.15% for the year ended December 31, 2003. The increase in the return on
average assets is primarily due to the increase in net income. The increase in
the returns on average stockholders' equity and average tangible stockholders'
equity is primarily due to the increase in net income, coupled with the decrease
in the average balance of stockholders' equity for the year ended December 31,
2004, compared to the year ended December 31, 2003.
As previously discussed, our results of operations for the year ended December
31, 2004 include a $16.5 million, before-tax ($9.6 million, after-tax),
other-than-temporary impairment write-down charge on $120.0 million face value
of perpetual preferred stock issued by FHLMC. This charge reduced diluted
earnings per common share by $0.09 per share for the year ended December 31,
2004. This charge also reduced our return on average assets by 4 basis points,
return on average stockholders' equity by 69 basis points, and return on average
tangible stockholders' equity by 79 basis points. For a further discussion of
the other-than-temporary impairment write-down, see "Critical Accounting
Policies - Securities Impairment."
Net Interest Income
For the year ended December 31, 2004, net interest income increased $91.1
million to $470.6 million, from $379.5 million for the year ended December 31,
2003. The net interest margin increased to 2.17% for the year ended December 31,
2004, from 1.78% for the year ended December 31, 2003. The increases in net
interest income and the net interest margin for the year ended December 31, 2004
were primarily the result of a decrease in interest expense, partially offset by
a decrease in interest income. The decrease in interest expense was attributable
to a decrease in our cost of funds, which is primarily due to the repayment and
refinancing of various higher cost borrowings. The decrease in interest income
was primarily due to the decrease in the yield on interest-earning assets as a
result of the extraordinarily high level of mortgage loan and mortgage-backed
securities repayments we experienced throughout 2003 resulting in reinvestment
in assets at lower rates. Partially offsetting the negative impact of the
reinvestment in assets at lower rates was an increase in the average balance of
total interest-earning assets and a reduction in net premium amortization on
mortgage-backed securities and mortgage loans. Net premium amortization on our
mortgage-backed securities and mortgage loan portfolios decreased $81.0 million
to $32.0 million for the year ended December 31, 2004, from $113.0 million for
the year ended December 31, 2003.
The average balance of net interest-earning assets increased $241.3 million to
$665.7 million for the year ended December 31, 2004, from $424.4 million for the
year ended December 31, 2003. The increase in the average balance of net
interest-earning assets was primarily the result of an increase of $343.2
million in the average balance of total interest-earning assets to $21.66
billion for the year ended December 31, 2004, from $21.32 billion for the year
ended December 31, 2003, partially offset by an increase of $102.0 million in
the average balance of total interest-bearing liabilities to $20.99 billion for
the year ended December 31, 2004, from $20.89 billion for the year ended
December 31, 2003. Also contributing to the increase in the average balance of
net interest-earning assets was the decrease in non-interest-earning assets,
primarily as a result of the reduction in the monthly mortgage-backed securities
principal payments receivable due to the reduction in the mortgage-backed
securities cash flow. The net interest rate spread increased to 2.09% for the
year ended December 31, 2004, from 1.72% for the year ended December 31, 2003,
primarily due to a decrease in the average cost of interest-bearing liabilities,
partially offset by a decrease in the average yield on interest-earning assets.
The average cost of interest-bearing liabilities decreased to 2.74% for the year
57
ended December 31, 2004, from 3.24% for the year ended December 31, 2003. The
average yield on interest-earning assets decreased to 4.83% for the year ended
December 31, 2004, from 4.96% for the year ended December 31, 2003.
The changes in average interest-earning assets and interest-bearing liabilities
and their related yields and costs are discussed in greater detail under
"Interest Income" and "Interest Expense."
Interest Income
Interest income for the year ended December 31, 2004 decreased slightly to $1.05
billion, from $1.06 billion for the year ended December 31, 2003. This decrease
was primarily the result of a decrease in the average yield on interest-earning
assets to 4.83% for the year ended December 31, 2004, from 4.96% for the year
ended December 31, 2003, substantially offset by an increase of $343.2 million
in the average balance of interest-earning assets to $21.66 billion for the year
ended December 31, 2004, from $21.32 billion for the year ended December 31,
2003. The decrease in the average yield on interest-earning assets was primarily
due to decreases in the average yields on mortgage loans, partially offset by an
increase in the average yield on mortgage-backed and other securities. The
decreases in the average yields on our mortgage loan portfolios are attributable
to a reduction in coupon rates resulting from the extraordinarily high levels of
repayments in these portfolios, primarily during 2003, resulting in reinvestment
in those assets at lower rates, coupled with the significant growth in the
multi-family, commercial real estate and construction loan portfolio in a
relatively low interest rate environment. Partially offsetting this decrease in
coupon rates was the significant decrease in net premium amortization as a
result of the reduction in refinance activity in 2004. The increase in the
average yield on mortgage-backed and other securities was primarily the result
of the significant decrease in net premium amortization as a result of the
reduction in refinance activity in 2004, as well as the reduced amount of
unamortized premium remaining in our portfolio, partially offset by a reduction
in coupon rates. The increase in the average balance of interest-earning assets
was primarily due to increases in the average balances of multi-family,
commercial real estate and construction loans and consumer and other loans,
partially offset by decreases in the average balances of mortgage-backed and
other securities, one-to-four family mortgage loans, and federal funds sold and
repurchase agreements.
Interest income on one-to-four family mortgage loans decreased $38.3 million to
$428.2 million for the year ended December 31, 2004, from $466.5 million for the
year ended December 31, 2003, which was the result of a decrease in the average
yield to 4.81% for the year ended December 31, 2004, from 5.19% for the year
ended December 31, 2003, coupled with a decrease of $96.4 million in the average
balance of such loans. The decrease in the average yield on one-to-four family
mortgage loans reflects the impact of the low interest rate environment as
higher rate loans were repaid and replaced with lower yielding new originations
and purchases throughout most of 2003. However, the yield has been positively
impacted by a reduction of mortgage loan premium amortization as a result of the
decreased refinance activity during 2004 as compared to 2003. The decrease in
the average balance of one-to-four family mortgage loans is the result of
repayments continuing to outpace originations and purchases of one-to-four
family mortgage loans during the first nine months of 2004. However, as a result
of reduced prepayment activity and continued strong purchase mortgage activity,
during the 2004 fourth quarter, originations and purchases exceeded the levels
of repayments resulting in a modest increase in the balance of the portfolio
from December 31, 2003 to December 31, 2004.
Interest income on multi-family, commercial real estate and construction loans
increased $16.9 million to $220.7 million for the year ended December 31, 2004,
from $203.8 million for the year ended December 31, 2003, which was primarily
the result of an increase of $661.9 million in the average balance of such
loans, partially offset by a decrease in the average yield to 6.45% for the year
ended December 31, 2004, from 7.39% for the year ended December 31, 2003. The
increase in the average balance of multi-family, commercial real estate and
construction loans reflects our increased emphasis on originations of such loans
over the past several years, coupled with the fact that repayment activity
within this portfolio is generally not as significant as that which we have
experienced on our one-to-four family mortgage loan portfolio in part due to the
prepayment penalties associated with these loans. The decrease in the average
yield on multi-family, commercial real estate and construction loans reflects
the significant growth in this portfolio
58
in the relatively low interest rate environment, coupled with a decrease of $3.4
million in prepayment penalties which totaled $12.6 million in 2004 compared to
$16.0 million in 2003.
Interest income on mortgage-backed and other securities increased $15.4 million
to $371.0 million for the year ended December 31, 2004, from $355.6 million for
the year ended December 31, 2003. This increase was the result of an increase in
the average yield to 4.31% for the year ended December 31, 2004, from 4.06% for
the year ended December 31, 2003, partially offset by a decrease of $143.6
million in the average balance of the portfolio. The increase in the average
yield on mortgage-backed and other securities reflects the reduction in net
premium amortization during 2004. Net premium amortization decreased $60.5
million to $8.1 million for the year ended December 31, 2004, from $68.6 million
for the year ended December 31, 2003. The benefit from the reduction in the
amount of net premium amortization was partially offset by a reduction in coupon
rates resulting from the substantial turnover we experienced in our
mortgage-backed securities portfolio during 2003 as higher yielding securities
paid off and were replaced with lower yielding securities. In 2004, we continued
to purchase mortgage-backed securities to effectively redeploy our securities
and excess mortgage cash flows, in addition to cash flows from deposit growth,
which resulted in an increase in the balance of mortgage-backed and other
securities at December 31, 2004, compared to December 31, 2003. The decrease in
the average balance of mortgage-backed and other securities for the year ended
December 31, 2004, compared to the year ended December 31, 2003, is the result
of the volatility in cash flows we experienced in 2004 on our mortgage-backed
securities portfolio, due to the interest rate volatility which occurred between
quarters in 2004, coupled with a reduction in the levels of other securities as
a result of securities which were sold or called in 2003 and early 2004.
Dividends on FHLB-NY stock totaled $3.5 million for the year ended December 31,
2004 and $10.6 million for the year ended December 31, 2003. The decrease in
dividends received was primarily due to a decrease in the dividend rates paid by
the FHLB-NY, coupled with a decrease in the average balance of FHLB-NY stock,
reflecting the reduction in the level of FHLB-NY borrowings. The FHLB-NY
suspended dividend payments in the 2003 fourth quarter but resumed payments in
January 2004 at a reduced rate from that which they had paid prior to the
suspension.
Interest Expense
Interest expense for the year ended December 31, 2004 decreased $102.5 million
to $575.3 million, from $677.8 million for the year ended December 31, 2003.
This decrease was primarily the result of a decrease in the average cost of
interest-bearing liabilities to 2.74% for the year ended December 31, 2004, from
3.24% for the year ended December 31, 2003, slightly offset by an increase of
$102.0 million in the average balance of interest-bearing liabilities to $20.99
billion for the year ended December 31, 2004, from $20.89 billion for the year
ended December 31, 2003. The decrease in the overall average cost of our
interest-bearing liabilities primarily reflects the impact of the repayment and
refinancing of higher cost borrowings as they matured at substantially lower
rates. The slight increase in the average balance of interest-bearing
liabilities was primarily due to an increase in the average balance of deposits,
substantially offset by a decrease in the average balance of borrowings.
Interest expense on deposits increased $12.1 million to $237.4 million for the
year ended December 31, 2004, from $225.3 million for the year ended December
31, 2003, reflecting an increase of $607.4 million in the average balance of
total deposits which was primarily due to an increase in the average balance of
certificates of deposit, partially offset by a decrease in the average balance
of money market accounts. The average cost of deposits in each of the deposit
categories decreased for the year ended December 31, 2004, as compared to the
year ended December 31, 2003, as a result of the low interest rate environment.
However, our overall average cost of deposits remained at 2.01% for the year
ended December 31, 2004, primarily due to the significant increase in the
average balance of certificates of deposit which have a higher average cost than
our other deposit products.
Interest expense on certificates of deposit increased $17.6 million resulting
from an increase of $791.3 million in the average balance, partially offset by a
decrease in the average cost to 3.51% for the year ended December 31, 2004, from
3.70% for the year ended December 31, 2003. The increase in the average balance
of certificates of deposit was primarily the result of the success of our
marketing campaigns which
59
have focused on attracting medium- and long-term certificates of deposit as part
of our interest rate risk management strategy to extend liabilities as well as
to enable us to reduce borrowings. During the year ended December 31, 2004,
$3.90 billion of certificates of deposit, with a weighted average rate of 2.45%
and a weighted average maturity at inception of sixteen months, matured and
$5.02 billion of certificates of deposit were issued or repriced, with a
weighted average rate of 2.66% and a weighted average maturity at inception of
twenty months.
Interest expense on money market accounts decreased $3.6 million reflecting a
decrease of $314.4 million in the average balance, coupled with a decrease in
the average cost to 0.59% for the year ended December 31, 2004, from 0.71% for
the year ended December 31, 2003. The decrease in the average balance of money
market accounts is attributable to the continued intense competition for these
accounts, previously discussed. The decrease in the average cost of money market
accounts is a result of the low interest rate environment.
Interest expense on savings accounts decreased $1.3 million which was
attributable to a decrease in the average cost to 0.40% for the year ended
December 31, 2004, from 0.45% for the year ended December 31, 2003, partially
offset by an increase of $65.5 million in the average balance. Interest expense
on NOW and demand deposit accounts decreased $605,000 as a result of a decrease
in the average cost to 0.06% for the year ended December 31, 2004, from 0.10%
for the year ended December 31, 2003, slightly offset by an increase of $65.0
million in the average balance of these accounts. The increases in the average
balances of savings and NOW and demand deposit accounts are consistent with our
emphasis on core deposit generation.
Interest expense on borrowings decreased $114.6 million to $337.9 million for
the year ended December 31, 2004, from $452.5 million for year ended December
31, 2003, resulting from a decrease in the average cost of borrowings to 3.68%
for the year ended December 31, 2004, from 4.67% for the year ended December 31,
2003, coupled with a decrease of $505.4 million in the average balance. The
decrease in the average cost of borrowings is the result of the repayment of
certain higher cost borrowings as they matured and the refinancing of the
remainder at substantially lower rates. The decrease in the average balance of
borrowings was primarily the result of the repayment of certain higher cost
borrowings as they matured, primarily through the increase in certificates of
deposits as a result of the success of our marketing campaigns, previously
discussed.
Provision for Loan Losses
During the years ended December 31, 2004 and 2003, no provision for loan losses
was recorded. We review our allowance for loan losses on a quarterly basis.
Our 2004 analyses did not indicate that a change in our allowance for loan
losses was warranted. Our net charge-off experience during the year ended
December 31, 2004 remained at an annualized rate of less than one basis point of
average loans outstanding for the period. We believe our current allowance for
loan losses is adequate to reflect the risks inherent in our loan portfolio.
The allowance for loan losses totaled $82.8 million at December 31, 2004 and
$83.1 million at December 31, 2003. Net loan charge-offs totaled $363,000 for
the year ended December 31, 2004 compared to $425,000 for the year ended
December 31, 2003. Non-performing loans increased $2.9 million to $32.6 million
at December 31, 2004, from $29.7 million at December 31, 2003. The allowance for
loan losses as a percentage of non-performing loans decreased to 254.02% at
December 31, 2004, from 280.10% at December 31, 2003, primarily due to the
increase in non-performing loans from December 31, 2003 to December 31, 2004.
The allowance for loan losses as a percentage of total loans decreased to 0.62%
at December 31, 2004, from 0.66% at December 31, 2003. For further discussion of
non-performing loans and the allowance for loan losses, see "Critical Accounting
Policies" and "Asset Quality."
Non-Interest Income
Non-interest income for the year ended December 31, 2004 decreased $39.5 million
to $80.1 million, from $119.6 million for the year ended December 31, 2003. All
components of non-interest income for the year
60
ended December 31, 2004 decreased as compared to the year ended December 31,
2003. However, the decrease in total non-interest income was primarily due to
the $16.5 million other-than-temporary impairment write-down of securities,
previously discussed, and the decreases in mortgage banking income, net, and
other non-interest income.
Mortgage banking income, net, decreased $5.6 million to $4.7 million for the
year ended December 31, 2004, from $10.3 million for the year ended December 31,
2003. This decrease was primarily due to decreases in net gain on sales of loans
and loan servicing fees, partially offset by a decrease in amortization of MSR.
Net gain on sales of loans decreased $8.6 million to $3.5 million for the year
ended December 31, 2004, from $12.1 million for the year ended December 31,
2003. The decrease in net gain on sales of loans was primarily due to a
significant decrease in the volume of fixed rate loans originated and sold into
the secondary market during 2004, coupled with less favorable pricing
opportunities during the year ended December 31, 2004, as compared to the year
ended December 31, 2003. Loan servicing fees decreased $2.1 million to $5.8
million for the year ended December 31, 2004, from $7.9 million for the year
ended December 31, 2003, primarily as a result of the decrease in the balance of
loans serviced for others to $1.67 billion at December 31, 2004, from $1.90
billion at December 31, 2003. The decrease in the balance of loans serviced for
others was the result of repayments in that portfolio exceeding the level of new
servicing volume from loan sales. Amortization of MSR decreased $6.0 million to
$6.8 million for the year ended December 31, 2004, from $12.8 million for the
year ended December 31, 2003. The decrease in MSR amortization is attributable
to the reduction in the level of mortgage loan repayments as a result of the
decrease in mortgage loan refinance activity previously discussed. We recorded a
recovery in the valuation allowance of MSR of $2.2 million for the year ended
December 31, 2004 compared to a recovery of $3.1 million for the year ended
December 31, 2003.
Other non-interest income decreased $7.7 million to $6.8 million for the year
ended December 31, 2004, from $14.5 million for the year ended December 31,
2003, primarily due to a $10.1 million gain on the sale of our interest in a
joint venture real estate investment held by one of our wholly-owned
subsidiaries in the 2003 fourth quarter, partially offset by income in 2004 from
an investment in a limited partnership.
Net gain on sales of securities decreased $2.6 million to $4.7 million for the
year ended December 31, 2004, from $7.3 million for the year ended December 31,
2003. During 2004, we sold mortgage-backed securities with an amortized cost of
$145.2 million and other securities with an amortized cost of $20.3 million.
During 2003, we sold mortgage-backed securities with an amortized cost of $1.40
billion and other securities with an amortized cost of $45.6 million. Net gains
on sales of securities are used as a natural hedge to offset MSR valuation
allowance adjustments.
Income from BOLI decreased $2.9 million to $17.1 million for the year ended
December 31, 2004, from $20.0 million for the year ended December 31, 2003,
primarily due to a reduction in the yield on the BOLI investment as a result of
the low interest rate environment. Other loan fees decreased $2.8 million to
$4.8 million for the year ended December 31, 2004, from $7.6 million for the
year ended December 31, 2003, primarily due to decreases in mortgage related
fees due to the decrease in loan origination and refinance activity previously
discussed.
Non-Interest Expense
Non-interest expense increased $19.1 million to $225.0 million for the year
ended December 31, 2004, from $205.9 million for the year ended December 31,
2003. This increase was primarily due to increases in compensation and benefits
expense, occupancy, equipment and systems expense and other expense.
Compensation and benefits expense increased $8.4 million to $118.7 million for
the year ended December 31, 2004, from $110.3 million for the year ended
December 31, 2003. This increase was primarily attributable to increases in
salary expense and ESOP expense, partially offset by a reduction in pension
expense. The increase in salary expense was primarily attributable to an
increase in corporate bonuses for 2004 compared to 2003. No bonuses were paid to
executive management for 2003. The increase in ESOP expense was primarily
attributable to a higher average market value of our common stock during the
year ended December 31, 2004 compared to the year ended December 31, 2003.
Pension expense decreased
61
primarily due to the increase in the expected return on plan assets in 2004
compared to 2003 as a result of the increase in the fair value of plan assets
from December 31, 2002 to December 31, 2003.
Occupancy, equipment and systems expense increased $4.7 million to $64.6 million
for the year ended December 31, 2004, from $59.9 million for the year ended
December 31, 2003. This increase was primarily due to increased furniture,
fixtures and computer equipment expense and computer equipment depreciation, as
a result of systems enhancements over the past two years, and an increase in
office building expense, resulting from increased maintenance costs, primarily
snow removal costs in the 2004 first quarter due to the harsh winter.
Other expense increased $5.5 million to $33.4 million for the year ended
December 31, 2004, from $27.9 million for the year ended December 31, 2003,
primarily due to a $3.2 million arbitration settlement resulting from the final
disposition of a compensation dispute between us and three former directors of
Long Island Bancorp, Inc. and increased legal fees and other costs as a result
of increased activity in preparation for the trial phase of the LISB goodwill
litigation. See Item 3, "Legal Proceedings," for further discussion of the LISB
goodwill litigation. Additionally, we incurred $800,000 in consulting fees
related to our implementation of the Sarbanes-Oxley Act of 2002.
Although non-interest expense increased in 2004, we continue to focus on expense
control, with expense ratios that are significantly lower than our peer
averages. Our percentage of general and administrative expense to average assets
increased to 0.99% for the year ended December 31, 2004, from 0.91% for the year
ended December 31, 2003, primarily due to the increase in general and
administrative expense. The efficiency ratio decreased to 40.86% for the year
ended December 31, 2004, from 41.25% for the year ended December 31, 2003,
primarily due to the increase in net interest income.
Income Tax Expense
For the year ended December 31, 2004, income tax expense totaled $106.1 million,
representing an effective tax rate of 32.6%, compared to $96.4 million,
representing an effective tax rate of 32.9%, for the year ended December 31,
2003.
Asset Quality
Non-performing assets increased $32.6 million to $66.1 million at December 31,
2005, from $33.5 million at December 31, 2004. Non-performing loans, the most
significant component of non-performing assets, increased $32.4 million to $65.0
million at December 31, 2005, from $32.6 million at December 31, 2004. These
increases were primarily due to increases in non-performing multi-family and
one-to-four family mortgage loans. The increase in non-performing multi-family
mortgage loans is primarily attributable to two large loans to unrelated
borrowers. The first is a $5.4 million loan involving fraud. We have notified
the applicable title insurance company of the existence of this fraud. They are
defending our interest subject to a reservation of rights. The second is a $5.3
million loan where the borrower has become delinquent as a result of a large
increase in his real estate taxes. The increase in non-performing one-to-four
family mortgage loans is partially the result of an $11.5 million increase in
loans which are classified as non-performing although they have only missed two
payments, as previously discussed. At December 31, 2005, non-performing
multi-family loans totaled $26.3 million and had an average loan-to-value ratio
of 69.1% and an average debt service coverage ratio of 1.77 times. At December
31, 2005, non-performing one-to-four family mortgage loans totaled $35.7 million
and had an average loan-to-value ratio of 64.9%. Loan-to-value ratios are based
on current principal balance and original appraised value. While our
non-performing loans at December 31, 2005 have increased from December 31, 2004,
our non-performing loans continue to remain at low levels in relation to the
size of our loan portfolio. The ratio of non-performing loans to total loans
increased to 0.45% at December 31, 2005, from 0.25% at December 31, 2004. Our
ratio of non-performing assets to total assets increased to 0.30% at December
31, 2005, from 0.14% at December 31, 2004. We have not experienced an increase
in non-performing assets or delinquent loans as a result of the hurricanes in
the Gulf Coast region of the United States during the latter half of 2005. See
Item 1, "Business" for further discussion of our asset quality.
62
Non-Performing Assets
The following table sets forth information regarding non-performing assets.
At December 31,
------------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Non-accrual delinquent mortgage loans (1) $ 64,351 $ 31,462 $ 28,321 $ 31,997 $ 34,848
Non-accrual delinquent consumer and other loans 500 544 792 1,485 991
Mortgage loans delinquent 90 days or more and
still accruing interest (2) 176 573 563 1,035 1,277
- --------------------------------------------------------------------------------------------------------
Total non-performing loans 65,027 32,579 29,676 34,517 37,116
Real estate owned, net (3) 1,066 920 1,635 1,091 2,987
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $ 66,093 $ 33,499 $ 31,311 $ 35,608 $ 40,103
========================================================================================================
Non-performing loans to total loans 0.45% 0.25% 0.23% 0.29% 0.31%
Non-performing loans to total assets 0.29 0.14 0.13 0.16 0.16
Non-performing assets to total assets 0.30 0.14 0.14 0.16 0.18
(1) Includes multi-family and commercial real estate loans totaling $28.6
million, $11.5 million, $6.1 million, $2.9 million and $3.6 million at
December 31, 2005, 2004, 2003, 2002 and 2001, respectively.
(2) 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.
If all non-accrual loans had been performing in accordance with their original
terms, we would have recorded interest income, with respect to such loans, of
$3.8 million for the year ended December 31, 2005, $1.8 million for the year
ended December 31, 2004 and $1.9 million for the year ended December 31, 2003.
This compares to actual payments recorded as interest income, with respect to
such loans, of $2.4 million for the year ended December 31, 2005, $1.0 million
for the year ended December 31, 2004 and $1.2 million for the year ended
December 31, 2003.
As previously discussed, 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. As of December 31,
2005, $28.1 million of mortgage loans classified as non-performing had missed
only two payments, compared to $12.3 million at December 31, 2004.
Excluded from non-performing assets are restructured loans that have complied
with the terms of their restructure agreement for a satisfactory period and
have, therefore, been returned to performing status. Restructured loans that are
in compliance with their restructured terms totaled $1.6 million at December 31,
2005, $2.8 million at December 31, 2004, $3.9 million at December 31, 2003, $5.0
million at December 31, 2002 and $5.4 million at December 31, 2001.
In addition to non-performing assets, we had $813,000 of potential problem loans
at December 31, 2005 compared to $4.1 million at December 31, 2004. Such loans
are 60-89 days delinquent as shown in the following table.
63
Delinquent Loans
The following table shows a comparison of delinquent loans at December 31, 2005,
2004 and 2003.
Principal Balance of Loans Past Due
----------------------------------------
60-89 Days 90 Days or More
----------------------------------------
Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount
- -----------------------------------------------------------------------------
At December 31, 2005:
Mortgage loans:
One-to-four family 6 $ 174 152 $ 35,727
Multi-family 1 101 26 26,256
Commercial real estate - - 6 2,544
Consumer and other loans 47 538 47 500
- -----------------------------------------------------------------------------
Total delinquent loans 54 $ 813 231 $ 65,027
=============================================================================
Delinquent loans to total loans 0.01% 0.45%
At December 31, 2004:
Mortgage loans:
One-to-four family 6 $ 805 98 $ 20,497
Multi-family 4 460 12 8,843
Commercial real estate - - 4 2,695
Construction 2 1,994 - -
Consumer and other loans 56 880 57 544
- -----------------------------------------------------------------------------
Total delinquent loans 68 $ 4,139 171 $ 32,579
=============================================================================
Delinquent loans to total loans 0.03% 0.25%
At December 31, 2003:
Mortgage loans:
One-to-four family 5 $ 192 143 $ 22,744
Multi-family 1 60 10 3,448
Commercial real estate - - 4 2,692
Consumer and other loans 83 587 90 792
- -----------------------------------------------------------------------------
Total delinquent loans 89 $ 839 247 $ 29,676
=============================================================================
Delinquent loans to total loans 0.01% 0.23%
Classified Assets
The following table sets forth the carrying value of our assets, exclusive of
general valuation allowances, classified as special mention, substandard or
doubtful at December 31, 2005. There were no assets classified as loss at
December 31, 2005.
Special Mention Substandard Doubtful
------------------- ------------------- -------------------
Number Number Number
(Dollars in Thousands) of Loans Amount of Loans Amount of Loans Amount
- ----------------------------------------------------------------------------------------------
Loans:
Mortgage loans:
One-to-four family - $ - 155 $ 35,749 4 $ 252
Multi-family 9 19,307 27 23,013 1 5,357
Commercial real estate 1 1,140 4 1,383 1 1,012
Construction 3 1,501 - - - -
Consumer and other loans - - 47 500 - -
- ----------------------------------------------------------------------------------------------
Total loans 13 21,948 233 60,645 6 6,621
Real estate owned:
One-to-four family - - 5 1,066 - -
- ----------------------------------------------------------------------------------------------
Total classified assets 13 $ 21,948 238 $ 61,711 6 $ 6,621
==============================================================================================
64
Allowance for Losses
The following table sets forth changes in our allowances for losses on loans and
REO for the periods indicated.
At or For the Year Ended December 31,
-----------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Allowance for losses on loans:
Balance at beginning of year $ 82,758 $ 83,121 $ 83,546 $ 82,285 $ 79,931
Provision charged to operations - - - 2,307 4,028
Charge-offs:
One-to-four family (749) (231) (194) (325) (506)
Multi-family - - - (83) (3)
Commercial real estate (650) - - (268) (464)
Construction - - - (281) -
Consumer and other loans (706) (656) (1,142) (1,251) (1,554)
- ---------------------------------------------------------------------------------------------------------
Total charge-offs (2,105) (887) (1,336) (2,208) (2,527)
- ---------------------------------------------------------------------------------------------------------
Recoveries:
One-to-four family 140 78 111 241 263
Multi-family 34 - - 83 -
Commercial real estate - - 20 291 -
Construction - - - - 9
Consumer and other loans 332 446 780 547 581
- ---------------------------------------------------------------------------------------------------------
Total recoveries 506 524 911 1,162 853
- ---------------------------------------------------------------------------------------------------------
Net charge-offs (1,599) (363) (425) (1,046) (1,674)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 81,159 $ 82,758 $ 83,121 $ 83,546 $ 82,285
=========================================================================================================
Net charge-offs to average loans outstanding 0.01% 0.00% 0.00% 0.01% 0.01%
Allowance for loan losses to total loans 0.56 0.62 0.66 0.69 0.68
Allowance for loan losses to non-performing loans 124.81 254.02 280.10 242.04 221.70
Allowance for losses on REO:
Balance at beginning of year $ - $ - $ 4 $ - $ 3
Provision (recovery) recorded to operations 56 - 4 4 (64)
Charge-offs (56) - (8) - (17)
Recoveries - - - - 78
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ - $ - $ - $ 4 $ -
=========================================================================================================
The following table sets forth our allocation of the allowance for loan losses
by loan category and the percent of loans in each category to total loans
receivable at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category does not represent the total available to absorb
losses which may occur within the loan category, since the total allowance is
available for losses applicable to the entire loan portfolio.
At December 31,
-------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------
% of Loans % of Loans % of Loans
to to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------------------
One-to-four family $ 34,051 68.24% $ 36,697 68.68% $ 39,614 71.13%
Multi-family 19,818 19.77 18,124 19.41 16,440 17.69
Commercial real estate 11,437 7.52 11,785 7.17 11,006 6.98
Construction 2,071 0.96 1,996 0.89 1,695 0.79
Consumer and other loans 13,782 3.51 14,156 3.85 14,366 3.41
- -----------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 81,159 100.00% $ 82,758 100.00% $ 83,121 100.00%
===========================================================================================================
At December 31,
------------------------------------------------
2002 2001
------------------------------------------------
% of Loans % of Loans
to to
(Dollars in Thousands) Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------
One-to-four family $ 45,485 76.86% $ 49,122 83.59%
Multi-family 12,449 13.35 8,612 9.05
Commercial real estate 10,099 6.21 8,529 4.95
Construction 786 0.47 1,329 0.42
Consumer and other loans 14,727 3.11 14,693 1.99
- ----------------------------------------------------------------------------------
Total allowance for loan losses $ 83,546 100.00% $ 82,285 100.00%
==================================================================================
65
Impact of Accounting Standards and Interpretations
In November 2005, the FASB issued FSP No. 115-1, which addresses the
determination of when an investment is considered impaired, whether the
impairment is other-than-temporary and how to measure an impairment loss. FSP
No. 115-1 also addresses accounting considerations subsequent to the recognition
of an other-than-temporary impairment on a debt security and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance
in Emerging Issues Task Force Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
with references to existing authoritative literature concerning
other-than-temporary impairment determinations (principally SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and SEC
Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity
Securities"). Under FSP No. 115-1, impairment losses must be recognized in
earnings for the difference between the security's cost and its fair value at
the financial statement date, without considering partial recoveries subsequent
to that date. FSP No. 115-1 also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. FSP No. 115-1 is effective for
reporting periods beginning after December 15, 2005. We do not expect our
application of FSP No. 115-1 to have a material impact on our financial
condition or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) which requires public entities
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 (with
limited exceptions). The fair-value-based method in SFAS No. 123(R) is similar
to the fair-value-based method in SFAS No. 123 in most respects. SFAS No. 123(R)
applies to all awards granted after the required effective date and to awards
modified, repurchased or cancelled after that date. Additionally, beginning on
the required effective date, public entities will 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 either recognition or pro forma disclosures. The
cumulative effect of initially applying SFAS No. 123(R), if any, is recognized
as of the required effective date. For periods before the required effective
date, public entities may elect, although they are not required, to
retroactively restate financial statements for prior periods to recognize
compensation cost on a basis consistent with the pro forma disclosures required
for those periods by SFAS No. 123. SFAS No. 123(R) is effective as of the
beginning of the first annual reporting period beginning after June 15, 2005.
Our adoption of SFAS No. 123(R), effective January 1, 2006, is expected to
reduce our 2006 net income by approximately $1.1 million with respect to our
December 2005 option grants and approximately $160,000 with respect to option
grants to directors made in January 2006. Additional equity grants that may be
made in 2006 will also result in compensation expense.
On December 22, 2005, in anticipation of our adoption of SFAS No. 123(R), we
accelerated the vesting of all outstanding unvested options which were granted
to employees on December 17, 2003 and December 15, 2004. We recognized pre-tax
compensation expense in 2005 of $111,000 as a result of the accelerated vesting
of these options. The purpose of the acceleration was to eliminate compensation
expense associated with these options in future periods upon our adoption of
SFAS No. 123(R). The accelerated vesting eliminates pre-tax compensation expense
of approximately $10.4 million which would have been recognized in future
periods, including approximately $6.7 million in 2006. Shares acquired through
the exercise of the accelerated options may not be sold prior to the earlier of
the date the optionee terminates employment with us or the original vesting
date. A number of the options which were accelerated were intended to qualify as
incentive stock options when granted. The accelerated vesting disqualified most
of such options from incentive stock option tax treatment. Upon the optionees'
exercise of such disqualified options, we may realize certain tax benefits that
would not have otherwise been available.
See Note 1 and Note 16 of Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data," for additional
disclosures regarding the impact of our adoption of SFAS No. 123(R).
66
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of our
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as the price of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the primary component of our market risk is IRR. Net
interest income is the primary component of our net income. Net interest income
is the difference between the interest earned on our loans, securities and other
interest-earning assets and the interest expense incurred on our deposits and
borrowings. The yields, costs, and volumes of loans, securities, deposits and
borrowings are directly affected by the levels of and changes in market interest
rates. Additionally, changes in interest rates also affect the related cash
flows of our assets and liabilities as the option to prepay assets or withdraw
liabilities remains with our customers, in most cases without penalty. 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 growth and/or earnings 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. In conjunction with performing these
analyses we also consider related factors including, but not limited to, our
overall credit profile, non-interest income and non-interest expense. We do not
enter into financial transactions or hold financial instruments for trading
purposes.
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 December 31, 2005 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. The actual
duration of mortgage loans and mortgage-backed securities can be significantly
impacted by changes in mortgage prepayment activity. The major factors affecting
mortgage prepayment rates are prevailing interest rates and related mortgage
refinancing opportunities. Prepayment rates will also vary due to a number of
other factors, including the regional economy in the area where the underlying
collateral is located, seasonal factors, demographic variables and the
assumability of the underlying mortgages.
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. The uncertainty and volatility of
interest rates, economic conditions and other markets which affect the value of
these call options, as well as the financial condition and strategies of the
holders of the options, increase the difficulty and uncertainty in predicting
when the call options may be exercised. Among the factors considered in our
estimates are current trends and historical repricing experience with respect to
similar products. As a result, different assumptions may be used at different
points in time.
67
The Gap Table includes $2.18 billion of callable borrowings classified according
to their maturity dates, in the more than one year to three years category,
which are callable within one year and at various times thereafter. In addition,
the Gap Table includes callable securities with an amortized cost of $107.8
million classified according to their maturity dates, which are callable within
one year and at various times thereafter. The classifications of callable
borrowings and securities are consistent with our experience with these
instruments in the current interest rate environment. As indicated in the Gap
Table, our one-year cumulative gap at December 31, 2005 was negative 6.79%. This
compares to a one-year cumulative gap of negative 2.87% at December 31, 2004.
The change in our one-year cumulative gap is primarily attributable to the
increase in our certificates of deposit, including our Liquid CDs, as a result
of the success of our various certificate of deposit campaigns throughout 2005
and 2004, partially offset by a decrease in our short-term borrowings.
At December 31, 2005
------------------------------------------------------------------------
More than More than
One Year Three Years
One Year to to More than
(Dollars in Thousands) or Less Three Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans (1) $ 4,281,541 $ 5,130,348 $ 3,980,822 $ 363,059 $ 13,755,770
Consumer and other loans (1) 469,535 21,987 11,489 - 503,011
Repurchase agreements 182,803 - - - 182,803
Securities available-for-sale 418,554 677,356 601,047 232,393 1,929,350
Securities held-to-maturity 1,442,630 2,014,629 1,273,991 7,570 4,738,820
FHLB-NY stock - - - 145,247 145,247
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,795,063 7,844,320 5,867,349 748,269 21,255,001
Net unamortized purchase premiums
and deferred costs (2) 27,263 28,323 22,335 1,903 79,824
- -----------------------------------------------------------------------------------------------------------------
Net interest-earning assets (3) 6,822,326 7,872,643 5,889,684 750,172 21,334,825
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings 116,785 233,572 233,572 1,926,968 2,510,897
Money market 514,198 30,750 30,750 73,032 648,730
NOW and demand deposit 79,175 158,348 158,348 1,173,988 1,569,859
Liquid CDs 619,784 - - - 619,784
Certificates of deposit 4,267,619 2,549,492 613,812 30,262 7,461,185
Borrowings, net (4) 2,743,285 4,518,722 299,066 378,215 7,939,288
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,340,846 7,490,884 1,335,548 3,582,465 20,749,743
- -----------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (1,518,520) 381,759 4,554,136 (2,832,293) $ 585,082
=================================================================================================================
Cumulative interest sensitivity gap $ (1,518,520) $ (1,136,761) $ 3,417,375 $ 585,082
=================================================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets (6.79)% (5.08)% 15.27% 2.61%
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 81.79% 92.82% 119.91% 102.82%
(1) Mortgage 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.
(4) Excludes the hedge accounting adjustment on our Junior Subordinated
Debentures.
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
68
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 January 1, 2006 would decrease by approximately 5.94% from the base
projection. At December 31, 2004, in the up 200 basis point scenario, our
projected net interest income for the twelve month period beginning January 1,
2005 would have decreased by approximately 4.50% from the base projection.
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 January 1, 2006 would increase by approximately 2.12% from the base
projection. The interest rate environment which existed at December 31, 2004
prevented us from performing an income simulation for a decline in interest
rates of the same magnitude and timing as our rising interest rate simulation,
since the assumptions which would have been used for a down 200 basis point
interest rate scenario related to asset and liability pricing, market yields and
customer behavior, given the low level of interest rates, would not have
produced reasonable and meaningful results. However, assuming the entire yield
curve was to decrease 100 basis points, through quarterly parallel decrements of
25 basis points, and remain at that level thereafter, our projected net interest
income for the twelve month period beginning January 1, 2005 would have
decreased by approximately 1.12% from the base projection. At December 31, 2005,
in the down 100 basis point scenario, our projected net interest income for the
twelve month period beginning January 1, 2006 would increase by approximately
1.87% from the base projection.
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 BOLI, changes in the fair value of
MSR and the mark-to-market adjustments on certain derivative instruments. 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 January 1, 2006 would increase by approximately
$4.8 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 January 1, 2006 would decrease by approximately $9.3 million
with respect to these items alone.
For information regarding our credit risk, see "Asset Quality," in Item 7,
"MD&A."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For our Consolidated Financial Statements, see the index on page 76.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
69
ITEM 9A. 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 the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of December 31, 2005. 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.
Effective December 1, 2005, we outsourced our mortgage loan servicing activities
under a sub-servicing agreement with DMI. Under this agreement, DMI services
mortgage loans on our behalf, where in the past we performed such activity
ourselves. In connection with the outsourcing, we substantially changed our
internal controls over financial reporting with respect to our mortgage loan
servicing operation. Both prior to and following the transfer of servicing
activities to DMI, we assessed the effectiveness of our internal controls over
financial reporting related to our mortgage loan servicing operation, as part of
our overall assessment of internal controls over financial reporting, and found
such controls, both before and after the transfer of servicing activities, to be
effective based upon the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated
Framework.
Except as noted in the preceding paragraph, there were no changes in our
internal controls over financial reporting that occurred during the three months
ended December 31, 2005 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
See page 77 for our Management Report on Internal Control Over Financial
Reporting and page 78 for the related Report of Independent Registered Public
Accounting Firm.
The Sarbanes-Oxley Act Section 302 Certifications regarding the quality of our
public disclosures have been filed with the SEC as exhibit 31.1 and exhibit 31.2
to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION
Information regarding directors and executive officers who are not directors of
Astoria Financial Corporation is presented in the tables under the heading
"Board Nominees, Directors and Executive Officers" and under the heading
"Committees and Meetings of the Board" in our definitive Proxy Statement to be
utilized in connection with our Annual Meeting of Shareholders to be held on May
17, 2006, which will be filed with the SEC within 120 days from December 31,
2005, and is incorporated herein by reference.
Audit Committee Financial Expert
Information regarding the audit committee of our Board of Directors, including
information regarding audit committee financial experts serving on the audit
committee, is presented under the heading "Committees and Meetings of the Board"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 17, 2006, which will be filed with the
SEC within 120 days from December 31, 2005, and is incorporated herein by
reference.
70
The Audit Committee Charter is available on our investor relations website at
http://ir.astoriafederal.com under the heading "Corporate Governance." In
addition, copies of our Audit Committee Charter will be provided to shareholders
upon written request to Astoria Financial Corporation, Investor Relations
Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no
charge.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to
our directors, officers and employees, including our principal executive officer
and principal financial officer, which is available on our investor relations
website at http://ir.astoriafederal.com under the heading "Corporate
Governance." In addition, copies of our code of business conduct and ethics will
be provided to shareholders upon written request to Astoria Financial
Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake
Success, New York 11042 at no charge.
Corporate Governance
Our Corporate Governance Guidelines and Nominating and Corporate Governance
Committee Charter are available on our investor relations website at
http://ir.astoriafederal.com under the heading "Corporate Governance." In
addition, copies of such documents will be provided to shareholders upon written
request to Astoria Financial Corporation, Investor Relations Department, One
Astoria Federal Plaza, Lake Success, New York 11042 at no charge.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive (and director) compensation is included under
the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values,"
"Pension Plans," "Director Compensation," "Employment Agreements," "Incentive
Option Plans," that portion of the "Report of the Compensation Committee on
Executive Compensation" entitled "Long-term Incentive Compensation," and
"Compensation Committee Interlocks and Insider Participation" in our definitive
Proxy Statement to be utilized in connection with our Annual Meeting of
Shareholders to be held on May 17, 2006 which will be filed with the SEC within
120 days from December 31, 2005, and is incorporated herein by reference.
The Compensation Committee Charter is available on our investor relations
website at http://ir.astoriafederal.com under the heading "Corporate
Governance." In addition, copies of our Compensation Committee Charter will be
provided to shareholders upon written request to Astoria Financial Corporation,
Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York
11042 at no charge.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in our definitive
Proxy Statement to be utilized in connection with our Annual Meeting of
Shareholders to be held on May 17, 2006, which will be filed with the SEC within
120 days from December 31, 2005, and is incorporated herein by reference.
71
The following chart provides information as of December 31, 2005 with respect to
compensation plans, including individual compensation arrangements, under which
equity securities of Astoria Financial Corporation are authorized for issuance:
Number of
securities to be issued Number of securities
upon exercise of Weighted-Average remaining available for
outstanding options, exercise price of future issuance under
warrants and rights outstanding options, equity compensation plans
and vesting of shares of warrants, rights (excluding securities
restricted stock and restricted stock (4) reflected in column (a))
Plan Category (1) (a) (b) (c)
- ------------------------------- ------------------------ ------------------------ ---------------------------
Equity compensation plans
approved by security holders (2) 11,325,528 $20.14 3,952,072
Equity compensation plans not
approved by security holders - - -
- ----------------------------------------------------------------------------------------------------------------------
Total (3) 11,325,528 $20.14 3,952,072
======================================================================================================================
(1) Excluded is any employee benefit plan that is intended to meet the
qualification requirements of Section 401(a) of the Internal Revenue Code,
such as the Astoria Federal ESOP and the Astoria Federal Incentive Savings
Plan. Also excluded are warrants or rights issuable to all of our security
holders as such on a pro rata basis, such as those issuable pursuant to
the Rights Agreement between us and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, dated as of July 17, 1996, as amended. The only
equity security issuable under the equity compensation plans referenced in
the table is our common stock. All equity compensation plans reflected in
the table include stock option plans or arrangements which provide for the
issuance of our common stock upon the exercise of options. In addition,
the 2005 Re-designated, Amended and Restated Stock Incentive Plan for
Officers and Employees of Astoria Financial Corporation, or the 2005 Plan,
also provides for the grant of equity settled stock appreciation rights
and awards of restricted stock or equity settled restricted stock units.
Of the number of securities to be issued and the number of securities
remaining available in the above table, 1,420,928 and 3,829,072,
respectively, were authorized pursuant to the 2005 Plan.
(2) With respect to "equity compensation plans approved by security holders,"
included are 27,000 shares of our common stock with respect to which
options were granted pursuant to the terms and conditions of the merger
agreement related to the acquisition of The Greater New York Savings Bank
and 28,896 shares of our common stock with respect to which options were
granted pursuant to the terms and conditions of the merger agreement
related to the acquisition of Long Island Bancorp, Inc. Both of these
merger agreements were approved by our stockholders. Neither arrangement
provides for the future issuance or grant of additional options, warrants,
rights or restricted stock.
(3) Of the shares available for future issuance, 3,829,072 were authorized
pursuant to the 2005 Plan and 123,000 were authorized pursuant to the 1999
Stock Option Plan for Outside Directors of Astoria Financial Corporation,
or the 1999 Plan. The 2005 Plan and the 1999 Plan provide for automatic
adjustments to outstanding options or grants upon certain changes in
capitalization. In the event of any stock split, stock dividend or other
event generally affecting the number of shares of our common stock held by
each person who is then a record holder of our common stock, the number of
shares covered by each outstanding option, grant or award and the number
of shares available for grant or award under the plans shall be adjusted
to account for such event.
(4) Shares of restricted stock have an exercise price of zero.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is included
under the headings "Transactions with Certain Related Persons" and "Compensation
Committee Interlocks and Insider Participation" in our definitive Proxy
Statement to be utilized in connection with our Annual Meeting of Shareholders
to be held on May 17, 2006, which will be filed with the SEC within 120 days
from December 31, 2005, and is incorporated herein by reference.
72
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is included under
the headings "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees"
in our definitive Proxy Statement to be utilized in connection with our Annual
Meeting of Shareholders to be held on May 17, 2006, which will be filed with the
SEC within 120 days from December 31, 2005, and is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
See Index to Consolidated Financial Statements on page 76.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto under Item 8, "Financial Statements
and Supplementary Data."
(b) Exhibits
See Index of Exhibits on page 117.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ George L. Engelke, Jr. Date: March 10, 2006
----------------------------------------------- -----------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
NAME DATE
---- ----
/s/ George L. Engelke, Jr. March 10, 2006
---------------------------------------------------- -----------------------
George L. Engelke, Jr.
Chairman, President and Chief Executive Officer
/s/ Monte N. Redman March 10, 2006
---------------------------------------------------- -----------------------
Monte N. Redman
Executive Vice President and Chief Financial Officer
/s/ Gerard C. Keegan March 10, 2006
---------------------------------------------------- -----------------------
Gerard C. Keegan
Vice Chairman, Chief Administrative
Officer and Director
/s/ Andrew M. Burger March 10, 2006
---------------------------------------------------- -----------------------
Andrew M. Burger
Director
/s/ John J. Conefry, Jr. March 10, 2006
---------------------------------------------------- -----------------------
John J. Conefry, Jr.
Director
/s/ Denis J. Connors March 10, 2006
---------------------------------------------------- -----------------------
Denis J. Connors
Director
/s/ Robert J. Conway March 10, 2006
---------------------------------------------------- -----------------------
Robert J. Conway
Director
/s/ Thomas J. Donahue March 10, 2006
---------------------------------------------------- -----------------------
Thomas J. Donahue
Director
/s/ Peter C. Haeffner, Jr. March 10, 2006
---------------------------------------------------- -----------------------
Peter C. Haeffner, Jr.
Director
74
/s/ Ralph F. Palleschi March 10, 2006
---------------------------------------------------- -----------------------
Ralph F. Palleschi
Director
/s/ Thomas V. Powderly March 10, 2006
---------------------------------------------------- -----------------------
Thomas V. Powderly
Director
/s/ Leo J. Waters March 10, 2006
---------------------------------------------------- -----------------------
Leo J. Waters
Director
75
CONSOLIDATED FINANCIAL STATEMENTS OF
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
Management Report on Internal Control Over Financial Reporting .......................... 77
Reports of Independent Registered Public Accounting Firm ................................ 78
Consolidated Statements of Financial Condition at December 31, 2005 and 2004 ............ 80
Consolidated Statements of Income for the years ended December 31, 2005, 2004
and 2003 .............................................................................. 81
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003 ...................................................... 82
Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003 ......................................................................... 83
Notes to Consolidated Financial Statements .............................................. 84
76
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Astoria Financial Corporation is responsible for establishing
and maintaining adequate internal control over financial reporting. Astoria
Financial Corporation's internal control system is a process designed to provide
reasonable assurance to the company's management and board of directors
regarding the preparation and fair presentation of published financial
statements.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of management and the directors of Astoria
Financial Corporation; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of Astoria
Financial Corporation's assets that could have a material effect on our
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Astoria Financial Corporation management assessed the effectiveness of the
company's internal control over financial reporting as of December 31, 2005. In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on our assessment we believe that, as of
December 31, 2005, the company's internal control over financial reporting is
effective based on those criteria.
Astoria Financial Corporation's independent registered public accounting firm
has issued an audit report on our assessment of, and the effective operation of,
the company's internal control over financial reporting as of December 31, 2005.
This report appears on page 78.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Astoria Financial
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by COSO. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of Astoria Financial Corporation and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2005, and our report dated March 8,
2006 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
New York, New York
March 8, 2006
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of Astoria Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Astoria Financial Corporation and subsidiaries (the "Company") as of December
31, 2005 and 2004, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Astoria Financial
Corporation and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 8, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
New York, New York
March 8, 2006
79
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31,
-------------------------------
(In Thousands, Except Share Data) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 169,234 $ 138,809
Repurchase agreements 182,803 267,578
Available-for-sale securities:
Encumbered 1,598,320 2,104,239
Unencumbered 243,031 302,644
- ----------------------------------------------------------------------------------------------------------------------
1,841,351 2,406,883
Held-to-maturity securities, fair value of $4,627,013 and $6,306,760,
respectively:
Encumbered 4,500,867 5,273,385
Unencumbered 230,086 1,029,551
- ----------------------------------------------------------------------------------------------------------------------
4,730,953 6,302,936
Federal Home Loan Bank of New York stock, at cost 145,247 163,700
Loans held-for-sale, net 23,651 23,802
Loans receivable 14,392,293 13,263,279
Allowance for loan losses (81,159) (82,758)
- ----------------------------------------------------------------------------------------------------------------------
Loans receivable, net 14,311,134 13,180,521
Mortgage servicing rights, net 16,502 16,799
Accrued interest receivable 80,318 79,144
Premises and equipment, net 151,494 157,107
Goodwill 185,151 185,151
Bank owned life insurance 382,613 374,719
Other assets 159,820 118,720
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 22,380,271 $ 23,415,869
======================================================================================================================
LIABILITIES:
Deposits $ 12,810,455 $ 12,323,257
Reverse repurchase agreements 5,780,000 7,080,000
Federal Home Loan Bank of New York advances 1,724,000 1,934,000
Other borrowings, net 433,526 455,835
Mortgage escrow funds 124,929 122,088
Accrued expenses and other liabilities 157,134 130,925
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 21,030,044 22,046,105
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A (1,800,000 shares authorized and -0- shares issued and outstanding) - -
Series B (2,000,000 shares authorized and -0- shares issued and outstanding) - -
Common stock, $.01 par value (200,000,000 shares authorized; 166,494,888
shares issued; and 104,967,280 and 110,304,669 shares outstanding, respectively) 1,665 1,665
Additional paid-in capital 824,102 811,777
Deferred compensation (5,636) -
Retained earnings 1,774,924 1,623,571
Treasury stock (61,527,608 and 56,190,219 shares, at cost, respectively) (1,171,604) (1,013,726)
Accumulated other comprehensive loss (49,536) (28,592)
Unallocated common stock held by ESOP (6,465,273 and 6,802,146 shares, respectively) (23,688) (24,931)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,350,227 1,369,764
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 22,380,271 $ 23,415,869
======================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
80
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
------------------------------------------------
(In Thousands, Except Share Data) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans:
One-to-four family $ 459,929 $ 428,229 $ 466,544
Multi-family, commercial real estate and construction 239,119 220,703 203,785
Consumer and other loans 31,160 21,312 19,247
Mortgage-backed and other securities 340,626 371,044 355,564
Federal funds sold and repurchase agreements 6,123 1,140 1,538
Federal Home Loan Bank of New York stock 6,030 3,473 10,613
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 1,082,987 1,045,901 1,057,291
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 281,399 237,429 225,251
Borrowings 322,808 337,906 452,502
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 604,207 575,335 677,753
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 478,780 470,566 379,538
Provision for loan losses - - -
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 478,780 470,566 379,538
- ----------------------------------------------------------------------------------------------------------------------
Non-interest income:
Customer service fees 66,256 58,524 59,841
Other loan fees 4,980 4,805 7,556
Net gain on sales of securities - 4,651 7,346
Other-than-temporary impairment write-down of securities - (16,520) -
Mortgage banking income, net 6,015 4,715 10,291
Income from bank owned life insurance 16,446 17,134 19,978
Other 8,502 6,775 14,549
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest income 102,199 80,084 119,561
- ----------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 119,417 118,684 110,349
Occupancy, equipment and systems 63,695 64,592 59,892
Federal deposit insurance premiums 1,760 1,775 1,896
Advertising 8,815 6,583 5,833
Other 35,047 33,377 27,907
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 228,734 225,011 205,877
- ----------------------------------------------------------------------------------------------------------------------
Income before income tax expense 352,245 325,639 293,222
Income tax expense 118,442 106,102 96,376
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 233,803 $ 219,537 $ 196,846
======================================================================================================================
Basic earnings per common share $ 2.30 $ 2.03 $ 1.68
======================================================================================================================
Diluted earnings per common share $ 2.26 $ 2.00 $ 1.66
======================================================================================================================
Basic weighted average common shares 101,476,376 107,930,909 114,574,956
Diluted weighted average common and common equivalent shares 103,408,637 109,806,855 115,942,058
See accompanying Notes to Consolidated Financial Statements.
81
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
Additional
Preferred Common Paid-in Deferred
(In Thousands, Except Share Data) Total Stock Stock Capital Compensation
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 1,553,998 $ 2,000 $ 1,665 $ 840,186 $ -
Comprehensive income:
Net income 196,846 - - - -
Other comprehensive (loss) income, net
of tax:
Net unrealized loss on securities (57,226) - - - -
Amortization of unrealized loss on
securities transferred to
held-to-maturity 775 - - - -
Reclassification of loss on cash flow
hedge 191 - - - -
Minimum pension liability adjustment (29) - - - -
-----------
Comprehensive income 140,557
-----------
Common stock repurchased (10,610,700 shares) (195,471) - - - -
Redemption of preferred stock (54,500) (2,000) - (52,500) -
Dividends on common and preferred stock
($0.57 per share and $2.25 per share,
respectively) and amortization of
purchase premium (70,076) - - (978) -
Exercise of stock options and related
tax benefit (1,407,355 shares issued) 14,851 - - 6,058 -
Amortization relating to allocation of ESOP
stock 7,172 - - 5,817 -
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,396,531 - 1,665 798,583 -
Comprehensive income:
Net income 219,537 - - - -
Other comprehensive income (loss), net
of tax:
Net unrealized gain on securities 17,748 - - - -
Reclassification of loss on cash flow
hedge 191 - - - -
Minimum pension liability adjustment (42) - - - -
-----------
Comprehensive income 237,434
-----------
Common stock repurchased (9,067,500 shares) (225,052) - - - -
Dividends on common stock ($0.67 per share) (71,982) - - - -
Exercise of stock options and related
tax benefit (1,366,788 shares issued) 24,142 - - 5,798 -
Amortization relating to allocation of ESOP
stock 8,691 - - 7,396 -
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,369,764 - 1,665 811,777 -
Comprehensive income:
Net income 233,803 - - - -
Other comprehensive (loss) income, net
of tax:
Net unrealized loss on securities (21,083) - - - -
Reclassification of loss on cash flow
hedge 191 - - - -
Minimum pension liability adjustment (52) - - - -
-----------
Comprehensive income 212,859
-----------
Common stock repurchased (6,582,500 shares) (180,944) - - - -
Dividends on common stock ($0.80 per share) (81,199) - - - -
Exercise and acceleration of vesting
of stock options and related tax
benefit (1,048,283 shares issued) 20,488 - - 4,385 -
Restricted stock grants (196,828 shares) - - - - (5,712)
Amortization relating to earned
portion of restricted stock and
allocation of ESOP stock 9,259 - - 7,940 76
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 1,350,227 $ - $ 1,665 $ 824,102 $ (5,636)
=========================================================================================================================
Accumulated Unallocated
Other Common
Retained Treasury Comprehensive Stock Held
(In Thousands, Except Share Data) Earnings Stock Income (Loss) by ESOP
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 1,367,507 $ (639,579) $ 9,800 $ (27,581)
Comprehensive income:
Net income 196,846 - - -
Other comprehensive (loss) income, net
of tax:
Net unrealized loss on securities - - (57,226) -
Amortization of unrealized loss on
securities transferred to
held-to-maturity - - 775 -
Reclassification of loss on cash flow
hedge - - 191 -
Minimum pension liability adjustment - - (29) -
Comprehensive income
Common stock repurchased (10,610,700 shares) - (195,471) - -
Redemption of preferred stock - - - -
Dividends on common and preferred stock
($0.57 per share and $2.25 per share,
respectively) and amortization of
purchase premium (69,098) - - -
Exercise of stock options and related
tax benefit (1,407,355 shares issued) (14,264) 23,057 - -
Amortization relating to allocation of ESOP
stock - - - 1,355
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,480,991 (811,993) (46,489) (26,226)
Comprehensive income:
Net income 219,537 - - -
Other comprehensive income (loss), net
of tax:
Net unrealized gain on securities - - 17,748 -
Reclassification of loss on cash flow
hedge - - 191 -
Minimum pension liability adjustment - - (42) -
Comprehensive income
Common stock repurchased (9,067,500 shares) - (225,052) - -
Dividends on common stock ($0.67 per share) (71,982) - - -
Exercise of stock options and related
tax benefit (1,366,788 shares issued) (4,975) 23,319 - -
Amortization relating to allocation of ESOP
stock - - - 1,295
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,623,571 (1,013,726) (28,592) (24,931)
Comprehensive income:
Net income 233,803 - - -
Other comprehensive (loss) income, net
of tax:
Net unrealized loss on securities - - (21,083) -
Reclassification of loss on cash flow
hedge - - 191 -
Minimum pension liability adjustment - - (52) -
Comprehensive income
Common stock repurchased (6,582,500 shares) - (180,944) - -
Dividends on common stock ($0.80 per share) (81,199) - - -
Exercise and acceleration of vesting
of stock options and related tax
benefit (1,048,283 shares issued) (3,217) 19,320 - -
Restricted stock grants (196,828 shares) 1,966 3,746 - -
Amortization relating to earned
portion of restricted stock and
allocation of ESOP stock - - - 1,243
- -----------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 1,774,924 $(1,171,604) $ (49,536) $ (23,688)
===========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
82
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
----------------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 233,803 $ 219,537 $ 196,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Net premium amortization on mortgage loans and
mortgage-backed securities 17,073 32,017 113,031
Net amortization on consumer and other loans,
other securities and borrowings 4,743 4,066 981
Net provision for real estate losses 56 - 4
Depreciation and amortization 13,946 13,460 12,474
Net gain on sales of loans and securities (3,546) (8,199) (19,482)
Other-than-temporary impairment write-down of securities - 16,520 -
Gain on sale of joint venture real estate investment - - (10,058)
Originations of loans held-for-sale (363,855) (326,499) (616,804)
Proceeds from sales and principal repayments of loans held-for-sale 367,552 329,268 668,586
Amortization relating to earned portion of restricted stock and
allocation of ESOP stock 9,259 8,691 7,172
(Increase) decrease in accrued interest receivable (1,174) (1,188) 10,952
Mortgage servicing rights amortization, valuation allowance adjustments
and capitalized amounts, net 297 1,153 2,459
Income from bank owned life insurance, net of insurance proceeds received (7,894) (4,409) (11,412)
(Increase) decrease in other assets (26,232) (6,528) 12,376
Increase (decrease) in accrued expenses and other liabilities 27,530 (453) (8,929)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 271,558 277,436 358,196
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans receivable (3,390,543) (3,205,083) (5,468,504)
Loan purchases through third parties (882,590) (1,171,606) (1,550,100)
Principal payments on loans receivable 3,118,423 3,769,995 6,344,694
Purchases of securities held-to-maturity (177,599) (2,475,096) (5,521,833)
Purchases of securities available-for-sale (25) (596,765) (3,780,994)
Principal payments on securities held-to-maturity 1,749,866 1,957,248 4,729,460
Principal payments on securities available-for-sale 530,439 692,460 2,343,040
Proceeds from sales of securities available-for-sale - 170,189 1,457,010
Net redemptions of FHLB-NY stock 18,453 49,750 34,100
Proceeds from sales of real estate owned, net 2,002 2,157 1,528
Purchases of premises and equipment, net of proceeds from sales (8,333) (10,478) (15,266)
Net proceeds from sale of joint venture real estate investment - - 10,140
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 960,093 (817,229) (1,416,725)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 487,198 1,136,663 119,398
Net (decrease) increase in borrowings with original terms of three months or less (1,360,000) 870,000 810,000
Proceeds from borrowings with original terms greater than three months 800,000 2,400,000 1,700,000
Repayments of borrowings with original terms greater than three months (970,000) (3,435,000) (1,700,000)
Net increase in mortgage escrow funds 2,841 13,453 4,282
Common stock repurchased (180,944) (225,052) (195,471)
Cash dividends paid to stockholders (81,199) (71,982) (72,076)
Redemption of preferred stock - - (54,500)
Cash received for options exercised 16,103 18,344 8,793
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,286,001) 706,426 620,426
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (54,350) 166,633 (438,103)
Cash and cash equivalents at beginning of year 406,387 239,754 677,857
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 352,037 $ 406,387 $ 239,754
================================================================================================================================
Supplemental disclosures:
Cash paid during the year:
Interest $ 606,084 $ 587,373 $ 680,504
================================================================================================================================
Income taxes $ 104,786 $ 99,892 $ 88,478
================================================================================================================================
Additions to real estate owned $ 2,203 $ 1,443 $ 2,075
================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
83
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following significant accounting and reporting policies of Astoria Financial
Corporation and subsidiaries conform to U.S. generally accepted accounting
principles, or GAAP, and are used in preparing and presenting these consolidated
financial statements.
(a) 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 annual 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,"
or FIN 46(R). See Note 8 for a further discussion of Astoria Capital Trust I.
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The determination of our allowance for loan
losses, the valuation of mortgage servicing rights, or MSR, and judgments
regarding goodwill and securities impairment are particularly critical because
they involve a higher degree of complexity and subjectivity and require
estimates and assumptions about highly uncertain matters. Actual results may
differ from our estimates and assumptions. Certain reclassifications have been
made to prior year amounts to conform to the current year presentation.
(b) Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold and repurchase agreements with
original maturities of three months or less. Astoria Federal is required by the
Federal Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement totaled $46.8 million at
December 31, 2005 and $47.9 million at December 31, 2004.
(c) Repurchase Agreements (Securities Purchased Under Agreements to Resell)
We purchase securities under agreements to resell (repurchase agreements). These
agreements represent short-term loans and are reflected as an asset in the
consolidated statements of financial condition. We may sell, loan or otherwise
dispose of such securities to other parties in the normal course of our
operations. The same securities are to be resold at the maturity of the
repurchase agreements.
(d) Securities
Management determines the appropriate classification of securities at the time
of acquisition. Our available-for-sale 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. Premiums and
discounts are recognized as adjustments to interest income using the interest
method over the remaining period to contractual maturity, adjusted for estimated
prepayments when applicable. Gains and losses on the sale of all securities are
determined using the specific identification method and are reflected in
earnings when realized. For the years ended December 31, 2005, 2004 and 2003, we
did not maintain a trading portfolio. We conduct a periodic review and
evaluation of the securities portfolio to determine if the fair value of any
security has declined below its carrying value and whether such decline is
other-than-temporary. If such decline is deemed other-than-temporary, the
security is written down to a new cost basis and the resulting loss is charged
to earnings.
84
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(e) Loans Held-for-Sale
Generally, we originate fifteen year and thirty year fixed rate one-to-four
family mortgage loans for sale to various government-sponsored enterprises, or
GSEs, or other investors on a servicing released or retained basis. The sale of
such loans is usually arranged through a master commitment on a mandatory
delivery or best efforts basis. In addition, student loans are sold to the
Student Loan Marketing Association generally before repayment begins during the
grace period of the loan.
Loans held-for-sale are carried at the lower of cost or estimated fair value, as
determined on an aggregate basis. Net unrealized losses, if any, are recognized
in a valuation allowance through charges to earnings. Premiums and discounts and
origination fees and costs on loans held-for-sale are deferred and recognized as
a component of the gain or loss on sale. Gains and losses on sales of loans
held-for-sale are recognized on settlement dates and are determined by the
difference between the sale proceeds and the allocated cost basis of the loans.
(f) Loans Receivable
Loans receivable are carried at the unpaid principal balances, net of
unamortized premiums and discounts and deferred loan origination costs and fees,
which are recognized as yield adjustments using the interest method. We
generally amortize these amounts over the contractual life of the related loans,
adjusted for estimated prepayments when applicable.
We discontinue accruing interest on mortgage loans when such loans become 90
days delinquent as to their interest due. 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. In some
circumstances, we continue to accrue interest on mortgage loans delinquent 90
days or more as to their maturity date but not their interest due.
The allowance for loan losses is increased by charges to earnings and decreased
by charge-offs, net of recoveries. Pursuant to our policy, loan losses are
charged-off in the period the loans, or portions thereof, are deemed
uncollectible. Our periodic evaluation of the adequacy of the allowance is based
on our past loan loss experience, trends in portfolio volume, quality, maturity
and composition, the status and amount of impaired and other non-performing and
past-due loans, known and inherent risks in the portfolio, adverse situations
that may affect a borrower's ability to repay, the estimated fair value of any
underlying collateral and current and prospective, as well as specific and
general, economic conditions.
We review certain loans for individual impairment and groups of smaller balance
loans based on homogeneous pools. Loans we individually review for impairment
are limited to multi-family mortgage loans, commercial real estate loans,
construction loans, loans modified in a troubled debt restructuring and selected
large one-to-four family mortgage loans. A loan is considered impaired when,
based upon current information and events, it is probable that we will be unable
to collect all amounts due, including principal and interest, according to the
contractual terms of the loan agreement. Impaired loans are principally measured
using the market price of the loan, if one exists, the estimated fair value of
the collateral, for collateral dependent loans, or the present value of expected
future cash flows. Interest income on impaired non-accrual loans is recognized
on a cash basis, while interest income on all other impaired loans is recognized
on an accrual basis.
(g) Mortgage Servicing Rights
We recognize as separate assets the rights to service mortgage loans. The right
to service loans for others is generally obtained through the sale of loans with
servicing retained. The initial recognition of originated MSR is based upon an
allocation of the total cost of the related loans between the loans and the
servicing rights based on their relative estimated fair values. The fair value
of MSR is estimated by reference to quoted market prices of similar loans sold
servicing released. 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. Fees earned for servicing loans are reported as income when the
related mortgage loan payments are collected.
85
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
We assess impairment of our MSR based on the estimated fair value of those
rights on a stratum-by-stratum basis with any impairment recognized through a
valuation allowance for each impaired stratum. We stratify our MSR by underlying
loan type (primarily fixed and adjustable) and interest rate. The estimated fair
values of each MSR stratum are obtained through independent third party
valuations through an analysis of future cash flows, incorporating numerous
market based assumptions including market discount rates, prepayment speeds,
servicing income, servicing costs, default rates and other market driven data.
Individual allowances for each stratum are then adjusted in subsequent periods
to reflect changes in the measurement of impairment. Increases in the fair value
of impaired MSR are recognized only up to the amount of the previously
recognized valuation allowance.
During the 2005 third quarter, we entered into a sub-servicing agreement with
Dovenmuehle Mortgage, Inc., or DMI, to outsource our mortgage loan servicing
activities. Pursuant to this sub-servicing agreement, effective December 1,
2005, DMI has undertaken the servicing of our mortgage loan portfolio, including
our portfolio of mortgage loans serviced for other investors. Fees paid to DMI
are reported in non-interest expense.
(h) Premises and Equipment
Land is carried at cost. Buildings and improvements, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization totaling $126.7 million at December 31, 2005 and
$122.9 million at December 31, 2004. Buildings and improvements and furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the term of the related leases or
the estimated useful lives of the improved property.
(i) Goodwill
Goodwill is presumed to have an indefinite useful life and is tested, at least
annually, for impairment at the reporting unit level. For purposes of our
goodwill impairment testing, we have identified a single reporting unit. We use
the quoted market price of our common stock on our impairment testing date as
the basis for determining the fair value of our reporting unit. If the fair
value of our reporting unit exceeds its carrying amount, further evaluation is
not necessary. However, if the fair value of our reporting unit is less than its
carrying amount, further evaluation is required to compare the implied fair
value of the reporting unit's goodwill to its carrying amount to determine if a
write-down of goodwill is required.
As of December 31, 2005, the carrying value of our goodwill totaled $185.2
million. On September 30, 2005, we performed our annual goodwill impairment test
and determined the fair value of our reporting unit to be in excess of its
carrying amount by $1.44 billion. 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. No events have occurred and no circumstances have
changed since our annual impairment test date that would more likely than not
reduce the fair value of our reporting unit below its carrying amount.
(j) Bank Owned Life Insurance
Bank owned life insurance, or BOLI, is carried at its contract value and is
classified as a non-interest earning asset. Increases in the contract value are
recorded as non-interest income in the consolidated statements of income and
insurance proceeds received are recorded as a reduction of the contract value.
The contract value consists of cash surrender value of $356.3 million at
December 31, 2005 and $350.3 million at December 31, 2004, claims stabilization
reserve of $19.1 million at December 31, 2005 and $15.7 million at December 31,
2004 and deferred acquisition costs of $7.2 million at December 31, 2005 and
$8.7 million at December 31, 2004. Repayment of the claims stabilization reserve
(funds transferred from the cash surrender value to provide for future death
benefit payments) and the deferred acquisition costs (costs incurred by the
insurance carrier for the policy issuance) is guaranteed by the insurance
carrier provided that certain conditions are met at the date of a contract
surrender. We satisfied these conditions at December 31, 2005 and 2004.
86
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(k) Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of foreclosure is
initially recorded at the lower of cost or fair value, less estimated selling
costs. Thereafter, we maintain an allowance for decreases in value which are
charged to income along with any additional expenses incurred on the property.
Fair value is estimated through current appraisals. Write-downs required at the
time of acquisition are charged to the allowance for loan losses. Real estate
owned, net, which is included in other assets, amounted to $1.1 million at
December 31, 2005 and $920,000 at December 31, 2004.
(l) Reverse Repurchase Agreements (Securities Sold Under Agreements to
Repurchase)
We enter into sales of securities under agreements to repurchase with selected
dealers and banks. Such agreements are accounted for as secured financing
transactions since we maintain effective control over the transferred securities
and the transfer meets the other criteria for such accounting. Obligations to
repurchase securities sold are reflected as a liability in our consolidated
statements of financial condition. The securities underlying the agreements are
delivered to a custodial account for the benefit of the dealer or bank with whom
each transaction is executed. The dealers or banks, who may sell, loan or
otherwise dispose of such securities to other parties in the normal course of
their operations, agree to resell us the same securities at the maturities of
the agreements. We retain the right of substitution of collateral throughout the
terms of the agreements. The securities underlying the agreements are classified
as encumbered securities in our consolidated statements of financial condition.
(m) Derivative Instruments
As part of our asset/liability management program, we utilize, from
time-to-time, interest rate caps, floors, locks or swaps to reduce our
sensitivity to interest rate fluctuations. These agreements are derivative
instruments which are recorded as either assets or liabilities in the
consolidated statements of financial condition at fair value. Changes in the
fair values of derivatives are reported in our results of operations or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in those fair values or cash flows that are attributable to the hedged
risk, both at inception of the hedge and on an ongoing basis.
Derivatives that qualify for hedge accounting treatment are designated as either
a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (a cash flow hedge). For fair value hedges,
changes in the fair values of the derivative instruments are recognized in our
results of operations together with changes in the fair values of the related
assets and liabilities attributable to the hedged risk. For cash flow hedges,
changes in the fair values of the derivative instruments are reported in other
comprehensive income to the extent the hedge is effective. The gains and losses
on derivative instruments that are reported in other comprehensive income are
reflected in the results of operations in the periods in which the results of
operations are impacted by the variability of the cash flows of the hedged item.
Generally, net interest income is increased or decreased by amounts receivable
or payable with respect to our derivatives which qualify for hedge accounting.
We establish, at the inception of the hedge, the method we will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge (the amount by
which hedge gains or losses differ from the corresponding gains or losses on the
hedged item). The ineffective portion of any hedge is recognized currently in
our results of operations.
We also enter into derivative instruments with no hedging designations. Changes
in the fair values of these derivatives that do not qualify for hedge accounting
treatment are recognized currently in our results of operations. Generally,
other non-interest expense is increased or decreased by changes in the fair
values of our derivatives which do not qualify for hedge accounting. We do not
use derivatives for trading purposes.
(n) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date. Tax benefits attributable to stock
option exercises are credited to additional paid-in capital.
87
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(o) Earnings Per Common Share
Basic earnings per common share, or EPS, is computed by dividing net income less
preferred dividends, if any, by the weighted-average common shares outstanding
during the year. The weighted-average common shares outstanding includes the
average number of shares of common stock outstanding less the weighted average
number of unallocated shares held by the Employee Stock Ownership Plan, or ESOP,
and the weighted average number of unvested shares of restricted stock.
Diluted EPS is computed using the same method as basic EPS, but includes the
effect of all dilutive potential common shares that were outstanding during the
period, such as unexercised stock options and unvested shares of restricted
stock, calculated using the treasury stock method. When applying the treasury
stock method, we add: (1) the assumed proceeds from option exercises; (2) the
tax benefit that would have been credited to additional paid-in capital assuming
exercise of non-qualified stock options and vesting of shares of restricted
stock; and (3) the average unamortized expense related to unvested shares of
restricted stock. We then divide this sum by our average stock price to
calculate shares repurchased. The excess of the number of shares issuable over
the number of shares assumed to be repurchased is added to basic weighted
average common shares to calculate diluted EPS.
(p) Employee Benefits
Astoria Federal has a qualified, non-contributory defined benefit pension plan,
or the Astoria Federal Pension Plan, covering employees meeting specified
eligibility criteria. Astoria Federal's policy is to fund pension costs in
accordance with the minimum funding requirement. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. In addition, Astoria Federal has
non-qualified and unfunded supplemental retirement plans covering certain
officers and directors.
We also sponsor a defined benefit health care plan that provides for
postretirement medical and dental coverage to select individuals. The costs of
postretirement benefits are accrued during an employee's active working career.
We record compensation expense related to the ESOP at an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the reporting period, plus cash contributions made to participant
accounts. For EPS disclosures, ESOP shares that have been committed to be
released are considered outstanding. ESOP shares that have not been committed to
be released are excluded from outstanding shares on a weighted average basis for
EPS calculations. The difference between the fair value of shares for the period
and the cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in capital.
(q) Stock Incentive Plans
We apply the intrinsic value method of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our stock incentive plans. Accordingly, no
stock-based employee compensation cost is 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 have recognized stock-based employee compensation
cost for the year ended December 31, 2005 related to restricted stock grants and
the acceleration of vesting of certain stock option grants. Compensation cost
related to restricted stock grants is recognized on a straight-line basis over
the vesting period. See Note 16 for a further discussion of the restricted stock
grants and the acceleration of vesting of certain stock option grants.
88
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table illustrates the effect on net income and EPS if we had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
For the Year Ended December 31,
---------------------------------
(In Thousands, Except Per Share Data) 2005 2004 2003
- ---------------------------------------------------------------------------------------
Net income:
As reported $ 233,803 $ 219,537 $ 196,846
Add: Total stock-based employee
compensation expense included in net
income as reported, net of related tax effects 118 - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (11,803) (5,072) (5,417)
--------- --------- ---------
Pro forma $ 222,118 $ 214,465 $ 191,429
========= ========= =========
Basic earnings per common share:
As reported $ 2.30 $ 2.03 $ 1.68
========= ========= =========
Pro forma $ 2.19 $ 1.99 $ 1.63
========= ========= =========
Diluted earnings per common share:
As reported $ 2.26 $ 2.00 $ 1.66
========= ========= =========
Pro forma $ 2.14 $ 1.95 $ 1.61
========= ========= =========
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment,"
or SFAS No. 123(R), which requires public entities 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 (with limited exceptions). The
fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based
method in SFAS No. 123 in most respects. SFAS No. 123(R) applies to all awards
granted after the required effective date and to awards modified, repurchased or
cancelled after that date. Additionally, beginning on the required effective
date, public entities will 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 either recognition or pro forma disclosures. The cumulative effect of
initially applying SFAS No. 123(R), if any, is recognized as of the required
effective date. For periods before the required effective date, public entities
may elect, although they are not required, to retroactively restate financial
statements for prior periods to recognize compensation cost on a basis
consistent with the pro forma disclosures required for those periods by SFAS No.
123. SFAS No. 123(R) is effective as of the beginning of the first annual
reporting period beginning after June 15, 2005. Our adoption of SFAS No. 123(R),
effective January 1, 2006, is expected to reduce our 2006 net income by
approximately $1.1 million with respect to our December 2005 option grants and
approximately $160,000 with respect to option grants to directors made in
January 2006. Additional equity grants that may be made in 2006 will also result
in compensation expense.
(r) Segment Reporting
As a community-oriented financial institution, substantially all of our
operations involve the delivery of loan and deposit products to customers. We
make operating decisions and assess performance based on an ongoing review of
these community banking operations, which constitute our only operating segment
for financial reporting purposes.
(2) Repurchase Agreements
Repurchase agreements averaged $195.9 million during the year ended December 31,
2005 and $85.8 million during the year ended December 31, 2004. The maximum
amount of such agreements outstanding at any month end was $272.5 million during
the year ended December 31, 2005 and $267.6 million during the year ended
December 31, 2004. As of December 31, 2005, two repurchase agreements totaling
$182.8 million were outstanding. As of December 31, 2004, three repurchase
agreements totaling $267.6 million were outstanding. The fair value of the
securities held under these agreements was $188.2 million as of December 31,
2005 and $273.8 million as of December 31, 2004. None of the securities held
under repurchase agreements were sold or repledged during the years ended
December 31, 2005 and 2004.
89
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) Securities
The amortized cost and estimated fair value of securities available-for-sale and
held-to-maturity at December 31, 2005 and 2004 are as follows:
At December 31, 2005
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 1,645,961 $ 100 $ (78,749) $ 1,567,312
Non-GSE issuance 61,735 14 (3,811) 57,938
GSE pass-through certificates 91,211 2,003 (90) 93,124
- --------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 1,798,907 2,117 (82,650) 1,718,374
- --------------------------------------------------------------------------------------------------------
Other securities:
FNMA and FHLMC preferred stock 123,495 32 (3,032) 120,495
Other securities 2,503 2 (23) 2,482
- --------------------------------------------------------------------------------------------------------
Total other securities 125,998 34 (3,055) 122,977
- --------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 1,924,905 $ 2,151 $ (85,705) $ 1,841,351
========================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 4,346,631 $ 117 $ (96,022) $ 4,250,726
Non-GSE issuance 354,395 - (8,296) 346,099
GSE pass-through certificates 5,737 191 (2) 5,926
- --------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 4,706,763 308 (104,320) 4,602,751
Obligations of states and political
subdivisions and corporate debt securities 24,190 72 - 24,262
- --------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 4,730,953 $ 380 $(104,320) $ 4,627,013
========================================================================================================
At December 31, 2004
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 2,125,549 $ 605 $ (48,252) $ 2,077,902
Non-GSE issuance 78,974 39 (3,298) 75,715
GSE pass-through certificates 123,029 3,628 (87) 126,570
- --------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 2,327,552 4,272 (51,637) 2,280,187
- --------------------------------------------------------------------------------------------------------
Other securities:
FNMA and FHLMC preferred stock 123,495 53 - 123,548
Other securities 3,152 10 (14) 3,148
- --------------------------------------------------------------------------------------------------------
Total other securities 126,647 63 (14) 126,696
- --------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 2,454,199 $ 4,335 $ (51,651) $ 2,406,883
========================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 5,772,676 $25,353 $ (19,144) $ 5,778,885
Non-GSE issuance 480,053 1,128 (4,474) 476,707
GSE pass-through certificates 9,154 537 - 9,691
- --------------------------------------------------------------------------------------------------------
Total mortgage-backed securities 6,261,883 27,018 (23,618) 6,265,283
Obligations of states and political
subdivisions and corporate debt securities 41,053 424 - 41,477
- --------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 6,302,936 $27,442 $ (23,618) $ 6,306,760
========================================================================================================
90
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables set forth the estimated fair values of securities with
gross unrealized losses at December 31, 2005 and 2004, segregated between
securities that have been in a continuous unrealized loss position for less than
twelve months at the respective dates and those that have been in a continuous
unrealized loss position for twelve months or longer.
At December 31, 2005
---------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Longer Total
----------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- --------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $ 107,888 $ (2,377) $1,453,323 $ (76,372) $1,561,211 $ (78,749)
Non-GSE issuance 1,310 (2) 55,709 (3,809) 57,019 (3,811)
GSE pass-through certificates 7,583 (34) 2,436 (56) 10,019 (90)
Other securities:
FNMA and FHLMC preferred stock 120,448 (3,032) - - 120,448 (3,032)
Other securities 250 (1) 1,080 (22) 1,330 (23)
- --------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
available-for-sale $ 237,479 $ (5,446) $1,512,548 $ (80,259) $1,750,027 $ (85,705)
====================================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $2,630,151 $(40,881) $1,599,067 $ (55,141) $4,229,218 $ (96,022)
Non-GSE issuance 91,948 (1,049) 254,109 (7,247) 346,057 (8,296)
GSE pass-through certificates 55 (1) 45 (1) 100 (2)
- --------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
held-to-maturity $2,722,154 $(41,931) $1,853,221 $ (62,389) $4,575,375 $(104,320)
====================================================================================================================
At December 31, 2004
---------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Longer Total
----------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- --------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $1,031,174 $ (6,691) $ 888,198 $ (41,561) $1,919,372 $ (48,252)
Non-GSE issuance 4,741 (15) 67,567 (3,283) 72,308 (3,298)
GSE pass-through certificates 3,956 (46) 1,650 (41) 5,606 (87)
Other securities 1,093 (12) 414 (2) 1,507 (14)
- --------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
available-for-sale $1,040,964 $ (6,764) $ 957,829 $ (44,887) $1,998,793 $ (51,651)
====================================================================================================================
Held-to-maturity:
Mortgage-backed securities:
REMICs and CMOs:
GSE issuance $2,239,767 $ (17,025) $ 93,244 $ (2,119) $2,333,011 $ (19,144)
Non-GSE issuance 341,904 (4,474) - - 341,904 (4,474)
- --------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities
held-to-maturity $2,581,671 $ (21,499) $ 93,244 $ (2,119) $2,674,915 $ (23,618)
====================================================================================================================
The number of securities which had an unrealized loss totaled 228 at December
31, 2005 and 142 at December 31, 2004. Of the securities in an unrealized loss
position, 93.6% at December 31, 2005 and 91.1% at December 31, 2004, based on
estimated fair value, are obligations of GSEs. At December 31, 2005 and 2004,
substantially all of the securities in an unrealized loss position had a fixed
interest rate and the cause of the temporary impairment is directly related to
the change 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 generally view changes in fair value
caused by changes in interest rates as temporary, which is consistent with our
experience. Therefore, as of December 31, 2005 and 2004, 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
91
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
and our ability and intent to hold these investments until there is a full
recovery of the unrealized loss, which may be maturity.
In November 2005, the FASB issued Staff Position Nos. 115-1 and 124-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," or FSP No. 115-1, which addresses the determination of when an
investment is considered impaired, whether the impairment is
other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also
addresses accounting considerations subsequent to the recognition of an
other-than-temporary impairment on a debt security and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance
in Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
with references to existing authoritative literature concerning
other-than-temporary impairment determinations (principally SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 59,
"Accounting for Noncurrent Marketable Equity Securities"). Under FSP No. 115-1,
impairment losses must be recognized in earnings for the difference between the
security's cost and its fair value at the financial statement date, without
considering partial recoveries subsequent to that date. FSP No. 115-1 also
requires that an investor recognize an other-than-temporary impairment loss when
a decision to sell a security has been made and the investor does not expect the
fair value of the security to fully recover prior to the expected time of sale.
FSP No. 115-1 is effective for reporting periods beginning after December 15,
2005. We do not expect our application of FSP No. 115-1 to have a material
impact on our financial condition or results of operations.
During the year ended December 31, 2004, we recorded a $16.5 million
other-than-temporary impairment write-down on $120.0 million of FHLMC perpetual
preferred securities which is included as a component of non-interest income.
There were no other-than-temporary impairment write-downs recorded for the years
ended December 31, 2005 and 2003.
There were no sales of securities from the available-for-sale portfolio during
the year ended December 31, 2005. During the year ended December 31, 2004,
proceeds from sales of securities from the available-for-sale portfolio totaled
$170.2 million resulting in gross realized gains totaling $4.7 million. During
the year ended December 31, 2003, proceeds from sales of securities from the
available-for-sale portfolio totaled $1.46 billion resulting in gross realized
gains totaling $14.6 million and gross realized losses totaling $7.3 million.
The amortized cost and estimated fair value of debt securities at December 31,
2005, by contractual maturity, excluding mortgage-backed securities, are
summarized in the following table. Actual maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties. In addition, issuers of
certain securities have the right to call obligations with or without prepayment
penalties.
At December 31, 2005
----------------------
Estimated
Amortized Fair
(In Thousands) Cost Value
- ----------------------------------------------------------------------
Available-for-sale:
Due in one year or less $ 1,753 $ 1,741
Due after one year through five years 750 741
- ----------------------------------------------------------------------
Total available-for-sale $ 2,503 $ 2,482
======================================================================
Held-to-maturity:
Due after one year through five years $ 9,992 $ 10,064
Due after ten years 14,198 14,198
- ----------------------------------------------------------------------
Total held-to-maturity $ 24,190 $ 24,262
======================================================================
The balance of accrued interest receivable for securities totaled $24.0 million
at December 31, 2005 and $31.6 million at December 31, 2004.
As of December 31, 2005, the amortized cost of the callable securities in our
portfolio totaled $124.1 million, of which $107.8 million are callable within
one year and at various times thereafter.
92
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Loans Receivable
Loans receivable, net are summarized as follows:
At December 31,
----------------------------
(In Thousands) 2005 2004
- ------------------------------------------------------------------------
Mortgage loans:
One-to-four family $ 9,757,920 $ 9,054,747
Multi-family 2,826,807 2,558,935
Commercial real estate 1,075,914 944,859
Construction 137,012 117,766
- ------------------------------------------------------------------------
13,797,653 12,676,307
Net deferred loan origination costs 8,119 3,400
Net unamortized premiums 74,032 66,427
- ------------------------------------------------------------------------
Total mortgage loans, net 13,879,804 12,746,134
- ------------------------------------------------------------------------
Consumer and other loans:
Home equity 460,064 466,087
Commercial 24,644 21,819
Other 17,796 19,382
- ------------------------------------------------------------------------
502,504 507,288
Net deferred loan origination costs 9,443 9,180
Net unamortized premiums 542 677
- ------------------------------------------------------------------------
Total consumer and other loans, net 512,489 517,145
- ------------------------------------------------------------------------
Total loans 14,392,293 13,263,279
Allowance for loan losses (81,159) (82,758)
- ------------------------------------------------------------------------
Loans receivable, net $ 14,311,134 $ 13,180,521
========================================================================
Accrued interest receivable on all loans totaled $56.2 million at December 31,
2005 and $47.4 million at December 31, 2004.
Our one-to-four family loans receivable consist primarily of adjustable rate
mortgage, or ARM, loans which consist primarily of hybrid and interest only ARM
loans. We currently offer hybrid ARM loans which initially have a fixed rate for
one, three, five, seven or ten years and convert into one year ARM loans at the
end of the initial fixed rate period and require the borrower to make principal
and interest payments during the entire loan term. We also offer interest only
ARM loans, which have an initial fixed rate for three, five or seven years and
convert into one year interest only ARM loans at the end of the initial fixed
rate period. Interest only ARM loans require the borrower to pay interest only
during the first ten years of the loan term. After the tenth anniversary of the
loan, principal and interest payments are required to amortize the loan over the
remaining loan term. Our portfolio of one-to-four family interest only ARM loans
totaled $4.97 billion, or 54.0% of our one-to-four family ARM loans, at December
31, 2005 and $3.13 billion, or 37.2% of our one-to-four family ARM loans, at
December 31, 2004. During 2005, we began originating interest only multi-family
and commercial real estate loans to qualified borrowers. The interest only loans
do not comprise a significant portion of the total multi-family and commercial
real estate loan portfolio at December 31, 2005. We do not originate negative
amortization or payment option ARM loans.
At December 31, 2005, $8.06 billion, or 58.4%, of our total mortgage loan
portfolio was secured by properties located in 43 states, other than New York,
and the District of Columbia. We have a concentration of greater than 5.0% of
our total mortgage loan portfolio in six states: 41.6% in New York, 12.5% in New
Jersey, 8.9% in Connecticut, 6.6% in Virginia, 6.4% in Illinois and 5.5% in
Maryland.
Included in loans receivable were non-accrual loans totaling $64.9 million at
December 31, 2005 and $32.0 million at December 31, 2004. If all non-accrual
loans had been performing in accordance with their original terms, we would have
recorded interest income, with respect to such loans, of $3.8 million for the
year ended December 31, 2005, $1.8 million for the year ended December 31, 2004
and $1.9 million for the year ended December 31, 2003. This compares to actual
payments recorded as interest income, with respect to such loans, of $2.4
million for the year ended December 31, 2005, $1.0 million for the year ended
December 31, 2004 and $1.2 million for the year ended December 31, 2003. Loans
delinquent 90 days or more and still accruing interest totaled $176,000 at
December 31, 2005 and $573,000 at December 31, 2004. These loans are delinquent
90 days or more as to their maturity date but not their interest due.
93
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables summarize information regarding our impaired mortgage
loans:
At December 31, 2005
------------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------------
One-to-four family $ 7,650 $ (633) $ 7,017
Multi-family, commercial real estate and
construction 30,729 (6,245) 24,484
- --------------------------------------------------------------------------------
Total impaired mortgage loans $ 38,379 $ (6,878) $ 31,501
================================================================================
At December 31, 2004
------------------------------------
Allowance
Recorded for Loan Net
(In Thousands) Investment Losses Investment
- --------------------------------------------------------------------------------
One-to-four family $ 5,703 $ (398) $ 5,305
Multi-family, commercial real estate and
construction 12,371 (1,824) 10,547
- --------------------------------------------------------------------------------
Total impaired mortgage loans $ 18,074 $ (2,222) $ 15,852
================================================================================
Our average recorded investment in impaired loans was $21.6 million for the year
ended December 31, 2005, $12.9 million for the year ended December 31, 2004 and
$15.4 million for the year ended December 31, 2003. Interest income recognized
on impaired loans, which was not materially different from cash-basis interest
income, amounted to $1.3 million for the year ended December 31, 2005, $616,000
for the year ended December 31, 2004 and $597,000 for the year ended December
31, 2003.
(5) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31,
------------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------
Balance at beginning of year $ 82,758 $ 83,121 $ 83,546
Provision charged to operations - - -
Charge-offs (net of recoveries of $506,
$524 and $911, respectively) (1,599) (363) (425)
- --------------------------------------------------------------------------------
Balance at end of year $ 81,159 $ 82,758 $ 83,121
================================================================================
(6) Mortgage Servicing Rights
We own rights to service mortgage loans for investors with aggregate unpaid
principal balances of $1.50 billion at December 31, 2005 and $1.67 billion at
December 31, 2004, which are not reflected in the accompanying consolidated
statements of financial condition. As described in Note 1(g), effective December
1, 2005, we outsourced our mortgage loan servicing to a third party under a
sub-servicing agreement.
MSR activity is summarized as follows:
For the Year Ended December 31,
------------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------
Amortized cost at beginning of year $ 26,189 $ 29,552 $ 35,093
Additions 2,223 3,409 7,225
Amortization (5,239) (6,772) (12,766)
- --------------------------------------------------------------------------------
Amortized cost at end of year 23,173 26,189 29,552
Valuation allowance (6,671) (9,390) (11,600)
- --------------------------------------------------------------------------------
MSR, net $ 16,502 $ 16,799 $ 17,952
================================================================================
94
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. At December 31,
2004, our MSR, net, had an estimated fair value of $16.8 million and were valued
based on expected future cash flows considering a weighted average discount rate
of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and
a weighted average life of 4.8 years. As of December 31, 2005, estimated future
MSR amortization through 2010, based on the prepayment assumptions utilized in
the December 31, 2005 MSR valuation, is as follows: $3.6 million for 2006, $3.1
million for 2007, $2.6 million for 2008, $2.2 million for 2009 and $1.9 million
for 2010. Actual results will vary depending upon the level of repayments on the
loans currently serviced.
Mortgage banking income, net, is summarized as follows:
For the Year Ended December 31,
------------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------
Loan servicing fees $ 5,021 $ 5,768 $ 7,851
Net gain on sales of loans 3,514 3,509 12,124
Amortization of MSR (5,239) (6,772) (12,766)
Recovery of valuation allowance on MSR 2,719 2,210 3,082
- --------------------------------------------------------------------------------
Total mortgage banking income, net $ 6,015 $ 4,715 $ 10,291
================================================================================
(7) Deposits
Deposits are summarized as follows:
At December 31,
------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------
Weighted Weighted
Average Percent Average Percent
(Dollars in Thousands) Rate Balance of Total Rate Balance of Total
- ------------------------------------------------------------------------------------------------------
Core deposits:
Savings 0.40% $ 2,510,897 19.61% 0.40% $ 2,929,120 23.78%
Money market 0.95 648,730 5.06 0.80 965,288 7.83
NOW 0.10 942,919 7.36 0.10 961,497 7.80
Non-interest bearing NOW
and demand deposit - 626,940 4.89 - 619,217 5.02
Liquid CDs 3.66 619,784 4.84 - - -
---- ------------ ------ ---- ------------ ------
Total core deposits 0.74 5,349,270 41.76 0.37 5,475,122 44.43
Certificates of deposit 3.73 7,461,185 58.24 3.46 6,848,135 55.57
- ------------------------------------------------------------------------------------------------------
Total deposits 2.48% $ 12,810,455 100.00% 2.09% $ 12,323,257 100.00%
======================================================================================================
Liquid certificates of deposit, or Liquid CDs, were introduced in January 2005
and 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. We consider Liquid CDs as part of our core
deposits, along with savings accounts, money market accounts and NOW and demand
deposit accounts. Certificates of deposit include all time deposits other than
Liquid CDs.
The aggregate amount of certificates of deposit and Liquid CDs with balances
equal to or greater than $100,000 was $2.31 billion at December 31, 2005 and
$1.58 billion at December 31, 2004.
95
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Certificates of deposit and Liquid CDs at December 31, 2005 have scheduled
maturities as follows:
Weighted Percent
Average of
Year Rate Balance Total
----------------------------------------------------------------------
(In Thousands)
2006 3.48% $ 4,887,403 60.49%
2007 4.06 1,629,648 20.17
2008 4.12 919,844 11.38
2009 4.18 427,668 5.29
2010 4.29 186,144 2.30
2011 and thereafter 4.25 30,262 0.37
----------------------------------------------------------------------
Total 3.73% $ 8,080,969 100.00%
======================================================================
Interest expense on deposits is summarized as follows:
For the Year Ended December 31,
----------------------------------
(In Thousands) 2005 2004 2003
- --------------------------------------------------------------------------------
Savings $ 11,015 $ 11,920 $ 13,198
Money market 7,513 6,379 9,934
Interest-bearing NOW 928 921 1,526
Liquid CDs 10,708 - -
Certificates of deposit 251,235 218,209 200,593
- --------------------------------------------------------------------------------
Total interest expense on deposits $ 281,399 $ 237,429 $ 225,251
================================================================================
(8) Borrowings
Borrowings are summarized as follows:
At December 31,
-----------------------------------------------
2005 2004
-----------------------------------------------
Weighted Weighted
Average Average
(Dollars in Thousands) Amount Rate Amount Rate
- -------------------------------------------------------------------------------
Reverse repurchase agreements $ 5,780,000 3.57% $ 7,080,000 3.54%
FHLB-NY advances 1,724,000 4.50 1,934,000 2.81
Other borrowings, net 433,526 7.19 455,835 7.21
- -------------------------------------------------------------------------------
Total borrowings, net $ 7,937,526 3.97% $ 9,469,835 3.57%
===============================================================================
Reverse Repurchase Agreements
At December 31, 2005 and 2004, substantially all of the outstanding reverse
repurchase agreements had original contractual maturities between one and ten
years and were primarily secured by mortgage-backed securities. Reverse
repurchase agreements with the Federal Home Loan Bank of New York, or FHLB-NY,
may also be secured by certain qualifying mortgage loans pursuant to a blanket
collateral agreement with the FHLB-NY.
96
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following is a summary of information relating to reverse repurchase
agreements:
At December 31,
-------------------------
(In Thousands) 2005 2004
- ---------------------------------------------------------------------------------------------
Amortized cost of collateral (including accrued interest):
Mortgage-backed securities $ 6,253,654 $ 7,480,040
Mortgage loans - 77,123
Estimated fair value of collateral (including accrued interest):
Mortgage-backed securities 6,076,473 7,430,135
Mortgage loans - 78,184
At or For the Year Ended December 31,
----------------------------------------
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------------
Average balance during the year $6,751,096 $6,904,483 $6,642,945
Maximum balance at any month end during the year 7,580,000 7,085,000 7,235,000
Balance outstanding at end of the year 5,780,000 7,080,000 7,235,000
Weighted average interest rate during the year 3.54% 3.81% 5.01%
Weighted average interest rate at end of the year 3.57 3.54 4.62
Reverse repurchase agreements at December 31, 2005 have contractual maturities
as follows:
Year Amount
-----------------------
(In Thousands)
2006 $ 1,300,000
2007 1,750,000
2008 1,930,000
2009 300,000
2015 500,000
-----------------------
Total $ 5,780,000
=======================
Of the $1.30 billion of reverse repurchase agreements maturing in 2006, $100.0
million are due in less than 30 days, $200.0 million are due in 30 to 90 days
and $1.00 billion are due after 90 days. At December 31, 2005, $1.68 billion of
reverse repurchase agreements which mature after December 31, 2006 are callable
in 2006 and at various times thereafter. The $500.0 million of reverse
repurchase agreements which mature in 2015 are callable in 2007 and at various
times thereafter and have floating interest rates which are indexed to the
three-month LIBOR and reset quarterly. The remaining reverse repurchase
agreements have fixed interest rates.
FHLB-NY Advances
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are
secured by all of our stock in the FHLB-NY, certain qualifying mortgage loans
and mortgage-backed and other securities not otherwise pledged in an amount at
least equal to 110% of the advances outstanding. The following is a summary of
information relating to FHLB-NY advances:
At or For the Year Ended December 31,
----------------------------------------
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------------
Average balance during the year $1,370,701 $1,816,197 $2,574,091
Maximum balance at any month end during the year 1,813,000 3,134,000 3,517,000
Balance outstanding at end of the year 1,724,000 1,934,000 1,924,000
Weighted average interest rate during the year 3.64% 2.24% 3.30%
Weighted average interest rate at end of the year 4.50 2.81 2.32
97
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FHLB-NY advances at December 31, 2005 have contractual maturities as follows:
Year Amount
-----------------------
(In Thousands)
2006 $ 924,000
2007 100,000
2008 700,000
-----------------------
Total $ 1,724,000
=======================
Of the $924.0 million of FHLB-NY advances maturing in 2006, $40.0 million are
due overnight, $780.0 million are due in less than 30 days, $4.0 million are due
in 30 to 90 days and $100.0 million are due after 90 days. At December 31, 2005,
$500.0 million of FHLB-NY advances which mature after December 31, 2006 are
callable in 2006 and at various times thereafter.
At December 31, 2005, we had a 12-month commitment for overnight and one month
lines of credit with the FHLB-NY totaling $200.0 million, of which $40.0 million
was outstanding under the overnight and $50.0 million was outstanding under the
one month line of credit. Both lines of credit are priced at the federal funds
rate plus a spread (generally between 10 and 15 basis points) and reprice daily.
Other Borrowings
During the quarter ended December 31, 2002, we issued $250.0 million of senior
unsecured notes due in 2012 bearing a fixed interest rate of 5.75%. The notes,
which are designated as our 5.75% Senior Notes due 2012, Series B, are
registered with the SEC. We may redeem all or part of the notes at any time at a
"make-whole" redemption price, together with accrued interest to the redemption
date. The carrying amount of the 5.75% senior unsecured notes, net of deferred
costs, was $247.5 million at December 31, 2005 and $247.1 million at December
31, 2004.
On July 3, 2001, we issued $100.0 million of senior unsecured notes. The notes,
which were issued in a private placement, mature in 2008, bear a fixed interest
rate of 7.67%, were placed with a limited number of institutional investors and
are not registered with the SEC. The notes require annual principal payments of
$20.0 million which began in 2004. The carrying amount of the 7.67% senior
unsecured notes, net of deferred costs, was $59.8 million at December 31, 2005
and $79.6 million at December 31, 2004.
On October 28, 1999, our finance subsidiary, Astoria Capital Trust I, issued
$125.0 million aggregate liquidation amount of 9.75% Capital Securities due
November 1, 2029, or Capital Securities, in a private placement, and $3.9
million of common securities (which are the only voting securities of Astoria
Capital Trust I), which are 100% owned by Astoria Financial Corporation, and
used 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.
We have two interest rate swap agreements, designated as fair value hedges, that
have the effect of converting $125.0 million of the Junior Subordinated
Debentures from a 9.75% fixed rate instrument into a variable rate, LIBOR-based
instrument. The carrying amount of the Junior Subordinated Debentures has been
adjusted for changes in estimated fair value to satisfy hedge accounting
requirements. See Note 10 for additional information on the interest rate swap
agreements. The carrying amount of the Junior Subordinated Debentures, net of
deferred costs and including fair value hedge adjustments, was $126.2 million at
December 31, 2005 and $129.1 million at December 31, 2004.
The terms of our other borrowings subject us to certain debt covenants. We were
in compliance with these debt covenants at December 31, 2005.
98
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Other borrowings at December 31, 2005 have contractual maturities as follows:
Year Amount
-------------------------------------
(In Thousands)
2006 $ 20,000
2007 20,000
2008 20,000
2012 and thereafter 378,866
-------------------------------------
Total $ 438,866
=====================================
Interest expense on borrowings is summarized as follows:
For the Year Ended December 31,
---------------------------------
(Dollars in Thousands) 2005 2004 2003
- -------------------------------------------------------------------------
Reverse repurchase agreements $ 242,255 $ 267,527 $ 337,057
FHLB-NY advances 50,400 41,016 85,629
Other borrowings 30,153 29,363 29,816
- -------------------------------------------------------------------------
Total interest expense on borrowings $ 322,808 $ 337,906 $ 452,502
=========================================================================
(9) Stockholders' Equity
On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan
authorizing the purchase, at management's discretion, of 12,000,000 shares, or
approximately 10% of our common stock then outstanding, over a two year period
in open-market or privately negotiated transactions. During 2005, we repurchased
6,582,500 shares of our common stock at an aggregate cost of $180.9 million. In
total, as of December 31, 2005, 11,737,700 shares of our common stock, at an
aggregate cost of $308.6 million, have been repurchased under our tenth stock
repurchase plan. 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 the tenth stock repurchase
plan on January 10, 2006.
On October 1, 2003 we redeemed all of our outstanding shares of 12%
Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred Stock,
at a redemption price of $54.5 million plus accrued and unpaid dividends up to
the redemption date. The Series B Preferred Stock had a par value of $1.00 per
share and a liquidation preference of $25.00 per share.
In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared
a dividend of one preferred share purchase right, or Right, for each outstanding
share of our common stock. Each Right, initially, will entitle stockholders to
buy a one one-hundredth interest in a share of a new series of our preferred
stock at an exercise price of $100.00 upon the occurrence of certain events
described in the Rights Plan. We have reserved 1,800,000 shares of our Series A
Preferred Stock for the Rights Plan. Unless extended by the Board of Directors,
the Rights Plan is scheduled to expire on September 3, 2006.
We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant
to the Plan, 300,000 shares of authorized and unissued common shares are
reserved for use by the Plan, should the need arise. To date, all shares
required by the Plan have been acquired in open market purchases.
We are subject to the laws of the State of Delaware which generally limit
dividends to an amount equal to the excess of our net assets (the amount by
which total assets exceed total liabilities) over our statutory capital, or if
there is no such excess, to our net profits for the current and/or immediately
preceding fiscal year. Our ability to pay dividends, service our debt
obligations and repurchase our common stock is dependent primarily upon receipt
of dividend payments from Astoria Federal. The Office of Thrift Supervision, or
OTS, regulates all capital distributions by Astoria Federal directly or
indirectly to us, including dividend payments. Astoria Federal must file an
application to receive the approval of the OTS for a proposed capital
distribution if the total amount of all capital distributions (including each
proposed capital distribution) for the applicable calendar year exceeds net
income for that year to date plus the retained net income for the preceding two
years. Astoria Federal may not pay dividends to us if: (1) after paying those
dividends, it would fail to meet applicable regulatory capital requirements; (2)
the OTS notified Astoria Federal that it was in need of more than normal
supervision; or (3) after making such distribution, the
99
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
institution would become "undercapitalized" (as such term is used in the Federal
Deposit Insurance Act). Payment of dividends by Astoria Federal also may be
restricted at any time at the discretion of the appropriate regulator if it
deems the payment to constitute an unsafe and unsound banking practice.
(10) Derivative Instruments
As further discussed below, we use a variety of derivative instruments in
connection with our overall interest rate risk management strategy. We are
exposed to credit risk in the event of non-performance by counterparties to
derivative instruments. In the event of default by a counterparty, we would be
subject to an economic loss that corresponds to the cost to replace the
agreement. We control the credit risk associated with our derivative instruments
by dealing only with counterparties with the highest credit ratings,
establishing counterparty exposure limits and monitoring procedures.
Fair Value Hedges
We have two interest swap agreements designated and accounted for as fair value
hedges aggregating $125.0 million (notional amount) to effectively convert
$125.0 million of our Junior Subordinated Debentures from a fixed to a variable
rate instrument in order to protect the fair value of our Junior Subordinated
Debentures due to changes in interest rates. These two interest rate swap
agreements were entered into in 2002 as fair value hedges of the $125.0 million
Capital Securities issued by Astoria Capital Trust I. As a result of our
adoption of FIN 46(R), effective January 1, 2004, we redesignated these interest
rate swap agreements as fair value hedges of the debt Astoria Financial
Corporation issued to Astoria Capital Trust I. Under these agreements, we
receive a fixed interest rate of 9.75% and pay a floating interest rate which is
tied to the three-month LIBOR plus 400 basis points. The maturity dates, call
features, deferral provisions and other critical terms of these derivative
instruments match the terms of both the Capital Securities and the Junior
Subordinated Debentures. No net gains or losses have been recognized in earnings
with respect to these hedges. A $1.8 million liability was recorded at December
31, 2005 and a $1.4 million asset was recorded at December 31, 2004, which
represent the fair value of the interest rate swap agreements as of those dates.
A corresponding adjustment was made to the carrying amount of the Junior
Subordinated Debentures to recognize the change in their fair value. See Note 8
for additional information regarding our Junior Subordinated Debentures. On
March 8, 2006, we terminated our outstanding interest rate swap agreements at a
cost of $5.5 million, pre-tax, which will be reflected in our consolidated
results of operations for the quarter ending March 31, 2006.
Free-Standing Derivative Instruments
In connection with our mortgage banking activities, we had certain free-standing
derivative instruments at December 31, 2005 and 2004. We had commitments to fund
loans held-for-sale and commitments to sell loans which are considered
derivative instruments under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The fair values of these derivative
instruments are immaterial to our financial condition and results of operations.
In 2002 and 2001 we purchased interest rate cap agreements as an economic hedge
against rising interest rates and subsequent increases in our cost of funds. The
interest rate cap agreements, which did not qualify for hedge accounting
treatment, were included in other assets at their fair values. Changes in the
fair values of the agreements were included in non-interest expense. The
agreements, which had a total notional amount of $300.0 million, had various
maturity dates from July 2004 to January 2005. The fair values of these
agreements and changes therein were immaterial to our financial condition and
results of operations in 2005, 2004 and 2003.
Cash Flow Hedges
In September 2002, in connection with our anticipated issuance of the 5.75%
senior unsecured notes, we entered into an interest rate lock agreement
designated and accounted for as a cash flow hedge of a forecasted transaction.
The agreement was settled at the same time as the notes and the loss, net of
tax, which is included in accumulated other comprehensive loss/income, is being
reclassified into interest expense as a yield adjustment in the same periods in
which the related interest on the 5.75% senior unsecured notes affects earnings.
The remaining after-tax amount included in accumulated other comprehensive
loss/income totaled $1.3 million at December 31, 2005 and $1.5 million at
December 31, 2004. The after-tax amount to be reclassified into results of
operations during 2006 totals $191,000. See Note 8 for additional information
regarding our 5.75% senior unsecured notes.
100
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(11) Commitments and Contingencies
Lease Commitments
At December 31, 2005, we were obligated through 2035 under various
non-cancelable operating leases on buildings and land used for office space and
banking purposes. These operating leases contain escalation clauses which
provide for increased rental expense, based primarily on increases in real
estate taxes and cost-of-living indices. Rent expense under the operating leases
totaled $7.8 million for the year ended December 31, 2005, $7.5 million for the
year ended December 31, 2004 and $7.2 million for the year ended December 31,
2003.
The minimum rental payments due under the terms of the non-cancelable operating
leases as of December 31, 2005, which have not been reduced by minimum sublease
rentals of $29.3 million due in the future under non-cancelable subleases, are
summarized below:
Year Amount
--------------------------------------
(In Thousands)
2006 $ 7,267
2007 7,027
2008 6,601
2009 5,367
2010 4,775
2011 and thereafter 43,763
--------------------------------------
Total $ 74,800
======================================
Outstanding Commitments
We had outstanding commitments as follows:
At December 31,
----------------------
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------
Mortgage loans - commitments to extend credit (1) $ 470,388 $ 553,061
Mortgage loans - commitments to purchase 27,256 63,223
Home equity loans - unused lines of credit 362,107 328,510
Consumer and commercial loans - unused lines of credit 70,421 68,484
Commitments to sell loans 42,870 56,034
(1) Includes commitments to originate loans held-for-sale. Excluding
commitments to originate loans held-for-sale, which are fixed rate loans,
substantially all of the remaining mortgage loan commitments to extend
credit are for ARM loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. We evaluate creditworthiness on a
case-by-case basis. Our maximum exposure to credit risk is represented by the
contractual amount of the instruments.
Assets Sold with Recourse
We are obligated under various recourse provisions associated with certain first
mortgage loans we sold in the secondary market. The principal balance of loans
sold with recourse amounted to $596.7 million at December 31, 2005 and $565.8
million at December 31, 2004. We estimate the liability for loans sold with
recourse based on an analysis of our loss experience related to similar loans
sold with recourse. The carrying amount of this liability was immaterial at
December 31, 2005 and 2004.
We have collateralized repurchase obligations due to the sale of certain
long-term fixed rate municipal revenue bonds and Federal Housing Administration
project loans to investment trust funds for proceeds that approximated par
value. The trust funds have put options that require us to repurchase the
securities or loans for specified amounts prior to maturity under certain
specified circumstances, as defined in the agreements. The outstanding option
balance on the remaining agreements totaled $23.0 million at December 31, 2005
and $34.9 million at December 31,
101
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2004. Various GSE mortgage-backed securities, with an amortized cost of $36.3
million and a fair value of $36.9 million at December 31, 2005, have been
pledged as collateral.
Guarantees
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The guarantees generally extend
for a term of up to one year and are fully collateralized. For each guarantee
issued, if the customer defaults on a payment to the third party, we would have
to perform under the guarantee. Outstanding standby letters of credit totaled
$4.6 million at December 31, 2005 and $5.2 million at December 31, 2004. The
fair value of these obligations is immaterial at December 31, 2005 and 2004.
Litigation
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.
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 entitled The Long Island Savings Bank,
FSB et al vs. The United States, commenced on January 18, 2005 and concluded on
July 7, 2005. We asked the Court to award damages totaling $594.0 million from
the U.S. government for breach of contract in connection with a 1983 Assistance
Agreement between the Long Island Savings Bank, FSB, which was acquired by us in
1998, and the Federal Savings and Loan Insurance Corporation. The Court rendered
a decision on September 15, 2005 awarding us $435.8 million in damages from the
U.S. government in this action. On December 14, 2005, the United States filed a
notice of appeal. 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, entitled Astoria Federal Savings and Loan Association vs.
United States, has not yet been scheduled for trial. The Court is currently
considering a summary judgment motion filed by the U.S. government.
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 subpoena duces tecum, or the
Subpoena, seeking documents and information concerning, among other things, our
contractual relationship with Independent Financial Marketing Group, Inc., or
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, or FDIC). On
several occasions thereafter in 2005, and again in January 2006, the Attorney
General supplemented the Subpoena with requests for additional documents and
information.
Our arrangements with IFMG impose on IFMG 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.
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.
102
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(12) Income Taxes
Income tax expense is summarized as follows:
For the Year Ended December 31,
----------------------------------
(In Thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------------
Current
Federal $ 114,606 $ 103,276 $ 93,383
State and local 6,103 6,688 5,107
- -------------------------------------------------------------------------------------------------
Total current 120,709 109,964 98,490
- -------------------------------------------------------------------------------------------------
Deferred
Federal (1,316) (1,899) (547)
State and local (951) (1,963) (1,567)
- -------------------------------------------------------------------------------------------------
Total deferred (2,267) (3,862) (2,114)
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 118,442 $ 106,102 $ 96,376
=================================================================================================
Total income tax expense differed from the amounts computed by applying the
federal income tax rate to income before income tax expense as a result of the
following:
For the Year Ended December 31,
----------------------------------
(In Thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------------
Expected income tax expense at statutory federal rate $ 123,286 $ 113,974 $ 102,628
State and local taxes, net of federal tax benefit 3,349 3,071 2,301
Tax exempt income (principally on bank owned life insurance) (6,270) (6,791) (7,889)
Reversal of deferred tax valuation allowance - - (3,396)
Other, net (1,923) (4,152) 2,732
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 118,442 $ 106,102 $ 96,376
=================================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
At December 31,
----------------------
(In Thousands) 2005 2004
- -------------------------------------------------------------------------------------
Deferred tax assets:
Allowances and tax reserves $ 20,747 $ 20,732
Compensation and benefits 8,662 6,417
Tax credits 3,129 3,129
Mark-to-market elected for tax purposes 1,462 1,476
Net unrealized loss on securities available-for-sale 34,885 19,594
Unrealized loss on securities impairment write-down 6,895 6,895
Other 5,633 3,478
- -------------------------------------------------------------------------------------
Total gross deferred tax assets 81,413 61,721
- -------------------------------------------------------------------------------------
Deferred tax liabilities:
Mortgage loans (13,701) (14,974)
Premises and equipment (8,973) (7,016)
Mortgage servicing rights (3,107) (1,285)
- -------------------------------------------------------------------------------------
Total gross deferred tax liabilities (25,781) (23,275)
- -------------------------------------------------------------------------------------
Net deferred tax assets $ 55,632 $ 38,446
=====================================================================================
We believe that our future results of operations and tax planning strategies
will enable us to generate sufficient taxable income to enable us to realize our
deferred tax assets. At December 31, 2005, we had alternative minimum tax credit
carryforwards for federal tax purposes of approximately $3.1 million.
Astoria Federal's retained earnings at December 31, 2005 and 2004 include base
year bad debt reserves, which amounted to approximately $159.1 million, for
which no federal income tax liability has been recognized. This represents the
balance of the bad debt reserves created for tax purposes as of December 31,
1987. These amounts are subject to recapture in the unlikely event that Astoria
Federal (1) makes distributions in excess of current and accumulated earnings
and profits, as calculated for federal income tax purposes, (2) redeems its
stock, or (3) liquidates.
103
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(13) Earnings Per Share
The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31,
-----------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
(In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 233,803 $ 233,803 $ 219,537 $ 219,537 $ 196,846 $ 196,846
Preferred dividends declared - - - - (4,500) (4,500)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 233,803 $ 233,803 $ 219,537 $ 219,537 $ 192,346 $ 192,346
=====================================================================================================================
Total weighted average basic
common shares outstanding 101,476 101,476 107,931 107,931 114,575 114,575
Effect of dilutive securities:
Options and unvested restricted stock - 1,933 - 1,876 - 1,367
- ---------------------------------------------------------------------------------------------------------------------
Total weighted average diluted
common shares outstanding 101,476 103,409 107,931 109,807 114,575 115,942
=====================================================================================================================
Net earnings per common share $ 2.30 $ 2.26 $ 2.03 $ 2.00 $ 1.68 $ 1.66
=====================================================================================================================
(1) Options to purchase 1,224,100 shares of common stock at $29.02 per share
were outstanding as of December 31, 2005, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2005.
(2) Options to purchase 1,948,800 shares of common stock at $26.63 per share
were outstanding as of December 31, 2004, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the year ended
December 31, 2004.
(3) Options to purchase 1,501,200 shares of common stock at prices between
$19.92 per share and $24.40 per share were outstanding as of December 31,
2003, but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the year ended December 31, 2003.
104
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(14) Comprehensive Income
The components of accumulated other comprehensive loss at December 31, 2005 and
2004 and the changes during the year ended December 31, 2005 are as follows:
At Current At
December 31, Period December 31,
(In Thousands) 2004 Change 2005
- ----------------------------------------------------------------------------------------------------------------
Net unrealized loss on securities available-for-sale $ (27,013) $ (21,083) $ (48,096)
Loss on cash flow hedge (1,489) 191 (1,298)
Minimum pension liability adjustment (90) (52) (142)
- ----------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (28,592) $ (20,944) $ (49,536)
================================================================================================================
The components of other comprehensive income, other than net income, for the
years ended December 31, 2005, 2004 and 2003 are as follows:
Before Tax Tax After Tax
(In Thousands) Amount Benefit (Expense) Amount
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2005
Net unrealized holding losses on securities arising
during the year $ (36,374) $ 15,291 $ (21,083)
Reclassification adjustment for loss on cash flow hedge
included in net income 330 (139) 191
Minimum pension liability adjustment (90) 38 (52)
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive loss $ (36,134) $ 15,190 $ (20,944)
================================================================================================================
For the Year Ended December 31, 2004
Net unrealized gains on securities available-for-sale:
Net unrealized holding gains on securities arising
during the year $ 18,755 $ (7,468) $ 11,287
Reclassification adjustment for net losses included
in net income 11,869 (5,408) 6,461
----------------------------------------------
30,624 (12,876) 17,748
Reclassification adjustment for loss on cash flow hedge
included in net income 329 (138) 191
Minimum pension liability adjustment (73) 31 (42)
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 30,880 $ (12,983) $ 17,897
================================================================================================================
For the Year Ended December 31, 2003
Net unrealized losses on securities available-for-sale:
Net unrealized holding losses on securities arising
during the year $ (91,405) $ 39,111 $ (52,294)
Reclassification adjustment for net gains included in
net income (7,346) 2,414 (4,932)
----------------------------------------------
(98,751) 41,525 (57,226)
Amortization of net unrealized loss on securities
transferred to held-to-maturity 1,337 (562) 775
Reclassification adjustment for loss on cash flow hedge
included in net income 330 (139) 191
Minimum pension liability adjustment (50) 21 (29)
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive loss $ (97,134) $ 40,845 $ (56,289)
================================================================================================================
105
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(15) Benefit Plans
Pension Plans and Other Postretirement Benefits
The following tables set forth information regarding our defined benefit pension
plans and other postretirement benefit plan.
Other Postretirement
Pension Benefits Benefits
----------------------------- ------------------------------
At or For the Year Ended At or For The Year Ended
December 31, December 31,
----------------------------- ------------------------------
(In Thousands) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------- ------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 176,551 $ 165,494 $ 18,678 $ 16,386
Service cost 3,264 3,265 504 512
Interest cost 9,856 9,786 1,037 1,087
Amendments 1,318 - 943 -
Actuarial loss 7,863 6,866 569 2,170
Benefits paid (8,833) (8,860) (1,276) (1,477)
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 190,019 176,551 20,455 18,678
- ----------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 154,071 149,944 - -
Actual return on plan assets 10,506 12,304 - -
Employer contribution 691 683 1,276 1,477
Benefits paid (8,833) (8,860) (1,276) (1,477)
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 156,435 154,071 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Funded status (33,584) (22,480) (20,455) (18,678)
Unrecognized net actuarial loss (gain) 48,941 42,255 213 (356)
Unrecognized prior service cost 1,791 694 1,026 124
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 17,148 $ 20,469 $ (19,216) $ (18,910)
==================================================================================================================================
Amounts recognized in the consolidated
statements of financial condition:
Prepaid benefit cost $ 34,360 $ 36,796 $ - $ -
Accrued benefit liability (18,807) (16,620) (19,216) (18,910)
Intangible asset 1,350 138 - -
Accumulated other comprehensive loss (pre-tax basis) 245 155 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 17,148 $ 20,469 $ (19,216) $ (18,910)
==================================================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was
$168.6 million at December 31, 2005 and $158.5 million at December 31, 2004. The
measurement date for our defined benefit pension plans and other postretirement
benefit plan is December 31.
Assumptions used to determine the benefit obligation:
Rate of
Discount Rate Compensation Increase
-------------------- ---------------------
2005 2004 2005 2004
---- ----- ----- ----
Pension Benefit Plans:
Astoria Federal Pension Plan 5.50% 5.75% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 5.50 6.00 8.00 8.00
Astoria Federal Directors' Retirement Plan 5.50 6.00 4.00 4.00
The Greater Directors' Retirement Plan 5.50 6.00 N/A N/A
Long Island Bancorp, Inc., or LIB, Directors'
Retirement Plan 5.50 6.00 N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 5.50 5.75 N/A N/A
106
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The components of net periodic cost are as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------------- -------------------------------------
For the Year Ended December 31, For the Year Ended December 31,
----------------------------------- -------------------------------------
(In Thousands) 2005 2004 2003 2005 2004 2003
- ------------------------------------------------------------------------------- -------------------------------------
Service cost $ 3,264 $ 3,265 $ 2,700 $ 504 $ 512 $ 360
Interest cost 9,856 9,786 9,570 1,037 1,087 995
Expected return on plan assets (11,974) (11,648) (9,956) - - -
Amortization of prior service cost 221 161 160 41 41 40
Recognized net actuarial loss (gain) 2,645 2,540 3,368 - - (152)
Amortization of transition asset - (35) (104) - - -
- -------------------------------------------------------------------------------------------------------------------------
Net periodic cost $ 4,012 $ 4,069 $ 5,738 $1,582 $ 1,640 $ 1,243
=========================================================================================================================
Assumptions used to determine the net periodic cost:
Expected Return Rate of
Discount Rate on Plan Assets Compensation Increase
------------------- -------------------- -----------------------
2005 2004 2005 2004 2005 2004
------ ------ ------ ------ ------ -------
Pension Benefit Plans:
Astoria Federal Pension Plan 5.75% 6.00% 8.00% 8.00% 5.00% 5.00%
Astoria Federal Excess Benefit and
Supplemental Benefit Plans 6.00 6.00 N/A N/A 8.00 8.00
Astoria Federal Directors' Retirement Plan 6.00 6.00 N/A N/A 4.00 4.00
The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
LIB Directors' Retirement Plan 6.00 6.00 N/A N/A N/A N/A
Other Postretirement Benefit Plan:
Astoria Federal Retiree Health Care Plan 5.75 6.00 N/A N/A N/A N/A
To determine the expected return on plan assets, we consider the long-term
historical return information on plan assets, the mix of investments that
comprise plan assets and the historical returns on indices comparable to the
fund classes in which the plan invests.
The assumed health care cost trend rates are as follows:
At December 31,
-----------------------
2005 2004
- --------------------------------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 7.00% 7.50%
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2009 2009
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One Percentage One Percentage
(In Thousands) Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------
Effect on total service and interest cost components $ 249 $ (193)
Effect on the postretirement benefit obligation 2,418 (1,918)
We adopted FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," or FSP No. 106-2, effective December 31, 2004. Upon
adoption of FSP No. 106-2, we determined our other postretirement benefit plan
(the Astoria Federal Retiree Health Care Plan) to be "actuarially equivalent,"
as defined, and determined the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or Medicare Act, were not a
"significant event," as defined. The impact of our adoption of FSP No. 106-2 was
a reduction of $850,000 in the accumulated postretirement benefit obligation at
December 31, 2004. The reduction to the net periodic cost of our other
postretirement benefit plan for
107
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
the year ended December 31, 2005 was immaterial to our financial condition and
results of operations and there was no impact on the net periodic cost for the
year ended December 31, 2004. At the end of 2005, the Astoria Federal Retiree
Health Care Plan was changed to require Medicare-eligible retirees to enroll in
a Medicare Part D equivalent prescription drug plan in order to maintain their
prescription drug coverage under the Astoria Federal Retiree Health Care Plan.
As a result, we will not be eligible to receive a federal subsidy for
prescription drug costs for these retirees and there is no reduction for a
federal subsidy in the accumulated postretirement benefit obligation at December
31, 2005. However, the accumulated postretirement benefit obligation at December
31, 2005 has been reduced to reflect the reduction in future prescription drug
coverage premiums that we will recognize as a result of requiring our
Medicare-eligible retirees to enroll in the Medicare Part D equivalent
prescription drug plan offered by our insurance carrier.
Included in the tables of pension benefits on pages 106 and 107 are the Astoria
Federal Excess Benefit and Supplemental Benefit Plans, Astoria Federal
Directors' Retirement Plan, The Greater Directors' Retirement Plan and the LIB
Directors' Retirement Plan, which are unfunded plans. The projected benefit
obligation and accumulated benefit obligation for these plans are as follows:
At December 31,
-------------------------------
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------
Projected benefit obligation $22,304 $18,685
Accumulated benefit obligation 16,226 13,891
The following table sets forth the asset allocations, by asset category, for the
Astoria Federal Pension Plan:
Plan Assets At December 31,
-------------------------------
2005 2004
- --------------------------------------------------------------------------------
Asset Category:
Equity securities (1) 14.53% 13.39%
Other (2) 85.47 86.61
- --------------------------------------------------------------------------------
Total 100.00% 100.00%
================================================================================
(1) Equity securities include Astoria Financial Corporation common stock with
a fair value of $22.7 million, or 14.5% of total plan assets, at December
31, 2005 and $20.6 million, or 13.4% of total plan assets, at December 31,
2004.
(2) Primarily comprised of investments in various insurance company pooled
separate accounts and trust company trust funds.
The overall strategy of the Astoria Federal Pension Plan Investment Policy is to
have a diverse portfolio that reasonably spans established risk/return levels,
preserves liquidity and achieves the rate of return specified in the actuarial
valuation. The strategy allows for a moderate risk approach in order to achieve
greater long-term asset growth. The asset mix within the various insurance
company pooled separate accounts and trust company trust funds can vary but
should not be more than 80% in equity securities, 50% in debt securities, 25% in
liquidity funds and 15% in Astoria Financial Corporation common stock. The
Astoria Federal Pension Plan will not acquire Astoria Financial Corporation
common stock to the extent that, after the acquisition, such common stock would
represent more than 10% of total plan assets. Within equity securities, the mix
is further clarified to have ranges not to exceed 10% in any one company, 30% in
any one industry, 50% in funds that mirror the S&P 500, 50% in large-cap equity
securities, 20% in mid-cap equity securities, 20% in small-cap equity securities
and 10% in international equities.
We expect to contribute $721,000 to our unfunded defined benefit pension plans
and $1.1 million to our other postretirement benefit plan to cover expected
benefit payments in 2006.
Total benefits expected to be paid under our defined benefit pension plans and
other postretirement benefit plan as of December 31, 2005, which reflect
expected future service, as appropriate, are as follows:
Pension Other Postretirement
Year Benefits Benefits
----------------------------------------------------
(In Thousands)
2006 $ 9,335 $1,408
2007 9,419 1,386
2008 9,577 1,295
2009 10,082 1,289
2010 10,384 1,288
2011-2015 56,724 6,117
108
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Incentive Savings Plan
Astoria Federal maintains a 401(k) incentive savings plan, or the 401(k) Plan,
which provides for contributions by both Astoria Federal and its participating
employees. Under the 401(k) Plan, which is a qualified, defined contribution
pension plan, participants may contribute up to 15% of their pre-tax base
salary, generally not to exceed $14,000 for the calendar year ended December 31,
2005. Matching contributions, if any, may be made at the discretion of Astoria
Federal. No matching contributions were made for 2005, 2004 and 2003.
Participants vest immediately in their own contributions and after a period of
five years for Astoria Federal contributions.
Employee Stock Ownership Plan
Astoria Federal maintains an ESOP for its eligible employees, which is also a
defined contribution pension plan. To fund the purchase of the ESOP shares, the
ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%,
mature on December 31, 2029 and are collateralized by our common stock purchased
with the loan proceeds. Astoria Federal makes scheduled discretionary
contributions to fund debt service. Astoria Federal's contributions, prior to
2010, may be reduced by dividends paid on unallocated shares and investment
earnings realized on such dividends. Beginning in 2010, dividends paid on
unallocated shares will be credited to participant accounts as investment
earnings. Dividends paid on unallocated shares, which reduced Astoria Federal's
contribution to the ESOP, totaled $5.4 million for the year ended December 31,
2005, $4.8 million for the year ended December 31, 2004 and $4.3 million for the
year ended December 31, 2003. The ESOP loans had an aggregate outstanding
principal balance of $32.9 million at December 31, 2005 and $33.8 million at
December 31, 2004.
Shares purchased by the ESOP are held in trust for allocation among participants
as the loans are repaid. Pursuant to the loan agreements, the number of shares
released annually is based upon a specified percentage of aggregate eligible
payroll for our covered employees. Shares allocated to participants totaled
336,873 for the year ended December 31, 2005, 337,935 for the year ended
December 31, 2004 and 387,657 for the year ended December 31, 2003. Through
December 31, 2005, 8,603,289 shares have been allocated to participants. As of
December 31, 2005, 6,465,273 shares which had a fair value of $190.1 million
remain unallocated. In addition to shares allocated, Astoria Federal makes an
annual cash contribution to participant accounts. This cash contribution totaled
$2.4 million for the year ended December 31, 2005, $1.9 million for the year
ended December 31, 2004 and $1.6 million for the year ended December 31, 2003,
and will total not less than $1.2 million each year through 2009. Beginning in
2010, the only cash contributions Astoria Federal is required to make are to
fund debt service.
We recorded compensation expense relating to the ESOP of $11.6 million for the
year ended December 31, 2005, $10.6 million for the year ended December 31, 2004
and $8.8 million for the year ended December 31, 2003, which was equal to the
shares allocated by the ESOP multiplied by the average fair value of our common
stock during the year of allocation, plus the cash contribution made to
participant accounts.
(16) Stock Incentive Plans
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 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 December 31, 2005,
remaining shares available for issuance of future grants totaled 3,829,072 under
the 2005 Employee Stock Incentive Plan and 123,000 under the 1999 Directors'
Option Plan.
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 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.
109
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On December 22, 2005, we accelerated the vesting of all outstanding unvested
options which were granted to employees on December 17, 2003 and December 15,
2004 under the 2003 Employee Option Plan. On December 22, 2005 there were
1,402,950 unvested shares under the December 17, 2003 grants with an exercise
price of $24.40 per share and a vest date of January 10, 2007 and 1,897,200
unvested shares under the December 15, 2004 grants with an exercise price of
$26.63 and a vest date of January 10, 2008. The fair value of our stock on the
effective date of the acceleration was $29.72 per share, therefore, these
options were in-the-money at the time of the acceleration. We recognized pre-tax
compensation expense in 2005 of $111,000 as a result of the accelerated vesting
of these options. The purpose of the acceleration was to eliminate compensation
expense associated with these options in future periods upon our adoption of
SFAS No. 123(R) effective January 1, 2006. The accelerated vesting eliminates
pre-tax compensation expense of approximately $10.4 million, which would have
been recognized in future periods, including approximately $6.7 million in 2006.
Subsequent to December 22, 2005, shares acquired through the exercise of options
granted on December 17, 2003 or December 15, 2004 may not be sold prior to the
earlier of the date the optionee terminates employment with us or the original
vesting date. A number of the options which were accelerated were intended to
qualify as incentive stock options when granted. The accelerated vesting
disqualified most of such options from incentive stock option tax treatment.
Upon the optionees' exercise of such disqualified options, we may realize
certain tax benefits that would not have otherwise been available.
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. There was no
other restricted stock activity for the years ended December 31, 2005, 2004 and
2003.
Option activity in our stock incentive plans is summarized as follows:
For the Year Ended December 31,
----------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 10,922,133 $ 19.02 10,345,493 $ 16.83 10,262,826 $ 14.32
Granted 1,284,100 28.89 2,014,800 26.55 1,529,700 24.10
Forfeited (29,250) (22.63) (47,400) (20.07) (8,190) (17.56)
Exercised (1,048,283) (15.36) (1,390,760) (13.62) (1,438,843) (6.60)
---------- ---------- ----------
Outstanding at end of year 11,128,700 20.50 10,922,133 19.02 10,345,493 16.83
========== ========== ==========
Options exercisable at end of year 8,041,150 19.78 4,182,633 14.85 4,007,393 13.63
The following table summarizes information about our options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Exercise Prices of Options Contractual Life Exercise Price of Options Exercise Price
- -------------------------------------------------------------------------------------------------------
$ 7.42 to $15.02 1,526,757 3.31 years $ 11.94 1,526,757 $ 11.94
16.27 to 17.49 2,573,444 5.36 16.69 2,565,944 16.69
18.00 to 19.92 2,370,149 6.11 18.25 514,199 19.13
24.17 to 24.40 1,466,100 7.96 24.39 1,466,100 24.39
26.23 to 26.63 1,968,150 8.96 26.61 1,968,150 26.61
29.02 1,224,100 6.97 29.02 - -
---------- ---------
$ 7.42 to $29.02 11,128,700 6.40 20.50 8,041,150 19.78
========== =========
110
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes the per share weighted-average fair value of
options granted. The per share weighted-average fair value of options was
calculated to determine the effect on net income and EPS if we had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation. See Note 1(q) for an illustration of the effect on net income and
EPS of the provisions of SFAS No. 123.
For the Year Ended December 31,
------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
Granted Fair Value Granted Fair Value Granted Fair Value
- ------------------------------------------------------------------------------------------------
Employees 1,224,100 1,948,800 1,463,700
Outside directors 60,000 66,000 66,000
--------- --------- ---------
1,284,100 $4.83 2,014,800 $6.11 1,529,700 $6.06
========= ===== ========= ===== ========= =====
The per share weighted-average fair value of option grants was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
For the Year Ended December 31,
---------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------
Dividend yield 3.27% 2.50% 2.43%
Expected stock price volatility 21.28 25.17 28.81
Risk-free interest rate based upon
equivalent-term U.S. Treasury rates 4.25 3.66 3.16
Expected option lives 4.47 years 5.97 years 5.96 years
The per share weighted-average fair value of options 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. The
decrease in the weighted-average expected option lives from 2004 to 2005
reflects the anticipated effect of the shorter contractual term of seven years
for the 2005 employee option grants compared to ten years for the 2004 employee
option grants. 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
which are not immediately exercisable and are not traded on public markets.
(17) Regulatory Matters
Federal law requires that savings associations, such as Astoria Federal,
maintain minimum capital requirements. These capital standards are required to
be no less stringent than standards applicable to national banks. At December
31, 2005 and 2004, Astoria Federal was in compliance with all regulatory capital
requirements.
The following table sets forth the regulatory capital calculations for Astoria
Federal.
At December 31, 2005
---------------------------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- ----------------------------------------------------------------------------------------------------
Tangible $331,749 1.50% $1,444,407 6.53% $ 1,112,658 5.03%
Leverage 884,665 4.00 1,444,407 6.53 559,742 2.53
Risk-based 974,327 8.00 1,525,566 12.53 551,239 4.53
At December 31, 2004
---------------------------------------------------------------------------
Capital Actual Excess
(Dollars in Thousands) Requirement % Capital % Capital %
- ----------------------------------------------------------------------------------------------------
Tangible $345,326 1.50% $1,379,088 5.99% $ 1,033,762 4.49%
Leverage 920,869 4.00 1,379,088 5.99 458,219 1.99
Risk-based 939,958 8.00 1,461,870 12.44 521,912 4.44
Astoria Federal's Tier I risked-based capital ratio was 11.86% at December 31,
2005 and 11.74% at December 31, 2004.
111
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The regulators adopted rules which require them
to take action against undercapitalized institutions, based upon the five
categories of capitalization which FDICIA created: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The rules adopted generally provide that an
insured institution whose total risk-based capital ratio is 10% or greater, Tier
1 risk-based capital ratio is 6% or greater, leverage capital ratio is 5% or
greater and is not subject to any written agreement, order, capital directive or
prompt corrective action directive issued by the FDIC shall be considered a
"well capitalized" institution. As of December 31, 2005 and 2004, Astoria
Federal was a "well capitalized" institution.
(18) Fair Value of Financial Instruments
Estimated fair values of certain types of financial instruments are most
commonly derived from quoted market prices available in formal trading
marketplaces. In many cases, financial instruments we hold are not bought or
sold in formal trading marketplaces. Accordingly, in cases where quoted market
prices are not available, fair values are derived or estimated based on a
variety of valuation techniques. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument. These estimates do not reflect any possible tax ramifications,
estimated transaction costs, or any premium or discount that could result from
offering for sale at one time our entire holdings of a particular financial
instrument. Because no market exists for a certain portion of our financial
instruments, fair value estimates are based on judgments regarding future loss
experience, current economic conditions, risk characteristics, and other such
factors. These estimates are subjective in nature, involve uncertainties and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. For these reasons and others, the estimated
fair value disclosures presented herein do not represent our entire underlying
value. As such, readers are cautioned in using this information for purposes of
evaluating our financial condition and/or value either alone or in comparison
with any other company.
The following table summarizes the carrying amounts and estimated fair values of
our financial instruments.
At December 31,
-----------------------------------------------------
2005 2004
-----------------------------------------------------
Carrying Estimated Carrying Estimated
(In Thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------
Financial Assets:
Repurchase agreements $ 182,803 $ 182,803 $ 267,578 $ 267,578
Securities available-for-sale 1,841,351 1,841,351 2,406,883 2,406,883
Securities held-to-maturity 4,730,953 4,627,013 6,302,936 6,306,760
FHLB-NY stock 145,247 145,247 163,700 163,700
Loans held-for-sale, net 23,651 23,657 23,802 23,813
Loans receivable, net 14,311,134 14,224,372 13,180,521 13,362,582
MSR, net 16,502 16,522 16,799 16,799
Interest rate swaps - - 1,365 1,365
Financial Liabilities:
Deposits 12,810,455 12,769,948 12,323,257 12,378,720
Borrowings, net 7,937,526 8,008,328 9,469,835 9,652,910
Interest rate swaps 1,762 1,762 - -
Methods and assumptions used to estimate fair values are as follows:
Repurchase agreements
The carrying amounts of repurchase agreements approximate fair values since all
mature in one month or less.
Securities available-for-sale and held-to-maturity
Fair values for securities are based on published or securities dealers'
estimated market values.
FHLB-NY stock
The carrying amount of FHLB-NY stock equals cost. The fair value of FHLB-NY
stock is based on redemption at par value.
112
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Loans held-for-sale, net
Fair values of loans held-for-sale are estimated based on current secondary
market prices for loans with similar terms.
Loans receivable, net
Fair values of loans are estimated by discounting the expected future cash flows
of pools of loans with similar characteristics. The loans are first segregated
by type, such as one-to-four family, multi-family, commercial real estate,
construction and consumer and other, and then further segregated into fixed and
adjustable rate and seasoned and nonseasoned categories. Expected future cash
flows are then projected based on contractual cash flows, adjusted for
prepayments. Prepayment estimates are based on a variety of factors including
our experience with respect to each loan category, the effect of current
economic and lending conditions and regional statistics for each loan category,
if available. The discount rates used are based on market rates for new loans of
similar type and purpose, adjusted, when necessary, for factors such as
servicing cost, credit risk and term.
As previously mentioned, this technique of estimating fair value is extremely
sensitive to the assumptions and estimates used. While we have attempted to use
assumptions and estimates which are the most reflective of the loan portfolio
and the current market, a greater degree of subjectivity is inherent in
determining these fair values than for fair values obtained from formal trading
marketplaces.
MSR, net
The fair value of MSR is obtained through independent third party valuations
through an analysis of future cash flows, incorporating numerous market based
assumptions including market discount rates, prepayment speeds, servicing
income, servicing costs, default rates and other market driven data.
Interest rate swaps
Fair values for interest rate swaps are based on securities dealers' estimated
market values.
Deposits
The fair values of deposits with no stated maturity, such as savings accounts,
NOW accounts, money market accounts and demand deposits, are equal to the amount
payable on demand. The fair values of certificates of deposit and Liquid CDs are
based on discounted contractual cash flows using rates which approximate the
rates we offer for deposits of similar remaining maturities.
Borrowings, net
Fair value estimates are based on securities dealers' estimated market values,
when available, or discounted contractual cash flows using rates which
approximate the rates offered for borrowings of similar remaining maturities.
Outstanding commitments
Outstanding commitments include (1) commitments to extend credit and unadvanced
lines of credit for which fair values were estimated based on an analysis of the
interest rates and fees currently charged to enter into similar transactions,
considering the remaining terms of the commitments and the creditworthiness of
the potential borrowers and (2) commitments to sell residential mortgage loans
for which fair values were estimated based on current secondary market prices
for commitments with similar terms. Due to the short-term nature of our
outstanding commitments, the fair values of these commitments are immaterial to
our financial condition.
113
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(19) Condensed Parent Company Only Financial Statements
The following condensed parent company only financial statements reflect our
investments in our wholly-owned consolidated subsidiaries, Astoria Federal and
AF Insurance Agency, Inc., using the equity method of accounting.
Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31,
----------------------------------------
(In Thousands) 2005 2004
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash $ - $ 1
Repurchase agreements 182,803 267,578
Other securities available-for-sale 127 133
ESOP loans receivable 32,881 33,796
Accrued interest receivable 104 78
Other assets 953 2,662
Investment in Astoria Federal 1,593,272 1,548,005
Investment in AF Insurance Agency, Inc. 3,565 2,641
Investment in Astoria Capital Trust I 3,929 3,929
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 1,817,634 $ 1,858,823
================================================================================================================
Liabilities and stockholders' equity:
Other borrowings, net $ 433,526 $ 455,835
Other liabilities 7,917 6,161
Amounts due to subsidiaries 25,964 27,063
Stockholders' equity 1,350,227 1,369,764
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,817,634 $1,858,823
================================================================================================================
Astoria Financial Corporation - Condensed Statements of Income
For the Year Ended December 31,
---------------------------------------------
(In Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Interest income:
Repurchase agreements and other securities $ 6,130 $ 1,139 $ 1,500
ESOP loans receivable 2,027 2,079 2,140
- ----------------------------------------------------------------------------------------------------------------
Total interest income 8,157 3,218 3,640
Interest expense on borrowings 30,153 29,363 29,816
- ----------------------------------------------------------------------------------------------------------------
Net interest expense 21,996 26,145 26,176
- ----------------------------------------------------------------------------------------------------------------
Non-interest income 713 1,307 (1,074)
Cash dividends from subsidiaries 200,000 522,470 120,000
- ----------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 2,979 1,878 1,736
Other 2,901 7,132 2,323
- ----------------------------------------------------------------------------------------------------------------
Total non-interest expense 5,880 9,010 4,059
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed (overdistributed) earnings of subsidiaries 172,837 488,622 88,691
Income tax benefit 11,238 14,028 12,970
- ----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed (overdistributed)
earnings of subsidiaries 184,075 502,650 101,661
Equity in undistributed (overdistributed) earnings
of subsidiaries (1) 49,728 (283,113) 95,185
- ----------------------------------------------------------------------------------------------------------------
Net income $ 233,803 $ 219,537 $ 196,846
================================================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended
December 31, 2004 represents dividends paid to us in excess of our
subsidiaries' 2004 earnings.
114
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Astoria Financial Corporation - Condensed Statements of Cash Flows
For the Year Ended December 31,
---------------------------------------------
(In Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 233,803 $ 219,537 $ 196,846
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (undistributed) overdistributed earnings of
subsidiaries (49,728) 283,113 (95,185)
(Increase) decrease in accrued interest receivable (26) (69) 13
Amortization of premiums and deferred costs 1,148 1,142 1,070
Decrease (increase) in other assets, net of other liabilities
and amounts due to subsidiaries 578 434 (82)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 185,775 504,157 102,662
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal payments on ESOP loans receivable 915 924 942
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 915 924 942
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of borrowings with original terms greater
than three months (20,000) (20,000) -
Common stock repurchased (180,944) (225,052) (195,471)
Cash dividends paid to stockholders (86,625) (76,720) (76,370)
Redemption of preferred stock - - (54,500)
Cash received for options exercised 16,103 18,344 8,793
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (271,466) (303,428) (317,548)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (84,776) 201,653 (213,944)
Cash and cash equivalents at beginning of year 267,579 65,926 279,870
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 182,803 $ 267,579 $ 65,926
================================================================================================================
Supplemental disclosure:
Cash paid during the year for interest $ 29,321 $ 28,733 $ 28,892
================================================================================================================
115
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
For the Year Ended December 31, 2005
----------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
Interest income $ 273,103 $ 270,210 $ 268,973 $ 270,701
Interest expense 147,890 148,863 150,437 157,017
- -----------------------------------------------------------------------------------------------------------
Net interest income 125,213 121,347 118,536 113,684
Provision for loan losses - - - -
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 125,213 121,347 118,536 113,684
Non-interest income 24,742 22,526 28,372 26,559
- -----------------------------------------------------------------------------------------------------------
Total income 149,955 143,873 146,908 140,243
General and administrative expense 60,512 57,563 57,915 52,744
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense 89,443 86,310 88,993 87,499
Income tax expense 29,964 28,914 29,814 29,750
- -----------------------------------------------------------------------------------------------------------
Net income $ 59,479 $ 57,396 $ 59,179 $ 57,749
===========================================================================================================
Basic earnings per common share $ 0.58 $ 0.56 $ 0.59 $ 0.58
Diluted earnings per common share $ 0.57 $ 0.55 $ 0.57 $ 0.57
For the Year Ended December 31, 2004
----------------------------------------------
First Second Third Fourth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
Interest income $ 261,094 $ 252,563 $ 264,080 $ 268,164
Interest expense 146,581 139,247 142,222 147,285
- -----------------------------------------------------------------------------------------------------------
Net interest income 114,513 113,316 121,858 120,879
Provision for loan losses - - - -
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 114,513 113,316 121,858 120,879
Non-interest income 22,139 27,866 24,036 6,043 (1)
- -----------------------------------------------------------------------------------------------------------
Total income 136,652 141,182 145,894 126,922
General and administrative expense 57,043 55,360 59,168 53,440
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense 79,609 85,822 86,726 73,482
Income tax expense 26,196 28,321 28,619 22,966
- -----------------------------------------------------------------------------------------------------------
Net income $ 53,413 $ 57,501 $ 58,107 $ 50,516
===========================================================================================================
Basic earnings per common share $ 0.48 $ 0.53 $ 0.54 $ 0.48
Diluted earnings per common share $ 0.47 $ 0.52 $ 0.53 $ 0.48
(1) Includes a $16.5 million charge for an other-than-temporary securities
impairment write-down.
116
ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
3.1 Certificate of Incorporation of Astoria Financial Corporation, as
amended effective as of June 3, 1998. (1)
3.2 Bylaws of Astoria Financial Corporation, as amended May 19, 2004.
(2)
4.1 Astoria Financial Corporation Specimen Stock Certificate. (3)
4.2 Federal Stock Charter of Astoria Federal Savings and Loan
Association. (4)
4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended
effective May 18, 2005. (5)
4.4 Amended and Restated Certificate of Designations, Preferences and
Rights of Series A Junior Participating Preferred Stock. (6)
4.5 Rights Agreement between Astoria Financial Corporation and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated
as of July 17, 1996, as amended. (7)
4.6 Amendment No. 1 to Rights Agreement, dated as of April 2, 1998 by
and between Astoria Financial Corporation and ChaseMellon
Shareholder Services L.L.C. (8)
4.7 Amendment No. 2 to Rights Agreement, dated as of September 15,
1999 by and between Astoria Financial Corporation and ChaseMellon
Shareholder Services L.L.C., as Rights Agent. (9)
4.8 Form of Rights Certificate. (7)
4.9 Indenture, dated as of October 28, 1999, between Astoria Financial
Corporation and Wilmington Trust Company, as Debenture Trustee,
including as Exhibit A thereto the Form of Certificate of Exchange
Junior Subordinated Debentures. (10)
4.10 Form of Certificate of Junior Subordinated Debenture. (10)
4.11 Form of Certificate of Exchange Junior Subordinated Debenture.
(10)
4.12 Amended and Restated Declaration of Trust of Astoria Capital Trust
I, dated as of October 28, 1999. (10)
117
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
4.13 Common Securities Guarantee Agreement of Astoria Financial
Corporation, dated as of October 28, 1999. (10)
4.14 Form of Certificate Evidencing Common Securities of Astoria
Capital Trust I. (10)
4.15 Form of Exchange Capital Security Certificate for Astoria Capital
Trust I. (10)
4.16 Series A Capital Securities Guarantee Agreement of Astoria
Financial Corporation, dated as of October 28, 1999. (10)
4.17 Form of Series B Capital Securities Guarantee Agreement of Astoria
Financial Corporation. (10)
4.18 Form of Capital Security Certificate of Astoria Capital Trust I.
(10)
4.19 Indenture between Astoria Financial Corporation and Wilmington
Trust Company, as Debenture Trustee, dated as of October 16, 2002,
relating to the Senior Notes due 2012. (11)
4.20 Form of 5.75% Senior Note due 2012, Series B. (11)
4.21 Astoria Financial Corporation Automatic Dividend Reinvestment and
Stock Purchase Plan. (12)
10.1 Agreement dated as of December 28, 2000 by and between Astoria
Federal Savings and Loan Association, Astoria Financial
Corporation, the Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust and The Long Island Savings
Bank FSB Employee Stock Ownership Plan Trust. (4)
10.2 Amended and Restated Loan Agreement by and between Astoria Federal
Savings and Loan Association Employee Stock Ownership Plan Trust
and Astoria Financial Corporation made and entered into as of
January 1, 2000. (4)
10.3 Promissory Note of Astoria Federal Savings and Loan Association
Employee Stock Ownership Plan Trust dated January 1, 2000. (4)
10.4 Pledge Agreement made as of January 1, 2000 by and between Astoria
Federal Savings and Loan Association Employee Stock Ownership Plan
Trust and Astoria Financial Corporation. (4)
10.5 Amended and Restated Loan Agreement by and between The Long Island
Savings Bank FSB Employee Stock Ownership Plan Trust and Astoria
Financial Corporation made and entered into as of January 1, 2000.
(4)
10.6 Promissory Note of The Long Island Savings Bank FSB Employee Stock
Ownership Plan Trust dated January 1, 2000. (4)
118
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
10.7 Pledge Agreement made as of January 1, 2000 by and between The
Long Island Savings Bank FSB Employee Stock Ownership Plan Trust
and Astoria Financial Corporation. (4)
Exhibits 10.8 through 10.45 are management contracts or
compensatory plans or arrangements required to be filed as
exhibits to this Form 10-K pursuant to Item 15(c) of this report.
10.8 Astoria Federal Savings and Loan Association and Astoria Financial
Corporation Directors' Retirement Plan, as amended and restated
effective January 1, 2005. (13)
10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement
Benefit Plan, as amended. (14)
10.10 Astoria Financial Corporation Death Benefit Plan for Outside
Directors. (3)
10.11 Deferred Compensation Plan for Directors of Astoria Financial
Corporation. (3)
10.12 1996 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation, as amended December 29, 2005. (*)
10.13 1996 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, as amended December 29, 2005. (*)
10.14 1999 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation, as amended December 29, 2005. (*)
10.15 1999 Stock Option Plan for Outside Directors of Astoria Financial
Corporation, as amended December 29, 2005. (*)
10.16 2003 Stock Option Plan for Officers and Employees of Astoria
Financial Corporation, as amended December 29, 2005. (*)
10.17 2005 Re-designated, Amended and Restated Stock Incentive Plan for
Officers and Employees of Astoria Financial Corporation. (15)
10.18 Astoria Federal Savings and Loan Association Annual Incentive Plan
for Select Executives. (14)
10.19 Astoria Financial Corporation Executive Officer Annual Incentive
Plan, as amended. (17)
10.20 Astoria Financial Corporation Amended and Restated Employment
Agreement with George L. Engelke, Jr., dated as of January 1,
2000. (18)
119
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
10.21 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with George L. Engelke, Jr., dated as of
January 1, 2000. (18)
10.22 Astoria Financial Corporation Amended and Restated Employment
Agreement with Gerard C. Keegan, dated as of January 1, 2000. (18)
10.23 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Gerard C. Keegan, dated as of January 1,
2000. (18)
10.24 Employment Termination and Release Agreement by and among John J.
Conefry, Jr., Astoria Federal Savings and Loan Association and
Astoria Financial Corporation. (4)
10.25 Astoria Financial Corporation Amended and Restated Employment
Agreement with Arnold K. Greenberg dated as of January 1, 2000.
(18)
10.26 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Arnold K. Greenberg, dated as of January
1, 2000. (18)
10.27 Astoria Financial Corporation Employment Agreement with Gary T.
McCann, dated as of December 1, 2003. (3)
10.28 Astoria Federal Savings and Loan Association Employment Agreement
with Gary T. McCann, dated as of December 1, 2003. (3)
10.29 Astoria Financial Corporation Amended and Restated Employment
Agreement with Monte N. Redman dated as of January 1, 2000. (18)
10.30 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Monte N. Redman, dated as of January 1,
2000. (18)
10.31 Astoria Financial Corporation Amended and Restated Employment
Agreement with Alan P. Eggleston dated as of January 1, 2000. (18)
10.32 Astoria Federal Savings and Loan Association Amended and Restated
Employment Agreement with Alan P. Eggleston, dated as of January
1, 2000. (18)
10.33 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Josie Callari. (18)
10.34 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Robert J. DeStefano. (18)
120
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
10.35 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Frank E. Fusco. (18)
10.36 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Robert T. Volk. (18)
10.37 Change of Control Severance Agreement, dated as of January 1,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Ira M. Yourman. (18)
10.38 Change of Control Severance Agreement, dated as of December 20,
2000, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Brian T. Edwards. (4)
10.39 Change of Control Severance Agreement, dated as of December 21,
2005, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Anthony S. DiCostanzo. (*)
10.40 Change of Control Severance Agreement, dated as of December 21,
2005, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and Thomas E. Lavery. (*)
10.41 Change of Control Severance Agreement, dated as of December 21,
2005, by and among Astoria Federal Savings and Loan Association,
Astoria Financial Corporation and William J. Mannix. (*)
10.42 Retirement Medical and Dental Benefit Policy for Senior Officers.
(16)
10.43 Form of Option Conversion Agreement by and between Astoria
Financial Corporation and Former Officer or Director of Long
Island Bancorp, Inc. dated September 30, 1998. (19)
10.44 Option Conversion Certificates of Robert J. Conway and Leo J.
Waters. (14)
10.45 Trust Agreement, dated as of January 31, 1995 between Astoria
Financial Corporation and State Street Bank and Trust Company. (3)
12.1 Statement regarding computation of ratios. (*)
21.1 Subsidiaries of Astoria Financial Corporation. (*)
23.1 Consent of Independent Registered Public Accounting Firm. (*)
31.1 Certifications of Chief Executive Officer. (*)
31.2 Certifications of Chief Financial Officer. (*)
121
Exhibit No. Identification of Exhibit
- ----------- ------------------------------------------------------------------
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. (*)
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held
on May 17, 2006, which will be filed with the SEC within 120 days
from December 31, 2005, is incorporated herein by reference.
- ----------
* Filed herewith. Copies of exhibits will be provided to shareholders upon
written request to Astoria Financial Corporation, Investor Relations
Department, One Astoria Federal Plaza, Lake Success, New York 11042 at a
charge of $0.10 per page. Copies are also available at no charge through
the SEC website at www.sec.gov/edgar/searchedgar/webusers.htm.
(1) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with the
Securities and Exchange Commission on September 10, 1998 (File Number
000-22228).
(2) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K, dated May 19, 2004, filed with the Securities and
Exchange Commission on May 19, 2004 (File Number 001-11967).
(3) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 12, 2004 (File Number
001-11967).
(4) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 26, 2001 (File Number
000-22228).
(5) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 2004, filed with the
Securities and Exchange Commission on March 9, 2005 (File Number
001-11967).
(6) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K, dated February 9, 2005, filed with the Securities and
Exchange Commission on February 10, 2005 (File Number 001-11967).
(7) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form 8-K/A dated July 17, 1996, filed with the Securities and
Exchange Commission on July 23, 1996 (File Number 000-22228).
122
(8) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K/A, dated April 2, 1998, filed with the Securities and
Exchange Commission on April 10, 1998 (File Number 000-22228), as amended
by the First Amendment, incorporated by reference to the Registrant's
Current Report on Form 8-K, dated May 29, 1998 (File Number 000-22228) and
the Second Amendment, incorporated by reference to the Registrant's
Current Report on Form 8-K, dated July 10, 1998 (File Number 000-22228).
(9) Incorporated by reference to Astoria Financial Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed with
the Securities and Exchange Commission on November 12, 1999 (File Number
000-22228).
(10) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on February 18, 2000 (File Number
333-30792).
(11) Incorporated by reference to Form S-4 Registration Statement, filed with
the Securities and Exchange Commission on December 6, 2002 (File Number
333-101694).
(12) Incorporated by reference to Form 424B3 Prospectus Supplement, filed with
the Securities and Exchange Commission on February 1, 2000 (File Number
033-98532).
(13) Incorporated by reference to Astoria Financial Corporation's Current
Report on Form 8-K, dated December 21, 2005, filed with the Securities and
Exchange Commission on December 22, 2005 (File Number 001-11967).
(14) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 24, 1999 (File Number
000-22228).
(15) Incorporated by reference to Astoria Financial Corporation's Schedule 14A
Definitive Proxy Statement filed on April 11, 2005 (File Number
001-11967).
(16) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 25, 1998 (File Number
000-22228).
(17) Incorporated by reference to Astoria Financial Corporation's Schedule 14A
Definitive Proxy Statement filed on April 16, 2004 (File Number
001-11967).
(18) Incorporated by reference to Astoria Financial Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 24, 2000 (File Number
000-22228).
(19) Incorporated by reference to Astoria Financial Corporation's Registration
Statement on Form S-8, dated September 30, 1998, filed with the Securities
and Exchange Commission on September 30, 1998 (File Number 333-64895).
123