-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SMk/Xdds2EUsln39/OA/lUfxSS5/CVY+Qwy5cRCSUMhKZT76zh3YBPLf56lHqCin 5ZkLLH8gH1nkoDxeAGB/EA== 0000950117-04-000958.txt : 20040312 0000950117-04-000958.hdr.sgml : 20040312 20040312084758 ACCESSION NUMBER: 0000950117-04-000958 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTORIA FINANCIAL CORP CENTRAL INDEX KEY: 0000910322 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113170868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11967 FILM NUMBER: 04664201 BUSINESS ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 BUSINESS PHONE: 5163273000 MAIL ADDRESS: STREET 1: ONE ASTORIA FEDERAL PLAZA CITY: LAKE SUCCESS STATE: NY ZIP: 11042-1085 10-K 1 a37161.txt ASTORIA FINANCIAL ================================================================================ 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, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-22228 ASTORIA FINANCIAL CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-3170868 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Astoria Federal Plaza, Lake Success, New York 11042 ------------------------------------------------------- (Address of principal executive offices) (516) 327-3000 -------------- (Registrant's telephone number, including area code) (Securities registered pursuant to Section 12(b) of the Act): Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, par value New York $.01 per share, and related Stock Exchange preferred share purchase rights (Securities registered pursuant to Section 12(g) of the Act): None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [_] - -------------------------------------------------------------------------------- The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2003, 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 $2.17 billion. The number of shares of the registrant's Common Stock outstanding as of March 1, 2004 was 78,677,248 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 19, 2004 and any adjournment thereof, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2003, are incorporated by reference into Part III. ================================================================================ ASTORIA FINANCIAL CORPORATION 2003 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- Part I Item 1. Business...........................................................2 Item 2. Properties........................................................29 Item 3. Legal Proceedings.................................................30 Item 4. Submission of Matters to a Vote of Security Holders...............30 Part II Item 5. Market for Astoria Financial Corporation's Common Equity and Related Stockholder Matters.........................30 Item 6. Selected Financial Data...........................................32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................34 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........66 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...........................................69 Part III Item 10. Directors and Executive Officers of Astoria Financial Corporation....................................................70 Item 11. Executive Compensation............................................70 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................70 Item 13. Certain Relationships and Related Transactions....................71 Item 14. Principal Accounting Fees and Services............................71 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................................71 SIGNATURES...................................................................73
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; 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, including Astoria Federal Savings and Loan Association and its subsidiaries, Astoria Capital Trust I and AF Insurance Agency, Inc. ITEM 1. BUSINESS General We are a Delaware corporation organized in 1993 as the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association and its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake Success, New York and our principal business is the operation of our wholly-owned subsidiary, Astoria Federal. In addition to directing, planning and coordinating the business activities of Astoria Federal, we invest primarily in mortgage-backed securities, U.S. Government and federal agency securities and other securities. We have acquired, and may continue to acquire or organize either directly or indirectly through Astoria Federal, other operating subsidiaries and financial institutions. We continue to evaluate merger and acquisition activity as part of our strategic objective for long term growth. Astoria Federal's primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, primarily in one-to-four family mortgage loans, mortgage-backed securities, multi-family mortgage loans and commercial real estate loans. To a smaller degree, we also invest in construction loans and consumer and other loans. In addition, Astoria Federal invests in U.S. Government and federal agency securities and other investments permitted by federal laws and regulations. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and our cost of funds, which consists of the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, non-interest income, general and administrative expense, other non-interest expense and income tax expense. Non-interest income includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits; occupancy, equipment and systems expense; federal deposit insurance premiums; advertising; and other operating expenses. Other non-interest expense consisted of extinguishment of debt in 2002 and, prior to January 1, 2002, amortization of goodwill. 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 wholly-owned subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is a life insurance and property and casualty insurance agency. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. provides insurance products primarily to the customers of Astoria Federal. Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, which are prepayable at our option on or after November 1, 2009. 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, 2003, our loan portfolio totaled $12.69 billion, or 56.5% 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 $7.29 billion, including originations of loans held-for-sale totaling $613.3 million, for the year ended December 31, 2003 and $5.59 billion, including originations of loans held-for-sale totaling $484.3 million, for the year ended December 31, 2002. Our retail loan origination program accounted for $3.14 billion of originations during 2003 and $2.22 billion of originations during 2002. We also have an extensive broker network in nineteen 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 and Missouri. Our broker loan origination program consists of relationships with mortgage brokers and accounted for $2.61 billion of originations during 2003 and $1.84 billion of originations during 2002. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers in forty-four states and accounted for $1.54 billion of originations during 2003 and $1.53 billion of originations during 2002. See the "Loan Portfolio Composition" table on page 7 and the "Loan Maturity, Repricing and Activity" tables on pages 7 and 8. One-to-Four Family Mortgage Lending Our primary lending emphasis is on the origination and purchase of first mortgage loans secured by one-to-four family properties that serve as the primary residence of the owner. To a much lesser degree, we make loans secured by non-owner occupied one-to-four family properties acquired as an investment by the borrower. We also originate a limited number of second mortgage loans which are underwritten according to the same standards as first mortgage loans. At December 31, 2003, $8.97 billion, or 71.1%, of our total loan portfolio consisted of one-to-four family loans, of which $8.14 billion, or 90.7%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists primarily of hybrid ARM loans. We currently offer ARM loans which initially have a fixed rate for one, three, five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. The one, three, five and seven year ARM loans have terms of up to forty years and the ten year ARM loans have terms of up to thirty years. 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. The 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. 3 All ARM loans we offer have annual and lifetime interest rate ceilings and floors. Generally, ARM loans pose credit risks somewhat greater than the risks posed by fixed rate loans primarily because, as interest rates rise, the underlying payments of the borrower rise, increasing the potential for default. ARM loans may carry, for a period of time, an initial interest rate which is less than the fully indexed rate for the loan at the time of origination. We determine the initial discounted rate in accordance with market and competitive factors. However, in the current low interest rate environment, we generally have not been offering our ARM loans at interest rates below the fully indexed rate. 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. Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various governmental agencies or other investors with either servicing retained or released. Generally, the sale of such loans is arranged through a master commitment either on a mandatory delivery or best efforts basis. At December 31, 2003, loans serviced for others totaled $1.90 billion. One-to-four family loan originations and purchases, including originations of loans held-for-sale, increased $1.04 billion to $5.57 billion in 2003, from $4.53 billion in 2002. This increase was primarily the result of the significant increase in mortgage refinance activity due to the continued decline in interest rates in 2002 and the first half of 2003. Multi-Family and Commercial Real Estate Lending While we continue to primarily be a one-to-four family mortgage lender, over the last several years we have increased our emphasis on multi-family and commercial real estate loan originations. As of December 31, 2003, our total loan portfolio contained $2.23 billion, or 17.7%, of multi-family loans and $880.3 million, or 7.0%, of commercial real estate loans. During 2003, we originated $1.65 billion of multi-family, commercial real estate and mixed use loans compared to $1.01 billion in 2002. Mixed use loans are secured by properties which are intended for both residential and business use and are classified as multi-family or commercial real estate based on the greater number of residential versus commercial units. The multi-family and commercial real estate loans in our portfolio consist of both fixed rate and adjustable rate loans which were originated at prevailing market rates. Multi-family and commercial real estate loans generally are provided as five to fifteen year term balloon loans amortized over fifteen to thirty years. Our policy generally has been to originate multi-family and commercial real estate loans in the New York metropolitan area, although, to a much smaller degree, we also originate loans throughout New York state and in New Jersey, Connecticut and Pennsylvania. Additionally, our board of directors has recently authorized us to further expand the areas in which we originate multi-family 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 4 with the borrower. Our current practice is to require a minimum debt service coverage ratio of 1.20 times for multi-family and commercial real estate loans. Additionally, on multi-familyloans, our current practice 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 practice 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 forty-unit apartment buildings and mixed use properties (more residential than business units). As of December 31, 2003, our single largest multi-family loan had an outstanding balance of $10.0 million and was current and secured by a 275-unit apartment complex located in Staten Island, New York. At December 31, 2003, the average balance of loans in our multi-family portfolio was approximately $700,000. 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, 2003, our single largest commercial real estate loan had an outstanding principal balance of $8.3 million and was current and secured by a multi-story office building in Mineola, New York. At December 31, 2003, the average balance of loans in our commercial real estate portfolio was approximately $1.1 million. 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. Construction Loans As of December 31, 2003, $99.0 million, or 0.8%, of our total loan portfolio consisted of construction loans. We offer construction loans for all types of residential properties and certain commercial real estate properties. Generally, construction loan terms run between one and two years and are interest only, adjustable rate loans indexed to the prime rate. Generally, we offer construction loans up to a maximum of $10.0 million. As of December 31, 2003, our average construction loan commitment was approximately $2.7 million and the average balance of loans in our construction loan portfolio was approximately $1.5 million. Construction lending generally involves additional credit risks to the lender as compared with other types of mortgage lending. These credit risks are attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Construction loans are funded monthly, 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, 2003, $430.1 million, or 3.4%, 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 5 determination of the borrower's payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the credit worthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. Our consumer 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 $21.9 million of commercial business loans at December 31, 2003. These loans are underwritten based upon the earnings of the borrower and the value of the collateral securing such loans, if any. Loan Approval Procedures and Authority Except for loans in excess of $15.0 million or when the overall lending relationship exceeds $60.0 million, mortgage loan approval authority has been delegated by the Board of Directors to our underwriters and Loan Committee, which consists of certain members of executive management and other Astoria Federal officers. 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 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. 6 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, --------------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------- Percent Percent Percent of of of (Dollars in Thousands) Amount Total Amount Total Amount Total - --------------------------------------------------------------------------------------------------------- Mortgage loans (gross): One-to-four family $ 8,971,048 71.13% $ 9,209,360 76.86% $10,105,063 83.59% Multi-family 2,230,414 17.69 1,599,985 13.35 1,094,312 9.05 Commercial real estate 880,296 6.98 744,623 6.21 598,334 4.95 Construction 99,046 0.79 56,475 0.47 50,739 0.42 - --------------------------------------------------------------------------------------------------------- Total mortgage loans 12,180,804 96.59 11,610,443 96.89 11,848,448 98.01 - --------------------------------------------------------------------------------------------------------- Consumer and other loans (gross): Home equity 386,846 3.07 323,494 2.70 189,259 1.57 Commercial 21,937 0.17 22,569 0.19 18,124 0.15 Lines of Credit, Overdraft 12,963 0.10 15,475 0.13 18,046 0.15 Passbook 6,995 0.06 7,502 0.06 9,012 0.07 Other 1,405 0.01 3,598 0.03 5,753 0.05 - --------------------------------------------------------------------------------------------------------- Total consumer and other loans 430,146 3.41 372,638 3.11 240,194 1.99 - --------------------------------------------------------------------------------------------------------- Total loans (gross) 12,610,950 100.00% 11,983,081 100.00% 12,088,642 100.00% Net unamortized premiums and deferred loan costs 76,037 76,280 78,619 - --------------------------------------------------------------------------------------------------------- Total loans 12,686,987 12,059,361 12,167,261 Allowance for loan losses (83,121) (83,546) (82,285) - --------------------------------------------------------------------------------------------------------- Total loans, net $12,603,866 $11,975,815 $12,084,976 ========================================================================================================= At December 31, --------------------------------------------- 2000 1999 --------------------------------------------- Percent Percent of of (Dollars in Thousands) Amount Total Amount Total - --------------------------------------------------------------------------------- Mortgage loans (gross): One-to-four family $ 9,850,390 86.79% $ 9,006,894 88.07% Multi-family 801,917 7.07 615,438 6.02 Commercial real estate 480,211 4.23 398,198 3.89 Construction 34,599 0.30 34,837 0.34 - --------------------------------------------------------------------------------- Total mortgage loans 11,167,117 98.39 10,055,367 98.32 - --------------------------------------------------------------------------------- Consumer and other loans (gross): Home equity 133,748 1.18 116,726 1.14 Commercial 8,822 0.08 4,531 0.04 Lines of Credit, Overdraft 20,603 0.18 23,186 0.23 Passbook 8,710 0.08 7,481 0.07 Other 10,673 0.09 20,200 0.20 - --------------------------------------------------------------------------------- Total consumer and other loans 182,556 1.61 172,124 1.68 - --------------------------------------------------------------------------------- Total loans (gross) 11,349,673 100.00% 10,227,491 100.00% Net unamortized premiums and deferred loan costs 72,622 58,803 - --------------------------------------------------------------------------------- Total loans 11,422,295 10,286,294 Allowance for loan losses (79,931) (76,578) - --------------------------------------------------------------------------------- Total loans, net $11,342,364 $10,209,716 =================================================================================
Loan Maturity, Repricing and Activity The following table shows the contractual maturities of our loans receivable at December 31, 2003 and does not reflect the effect of prepayments or scheduled principal amortization.
At December 31, 2003 ----------------------------------------------------------------------------- One-to Consumer -Four Multi- Commercial and Total Loans (In Thousands) Family Family Real Estate Construction Other Receivable - --------------------------------------------------------------------------------------------------------- Amount due: Within one year $ 5,784 $ 1,548 $ 3,978 $61,794 $ 18,072 $ 91,176 After one year: One to three years 11,947 4,364 5,310 32,112 17,587 71,320 Three to five years 43,211 30,643 27,347 -- 9,727 110,928 Five to ten years 458,812 867,403 429,150 5,140 11,969 1,772,474 Ten to twenty years 549,836 1,039,538 399,337 -- 26,469 2,015,180 Over twenty years 7,901,458 286,918 15,174 -- 346,322 8,549,872 - --------------------------------------------------------------------------------------------------------- Total due after one year 8,965,264 2,228,866 876,318 37,252 412,074 12,519,774 - --------------------------------------------------------------------------------------------------------- Total amount due $8,971,048 $2,230,414 $880,296 $99,046 $430,146 12,610,950 Net unamortized premiums and deferred loan costs 76,037 Allowance for loan losses (83,121) - --------------------------------------------------------------------------------------------------------- Loans receivable, net $12,603,866 =========================================================================================================
7 The following table sets forth at December 31, 2003, the dollar amount of our loans receivable contractually maturing after December 31, 2004, and whether such loans have fixed interest rates or adjustable interest rates. Our hybrid ARM loans are classified as adjustable rate loans.
Maturing After December 31, 2004 -------------------------------------- (In Thousands) Fixed Adjustable Total - -------------------------------------------------------------------------------- Mortgage loans: One-to-four family $ 825,292 $ 8,139,972 $ 8,965,264 Multi-family 420,727 1,808,139 2,228,866 Commercial real estate 134,752 741,566 876,318 Construction -- 37,252 37,252 Consumer and other loans 20,470 391,604 412,074 - -------------------------------------------------------------------------------- Total $1,401,241 $11,118,533 $12,519,774 ================================================================================
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) 2003 2002 2001 - -------------------------------------------------------------------------------------- Mortgage loans (gross) (1): At beginning of year $11,671,567 $11,889,940 $11,180,662 Mortgage loans originated: One-to-four family 4,036,573 2,992,746 2,510,227 Multi-family 1,231,944 750,196 413,518 Commercial real estate 418,107 259,986 178,246 Construction 64,300 50,942 29,187 - -------------------------------------------------------------------------------------- Total mortgage loans originated 5,750,924 4,053,870 3,131,178 - -------------------------------------------------------------------------------------- Purchases of mortgage loans (2) 1,536,139 1,534,999 1,427,099 Sales of mortgage loans (645,908) (463,984) (379,929) Transfer of loans to real estate owned (2,028) (1,900) (5,420) Principal repayments (6,108,400) (5,341,016) (3,462,677) Net loans charged off (63) (342) (973) - -------------------------------------------------------------------------------------- At end of year $12,202,231 $11,671,567 $11,889,940 ====================================================================================== Consumer and other loans (gross) (3): At beginning of year $ 374,183 $ 242,092 $ 184,710 Consumer and other loans originated 286,238 279,905 178,682 Sales of consumer and other loans (3,154) (3,518) (4,061) Principal repayments (225,113) (143,592) (115,685) Net loans charged off (362) (704) (1,554) - -------------------------------------------------------------------------------------- At end of year $ 431,792 $ 374,183 $ 242,092 ======================================================================================
(1) Includes loans classified as held-for-sale totaling $21.4 million, $61.2 million and $41.5 million at December 31, 2003, 2002 and 2001, 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 $1.6 million, $1.5 million and $1.9 million at December 31, 2003, 2002 and 2001, respectively. 8 Asset Quality General One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Our concentration on one-to-four family mortgage lending, the maintenance of sound credit standards for new loan originations and a strong real estate market have resulted in our maintaining a very low level of non-performing assets in relation to both the size of our loan portfolio and relative to our peers. 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. Non-performing Assets Non-performing assets include non-accrual loans, loans delinquent 90 days or more and still accruing interest and real estate owned, or REO. Total non-performing assets decreased to $31.3 million at December 31, 2003, from $35.6 million at December 31, 2002. Non-performing loans, the most significant component of non-performing assets, decreased $4.8 million to $29.7 million at December 31, 2003, from $34.5 million at December 31, 2002. The ratio of non-performing loans to total loans decreased to 0.23% at December 31, 2003, from 0.29% at December 31, 2002. Our ratio of non-performing assets to total assets was 0.14% at December 31, 2003, compared to 0.16% at December 31, 2002. The allowance for loan losses as a percentage of total non-performing loans was 280.10% at December 31, 2003, compared to 242.04% at December 31, 2002. For a further discussion of the allowance for loan losses and non-performing assets and loans, see Item 7, "Management's Discussion and Analysis," or "MD&A." We discontinue accruing interest when loans become 90 days delinquent as to their interest due, even though in most instances the borrower has only missed two payments. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we continue to accrue interest on loans delinquent 90 days or more as to their maturity date, but not their interest due. In general, 90 days prior to a loan's maturity, the borrower is reminded of the maturity date. Where the borrower has continued to make monthly payments to us and where we do not have a reason to believe that any loss will be incurred on the loan, we have treated these loans as current and have continued to accrue interest. Such loans consist primarily of one-to-four family mortgage loans and totaled $563,000 at December 31, 2003 and $1.0 million at December 31, 2002. Real Estate Owned The net carrying value of our REO totaled $1.6 million at December 31, 2003 and consisted of one-to-four family properties. The REO balance increased $544,000, from $1.1 million at December 31, 2002. REO is carried net of all allowances for losses at the lower of cost or fair value less estimated selling costs. See the table on page 62 for further detail on our REO. 9 Classified Assets Our Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to our Board of Directors quarterly. Our Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of our classified assets. Federal regulations and our policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as special mention, substandard, doubtful or loss. 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 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 62 for additional information on our classified assets. If a loan is classified, an estimated value of the property securing the loan, if any, is determined through an appraisal, where possible. In instances where we have not taken possession of the property or do not otherwise have access to the premises and, therefore, cannot obtain a complete appraisal, a real estate broker's opinion as to the value of the property is obtained based primarily on a drive-by inspection and a comparison of the property securing the loan with similar properties in the area. In circumstances for which we have determined that repayment of the loan will be based solely on the collateral and the unpaid balance of the loan is greater than the estimated fair value of such collateral, a specific valuation allowance is established for the difference between the carrying value and the estimated fair value. Impaired Loans A loan is normally deemed impaired when it is probable we will be unable to collect both principal and interest due according to the contractual terms of the loan agreement. A valuation allowance is established when the fair value of the property that collateralizes the impaired loan, if any, is less than the recorded investment in the loan. Our impaired loans at December 31, 2003, net of their related allowance for loan losses of $1.4 million, totaled $10.2 million. Interest income recognized on impaired loans amounted to $597,000 for the year ended December 31, 2003. For further detail on our impaired loans, see Note 4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Allowance for Loan Losses For a discussion of our accounting policy related to the allowance for loan losses, see "Critical Accounting Policies" in Item 7, "MD&A." In addition to the requirements of accounting principles generally accepted in the United States of America, or GAAP, related to loss contingencies, a federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking 10 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. 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, 2003, our portfolio of mortgage-backed and other securities totaled $8.45 billion, or 37.6% of total assets. Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs, certain certificates of deposit of insured banks and federally chartered savings associations, certain bankers acceptances and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. See Note 1 and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of such derivative financial instruments. Securities Our securities portfolio is comprised primarily of mortgage-backed securities. At December 31, 2003, our mortgage-backed securities totaled $8.24 billion, or 97.6% of total securities, of which $8.06 billion, or 95.5% of total securities, were REMIC and CMO mortgage-backed securities, substantially all of which had fixed rates. During the year ended December 31, 2003, we purchased $9.30 billion of REMIC and CMO mortgage-backed securities as a result of our redeployment of our cash flows in excess of our mortgage and other loan fundings. 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 mortgage-backed securities portfolio, $7.19 billion, or 89.1%, are insured or guaranteed, either directly or indirectly, by Fannie Mae, or FNMA, the Federal Home Loan Mortgage Corporation, or FHLMC, or the Government National Mortgage Association, or GNMA, as issuer. The balance of this portfolio is comprised of privately issued securities, substantially all of which have a credit rating of AAA. In addition to our REMIC and CMO mortgage-backed securities, at December 31, 2003, we had $181.1 million or 2.1% of total securities, in mortgage-backed pass-through certificates insured or 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 11 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. The other securities portfolio totaled $203.7 million, or 2.4% of total securities, and consisted of FNMA and FHLMC preferred stock, obligations of the U.S. Government and agencies, obligations of states and political subdivisions and corporate debt and other securities. Included in the other securities portfolio are various securities, which, by their terms, may be called by the issuer, typically after the passage of a fixed period of time. As of December 31, 2003, the amortized cost of such callable securities totaled $161.9 million. Securities called during the year ended December 31, 2003 totaled $198.1 million. At December 31, 2003, our securities available-for-sale totaled $2.65 billion and our securities held-to-maturity totaled $5.79 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." 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." Federal Funds Sold and Repurchase Agreements We invest in various money market instruments, including overnight and term federal funds and repurchase agreements (securities purchased under agreements to resell). Money market instruments are used to invest our available funds resulting from cash flow and to help satisfy liquidity needs. For a further discussion of our federal funds sold and repurchase agreements, see Item 7, "MD&A" and Note 1 and Note 2 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." 12 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.
At December 31, --------------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------- Percent Percent Percent (Dollars in Thousands) Amount of Total Amount of Total Amount of Total - ------------------------------------------------------------------------------------------------------------------ Securities available-for-sale: Mortgage-backed securities: Agency pass-through certificates (1) $ 166,724 6.28% $ 249,459 8.93% $ 462,748 13.04% REMICs and CMOs: Agency issuance (1) 2,227,851 83.90 616,552 22.08 1,402,093 39.50 Non-agency issuance 103,740 3.91 1,587,622 56.86 1,150,122 32.41 Obligations of the U.S. Government and agencies 1,767 0.07 133,448 4.78 359,561 10.13 FNMA and FHLMC preferred stock 131,361 4.95 136,682 4.89 111,276 3.14 Corporate debt and other securities 23,549 0.89 68,818 2.46 63,383 1.78 - ------------------------------------------------------------------------------------------------------------------ Total securities available-for-sale $2,654,992 100.00% $2,792,581 100.00% $3,549,183 100.00% ================================================================================================================== Securities held-to-maturity: Mortgage-backed securities: Agency pass-through certificates (1) $ 14,345 0.25% $ 24,534 0.49% $ 36,620 0.82% REMICs and CMOs: Agency issuance (1) 4,958,633 85.60 3,595,244 71.31 2,979,357 66.74 Non-agency issuance 772,728 13.34 1,306,113 25.91 1,043,110 23.37 Obligations of the U.S. Government and agencies -- -- 65,776 1.30 362,034 8.11 Obligations of states and political subdivisions 37,038 0.64 39,611 0.79 42,807 0.96 Corporate debt securities 9,983 0.17 9,979 0.20 -- -- - ------------------------------------------------------------------------------------------------------------------ Total securities held-to-maturity $5,792,727 100.00% $5,041,257 100.00% $4,463,928 100.00% ==================================================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored agencies. During the quarter ended June 30, 2001, we transferred agency REMIC and CMO securities with an amortized cost of $2.90 billion and a fair value of $2.88 billion from available-for-sale to held-to-maturity. The net unrealized loss, which was being amortized over the life of the securities transferred, was $22.6 million at the date of the transfer and was included, net of taxes, in accumulated other comprehensive income. The balance of the net unrealized loss was fully amortized as of December 31, 2003 and totaled $1.3 million at December 31, 2002 and $15.7 million at December 31, 2001. 13 The table below sets forth certain information regarding the amortized costs, estimated fair values, weighted average yields and contractual maturities of our federal funds sold and repurchase agreements, FHLB-NY stock and mortgage-backed and other securities available-for-sale and held-to-maturity portfolios at December 31, 2003.
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 - ------------------------------------------------------------------------------------------------------------ Federal funds sold and repurchase agreements $65,926 0.96% $ -- --% $ -- --% =========================================================================================================== FHLB-NY stock (1)(2) $ -- --% $ -- --% $ -- --% =========================================================================================================== Mortgage-backed and other securities available-for-sale: Agency pass-through certificates (3) $ -- --% $ 1,409 5.87% $4,532 7.73% REMICs and CMOs: Agency issuance (3) -- -- 173 6.55 -- -- Non-agency issuance -- -- 4 8.00 585 6.40 Obligations of the U.S. Government and agencies 500 3.21 738 4.04 500 3.00 FNMA and FHLMC preferred stock (1) -- -- -- -- -- -- Corporate debt and other securities -- -- 1,000 6.80 -- -- - ----------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 500 3.21% $ 3,324 5.78% $5,617 7.17% =========================================================================================================== Mortgage-backed and other securities held-to-maturity: Agency pass-through certificates (3) $ 1 7.76% $ 2,171 7.98% $4,839 7.06% REMICs and CMOs: Agency issuance (3) -- -- -- -- 275 10.07 Non-agency issuance -- -- -- -- -- -- Obligations of states and political subdivisions -- -- -- -- 754 6.50 Corporate debt securities -- -- 9,983 5.80 -- -- - ----------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 1 7.76% $12,154 6.19% $5,868 7.13% =========================================================================================================== Over Ten Years Total Securities --------------------- ---------------------------------- Weighted Estimated Weighted Amortized Average Amortized Fair Average (Dollars in Thousands) Cost Yield Cost Value Yield - ---------------------------------------------------------------------------------------------------- Federal funds sold and repurchase agreements $ -- --% $ 65,926 $ 65,926 0.96% =================================================================================================== FHLB-NY stock (1)(2) $ 213,450 1.45% $ 213,450 $ 213,450 1.45% =================================================================================================== Mortgage-backed and other securities available-for-sale: Agency pass-through certificates (3) $ 155,258 4.49% $ 161,199 $ 166,724 4.59% REMICs and CMOs: Agency issuance (3) 2,297,711 3.92 2,297,884 2,227,851 3.92 Non-agency issuance 109,080 3.40 109,669 103,740 3.42 Obligations of the U.S. Government and agencies -- -- 1,738 1,767 3.50 FNMA and FHLMC preferred stock (1) 140,015 5.03 140,015 131,361 5.03 Corporate debt and other securities 20,991 7.92 21,991 23,549 7.87 - --------------------------------------------------------------------------------------------------- Total securities available-for-sale $2,723,055 4.02% $2,732,496 $2,654,992 4.03% =================================================================================================== Mortgage-backed and other securities held-to-maturity: Agency pass-through certificates (3) $ 7,334 8.20% $ 14,345 $ 15,329 7.78% REMICs and CMOs: Agency issuance (3) 4,958,358 4.36 4,958,633 4,974,316 4.36 Non-agency issuance 772,728 4.29 772,728 772,021 4.29 Obligations of states and political subdivisions 36,284 6.70 37,038 37,038 6.70 Corporate debt securities -- -- 9,983 10,413 5.80 - --------------------------------------------------------------------------------------------------- Total securities held-to-maturity $5,774,704 4.37% $5,792,727 $5,809,117 4.38% ===================================================================================================
(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. (3) Includes FNMA and FHLMC securities which are U.S. Government sponsored agencies. 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 mortgage-backed and other securities. Our other sources of funds are provided by operating activities (primarily net income) and financing activities, including borrowings and deposits. Deposits We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer passbook and statement savings accounts, NOW accounts, money market accounts, demand deposit accounts and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our banking offices. We rely primarily on our sales and marketing efforts, including our PEAK Process, new products, quality service, competitive rates and long-standing customer relationships to attract and retain these deposits. Brokered deposits are used occasionally to supplement retail customer deposits in raising funds for financing and liquidity purposes. At December 31, 2003, our deposits totaled $11.19 billion. Of the total deposit balance, $1.45 billion, or 13.0%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2003. 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. Although we have experienced continued intense competition for deposits, particularly money market and checking accounts, we have not increased the rates we offer on these types of accounts as we do not consider it a cost effective strategy in the current low interest rate environment. Nevertheless, we have maintained a strong level of core deposits, which has contributed to our low cost of funds. Core deposits include savings, money market, NOW and demand deposit accounts, which, in the aggregate, represented 50.8% of total deposits at December 31, 2003 and 53.4% of total deposits at December 31, 2002. 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) 2003 2002 2001 - -------------------------------------------------------------------------------- Opening balance $11,067,196 $10,903,693 $10,071,687 Net (withdrawals) deposits (105,853) (124,497) 432,017 Interest credited 225,251 288,000 399,989 - -------------------------------------------------------------------------------- Ending balance $11,186,594 $11,067,196 $10,903,693 ================================================================================ Net increase $ 119,398 $ 163,503 $ 832,006 ================================================================================ Percentage increase 1.08% 1.50% 8.26% ================================================================================
The following table sets forth the maturity periods of our certificates of deposit in amounts of $100,000 or more at December 31, 2003.
(In Thousands) Amount - ---------------------------------------- Within three months $ 225,230 Three to six months 116,667 Six to twelve months 164,222 Over twelve months 556,160 - ---------------------------------------- Total $1,062,279 ========================================
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, ------------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------------------------------------------------------------------------- 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 $ 2,907,541 25.96% 0.45% $ 2,754,000 24.80% 1.05% $ 2,495,532 23.70% 1.83% Money market 1,403,363 12.53 0.71 1,876,107 16.90 1.72 1,734,232 16.47 3.71 NOW 851,723 7.60 0.18 732,905 6.60 0.43 599,919 5.70 0.85 Non-interest bearing NOW and demand deposit 618,082 5.52 -- 536,961 4.84 -- 475,605 4.52 -- - ------------------------------------------------------------------------------------------------------------------------------- Total 5,780,709 51.61 0.43 5,899,973 53.14 1.09 5,305,288 50.39 2.17 - ------------------------------------------------------------------------------------------------------------------------------- Certificates of deposit (1): Within one year 1,424,825 12.72 1.55 1,493,726 13.45 2.31 1,698,436 16.13 4.23 One to three years 1,688,220 15.07 3.51 1,790,529 16.12 4.48 1,769,563 16.81 5.61 Three to five years 2,071,864 18.51 5.22 1,658,333 14.94 5.67 1,410,231 13.39 6.08 Over five years 86,749 0.77 4.95 79,177 0.71 5.53 94,409 0.90 6.61 Jumbo 148,067 1.32 1.74 181,845 1.64 2.75 250,524 2.38 5.01 - ------------------------------------------------------------------------------------------------------------------------------- Total 5,419,725 48.39 3.62 5,203,610 46.86 4.19 5,223,163 49.61 5.28 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits $11,200,434 100.00% 1.97% $11,103,583 100.00% 2.54% $10,528,451 100.00% 3.71% ===============================================================================================================================
(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 outstanding at December 31, 2003 and the balances of our certificates of deposit outstanding at December 31, 2003, 2002 and 2001.
Period to maturity from December 31, 2003 At December 31, --------------------------------------------------- ------------------------------------ Within One to two Two to three Over three (In Thousands) one year years years years 2003 2002 2001 - ------------------------------------------------------------------------------ ------------------------------------ Certificates of deposit: 1.99% or less $1,300,602 $128,521 $ 17,014 $ -- $1,446,137 $ 919,465 $ 516,841 2.00% to 2.99% 373,621 249,806 161,222 12,857 797,506 1,003,774 329,506 3.00% to 3.99% 490,179 16,135 357,825 403,978 1,268,117 625,858 493,062 4.00% to 4.99% 218,371 86,469 160,363 146,772 611,975 775,861 1,037,154 5.00% to 5.99% 89,624 928 231,500 356,504 678,556 955,627 947,565 6.00% and over 238,039 416,716 44,051 301 699,107 872,453 1,836,170 - --------------------------------------------------------------------------------------------------------------------- Total $2,710,436 $898,575 $971,975 $920,412 $5,501,398 $5,153,038 $5,160,298 =====================================================================================================================
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 the stock of the FHLB-NY. The maximum amount that the FHLB-NY will advance, for purposes other than for meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB-NY. See "Regulation and Supervision - Federal Home Loan Bank System." Occasionally, we will obtain funds through the issuance of unsecured debt obligations. These obligations are classified as other borrowings in our statement of financial condition. At December 31, 2003, borrowings totaled $9.63 billion. 16 In addition, at December 31, 2003, we had available a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $100.0 million. Both lines of credit are generally priced at the federal funds rate plus 10.0 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, 2003, we had $2.59 billion of borrowings which are callable within one year and at various times thereafter and have contractual maturities of up to five years. 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, 2003, 2002 and 2001, see Item 7, "MD&A" and Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Non-interest Revenue We have continued to focus on building sources of non-interest revenue, including expanding our checking account base to generate additional fees and growing our mutual fund, deferred annuities and insurance sales. Our mutual fund, deferred annuities and insurance sales occur 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. Astoria Federal ranked third 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, 2003. Astoria Federal originates mortgage loans through its banking and loan production offices in the New York metropolitan area, through an extensive broker network in nineteen states and through a third party loan origination program in forty-four states. Our broker and third party loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, they provide geographic diversification, reducing our exposure to concentrations of credit risk. At December 31, 2003, $6.49 billion, or 53.3%, of our total mortgage loan portfolio was secured by properties located in 46 states other than New York. Excluding New York, we have a concentration of mortgage lending of greater than 5.0% in four states: Connecticut, which comprises 10.0% of our total mortgage loan portfolio; New Jersey, which comprises 9.9% of our total mortgage loan portfolio; Illinois, which comprises 6.0% of our total mortgage loan portfolio; and Massachusetts, which comprises 5.7% of our total mortgage loan portfolio. The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Additionally over the past 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 17 banks and savings and loan associations. We also have experienced continued intense competition for deposits, particularly money market and checking accounts, from certain local competitors, as well as recent entrants into the local market, who have offered these accounts at well above market rates. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face intense competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. During 2003, the nation continued its recovery from the recession. The national and local real estate markets have remained strong and continue to support new and existing home sales. While the recovering economy and strength of the real estate markets has helped us maintain our strong credit quality and purchase mortgage activity, the continued decline in interest rates during the first half of 2003 resulted in an extraordinary increase in refinance and prepayment activity during most of 2003. As a result, we, along with other mortgage originators and investors, were faced with the increased challenge of redeployment of funds in a lower interest rate environment. The rise in interest rates during the second half of 2003 has resulted in a decrease in refinance activity and cash flows. Interest rates, however, remain at historical lows. To date, other than the additional challenges resulting from the low interest rate environment, our banking and lending operations have not been negatively affected by the national and local economies. However, we cannot guarantee that our operations will not be affected in the future should current economic conditions worsen. Subsidiary Activities We have three direct wholly-owned subsidiaries, Astoria Federal, Astoria Capital Trust I and AF Insurance Agency, Inc., which are reported on a consolidated basis at December 31, 2003. Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million of Capital Securities. Effective January 1, 2004, we adopted revised Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN 46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," which requires us to deconsolidate Astoria Capital Trust I for financial reporting purposes. The impact of this deconsolidation is immaterial to our financial condition and results of operations. See Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of the Capital Securities and the deconsolidation of Astoria Capital Trust I upon adoption of FIN 46(R) effective January 1, 2004. AF Insurance Agency, Inc. is a life insurance and property and casualty insurance agency. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. provides insurance products primarily to the customers of Astoria Federal. At December 31, 2003, the following were wholly-owned subsidiaries of Astoria Federal and are reported on a consolidated basis: AF Agency, Inc. was formed in 1990 to offer tax-deferred annuities and a variety of mutual funds through its licensed agents and stock brokerage services through an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $9.3 million for the year ended December 31, 2003, which represented 7.7% of non-interest income. Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed in November 2000 in connection with the establishment of a BOLI program by Astoria Federal. The initial premium paid was $250.0 million. An additional $100.0 million premium was paid in the first quarter of 2002 to purchase additional BOLI. 18 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 qualifies as a real estate investment trust under the Internal Revenue Code of 1986, as amended. APFC mortgage loans totaled $5.47 billion at December 31, 2003. Suffco Service Corporation serves as document custodian in connection with mortgage loans being serviced for FNMA and certain other investors. Infoserve Corporation provides research information services for Astoria Federal and other financial institutions. The research generally relates to check clearing and processing as well as check and money order issuances. Entrust Holding Corp. is the owner of a fifty percent membership interest in Entrust Title Agency, LLC, which sells title insurance. Astoria Federal has four subsidiaries which may qualify for alternative tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, are retained by Astoria Federal. Astoria Federal has five additional subsidiaries, one of which is a single purpose entity that has an interest in a real estate investment, which is not material to our financial condition; one of which had an interest in a real estate investment which was sold in December 2003; and two of which have no assets or operations but may be used to acquire interests in real estate in the future. The fifth such subsidiary serves as a holding company for one of the other four. Astoria Federal has two additional subsidiaries which are inactive, one of which Astoria Federal intends to dissolve. Personnel As of December 31, 2003, we had 1,824 full-time employees and 294 part-time employees, or 1,971 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 19 OTS that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. This regulation and supervision establish a comprehensive framework to regulate and control the activities in which we can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the OTS, FDIC or Congress, could have a material adverse impact on Astoria Federal and us and our respective operations. The description of statutory provisions and regulations applicable to federally chartered savings associations and their holding companies and of tax matters set forth in this document does not purport to be a complete description of all such statutes and regulations and their effects on Astoria Federal and us. Federally Chartered Savings Association Regulation Business Activities Astoria Federal derives its lending and investment powers from the Home Owners' Loan Act, as amended, or HOLA, and the regulations of the OTS thereunder. Under these laws and regulations, 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, 2003, Astoria Federal exceeded each of its capital requirements with a tangible capital ratio of 7.37%, leverage capital ratio of 7.37% and total risk-based capital ratio of 15.39%. 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- 20 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 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, 2003, Astoria Federal was considered "well capitalized" by the OTS. Insurance of Deposit Accounts Pursuant to FDICIA, the FDIC established a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the risk-based assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of its most recent quarterly financial report filed with the applicable bank regulatory agency prior to the commencement of the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's deposit insurance assessment rate depends on the capital category and supervisory subcategory to which it is assigned. Under the risk-based assessment system, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied, ranging from 0 to 27 basis points. The assessment rates for our BIF-assessable and SAIF-assessable deposits since 1997 were each 0 basis points. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. SAIF-assessable deposits are also subject to assessments for payments on the bonds issued in the late 1980s by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Our total expense in 2003 for the assessment for the FICO payments was $1.9 million. 21 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, 2003, Astoria Federal's largest aggregate amount of loans to one borrower totaled $57.8 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Astoria Federal. Qualified Thrift Lender, or QTL, Test The HOLA requires savings associations to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and 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, 2003, Astoria Federal maintained in excess of 93% 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 ended December 31, 2003. 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). 22 Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. In addition, Astoria Federal may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below the amounts required for the liquidation accounts which were established as a result of Astoria Federal's conversion from mutual to stock form of ownership and the acquisitions of Fidelity New York, FSB, The Greater New York Savings Bank and Long Island Bancorp, Inc. For further discussion on the liquidation accounts, see Note 9 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Liquidity Astoria Federal maintains sufficient liquidity to ensure its safe and sound operation, in accordance with OTS regulations. Assessments The OTS charges assessments to recover the costs of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association's supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which results in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.00 billion in trust assets, serviced for others loans aggregating more than $1.00 billion, or had certain off-balance sheet assets aggregating more than $1.00 billion. For the year ended December 31, 2003, we paid $2.8 million in assessments. Branching The OTS regulations authorize federally chartered savings associations to branch nationwide to the extent allowed by federal statute. This permits federal savings and loan associations with interstate networks to more easily diversify their loan portfolios and lines of business geographically. OTS authority preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment Under the Community Reinvestment Act, or CRA, as implemented by the OTS regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution's record of making loans in its 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 businesses; and (3) a service test, to evaluate the institution's delivery of banking services throughout its CRA assessment area. The CRA also requires all institutions to make public disclosure of their CRA ratings. Astoria Federal has been rated as "outstanding" over its last four CRA examinations. Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreements in place at this time. 23 Transactions with Related Parties Astoria Federal is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA, as well as additional limitations as may be adopted by the Director of the OTS. These provisions, among other things, prohibit, limit or place restrictions upon a savings institution extending credit to, or entering into certain transactions with, its affiliates (which for Astoria Federal would include us and our non-federally chartered savings association subsidiaries, if any), principal stockholders, directors and executive officers. Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A and 23B of the FRA and replaced these interpretations with Regulation W. Regulation W made various changes to certain interpretations regarding Sections 23A and 23B, including expanding the definition of what constitutes an affiliate subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B. The OTS issued a final rule, effective as of October 6, 2003, which conforms the OTS's regulations on transactions with affiliates to Regulation W. In addition, the rule implements additional restrictions imposed 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 final rule also includes certain specific exemptions from these prohibitions. The FRB and the OTS expect each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the final OTS rule. We do not expect that the changes made by Regulation W and the final OTS rule will have a material adverse effect on our business. Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as Astoria Federal, that is subject to the insider lending restrictions of Section 22(h) of the FRA. Standards for Safety and Soundness Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, or Community Development Act, the OTS, together with the other federal bank regulatory agencies, adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant to FDICIA to require a savings association that is given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OTS. If, after being so notified, a savings association fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a savings association fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. For further discussion, see "Regulation and Supervision - Federally Chartered Savings Association Regulation - Prompt Corrective Regulatory Action." 24 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 insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. 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. 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. 25 The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and adopted final rules implementing the customer identification requirements on May 9, 2003. The final rule became effective June 9, 2003, however, financial institutions had until October 1, 2003 to come into compliance with such final rule. Compliance with the regulations adopted under the USA PATRIOT Act did not have a material adverse impact on our financial condition or results of operations. Federal Home Loan Bank System Astoria Federal is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Astoria Federal, as a member of the FHLB-NY, is currently required to acquire and hold shares of capital stock in the FHLB-NY in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 5% of its outstanding borrowings from the FHLB-NY, whichever is greater. Astoria Federal was in compliance with this requirement with an investment in FHLB-NY stock at December 31, 2003, of $213.5 million. Dividends from the FHLB-NY to Astoria Federal amounted to $10.6 million for the year ended December 31, 2003, $10.7 million for the year ended December 31, 2002 and $17.5 million for the year ended December 31, 2001. The FHLB-NY did not pay a quarterly dividend to stockholders in October 2003, but did pay a quarterly dividend to stockholders in January 2004. Pursuant to regulations promulgated by the Federal Housing Finance Board, as required by Gramm-Leach, the FHLB-NY has adopted a capital plan that will change the foregoing minimum stock ownership requirements for FHLB-NY stock. Under the new capital plan, each member of the FHLB-NY will have to maintain a minimum investment in FHLB-NY capital stock in an amount equal to the sum of (1) the greater of $1,000 or 0.20% of the member's mortgage-related assets and (2) 4.50% of the dollar amount of any outstanding advances under such member's Advances, Collateral Pledge and Security Agreement with the FHLB-NY. The FHLB-NY, however, has postponed the implementation of the new capital plan, and the new implementation date has not yet been determined. Federal Reserve System FRB regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $6.6 million and $45.4 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 $45.4 million. The first $6.6 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Astoria Federal is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce Astoria Federal's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. 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 26 and loan association holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as us, retain their authority under the prior law. All other unitary savings and loan association holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan association holding companies. The HOLA prohibits a savings and loan association holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Federal Securities Laws We are subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Exchange Act. Delaware Corporation Law We are incorporated under the laws of the State of Delaware. Thus, we are subject to regulation by the State of Delaware and the rights of our shareholders are governed by the Delaware General Corporation Law. Federal Taxation General We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations. Corporate Alternative Minimum Tax In addition to the regular income tax, corporations (including savings and loan associations) generally are subject to an alternative minimum tax, or AMT, in an amount equal to 20% of alternative minimum taxable income to the extent the AMT exceeds the corporation's regular tax. The AMT is available as a credit against future regular income tax. We do not expect to be subject to the AMT. Tax Bad Debt Reserves Effective 1996, federal tax legislation modified the methods by which a thrift computes its bad debt deduction. As a result, Astoria Federal is required to claim a deduction equal to its actual loss 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." 27 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) results in a greater tax, an alternative minimum tax will be imposed. In addition, New York State imposes a tax surcharge of 17.0% of the New York State franchise tax, calculated using an annual franchise tax rate of 9.0% (which represents the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to us, Astoria Federal and certain of Astoria Federal's subsidiaries. Certain subsidiaries of a banking corporation may be subject to a general business corporation tax in lieu of the tax on banking corporations. The rules regarding the determination of income allocated to New York and alternative minimum taxes differ for these subsidiaries. Bad Debt Deduction New York State passed legislation that incorporated the former provisions of Internal Revenue Code, or IRC, Section 593 into New York State tax law. The impact of this legislation enabled Astoria Federal to defer the recapture of the New York State tax bad debt reserves that would have otherwise occurred as a result of the federal amendment to IRC 593. The legislation also enabled Astoria Federal to continue to utilize the reserve method for computing its bad debt deduction. Astoria Federal must meet 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. 28 Astoria Federal presently satisfies the 60% Test. Although there can be no assurance that Astoria Federal will satisfy the 60% Test in the future, we believe that this level of qualifying assets can be maintained by Astoria Federal. Astoria Federal's deduction for additions to its bad debt reserve with respect to qualifying loans may be computed using the experience method or a percentage equal to 32% of Astoria Federal's taxable income, computed with certain modifications, without regard to Astoria Federal's actual loss experience, and reduced by the amount of any addition permitted to the reserve for non-qualifying loans, or NYS Percentage of Taxable Income Method. Astoria Federal's deduction with respect to non-qualifying loans must be computed under the experience method which is based on its actual loss experience. Under the experience method, the amount of a reasonable addition, in general, equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (2) the balance of the bad debt reserve at the close of the base year (assuming that the loans outstanding have not declined since then). The "base year" for these purposes is the last taxable year beginning before the NYS Percentage of Taxable Income Method bad debt deduction was taken. Any deduction for the addition to the reserve for non-qualifying loans reduces the addition to the reserve for qualifying real property loans calculated under the NYS Percentage of Taxable Income Method. Each year Astoria Federal reviews the most favorable way to calculate the deduction attributable to an addition to the bad debt reserve. The amount of the addition to the reserve for losses on qualifying real property loans under the NYS Percentage of Taxable Income Method cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Also, if the qualifying thrift uses the NYS Percentage of Taxable Income Method, then the qualifying thrift's aggregate addition to its reserve for losses on qualifying real property loans cannot, when added to the addition to the reserve for losses on non-qualifying loans, exceed the amount by which 12% of the amount that the total deposits or withdrawable accounts of depositors of the qualifying thrift at the close of the taxable year exceeded the sum of the qualifying thrift's surplus, undivided profits and reserves at the beginning of such year. New York City Taxation Astoria Federal is also subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Franchise Tax. New York City has enacted legislation regarding the use and treatment of tax bad debt reserves that is substantially similar to the New York State legislation described above. A significant portion of Astoria Federal's entire net income for New York City purposes is allocated outside the jurisdiction which has the effect of significantly reducing the New York City taxable income of Astoria Federal. Delaware Taxation As a Delaware holding company not earning income in Delaware, we are exempt from Delaware corporate income tax but are required to file an annual report with and pay an annual franchise tax to the State of Delaware. ITEM 2. PROPERTIES At December 31, 2003 we operated 86 full-service banking offices, of which 50 were owned and 36 were leased. At December 31, 2003, we owned our principal executive office and the office for our mortgage operations, both located in Lake Success, New York. We believe such facilities are suitable and adequate for our operational needs. 29 For further information regarding our lease obligations, see Item 7, "MD&A" and Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." At December 31, 2003, we leased our previous mortgage operating facility in Mineola, New York which we no longer occupy. At December 31, 2003 this facility was fully sublet. 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 affect on our financial condition, results of operations or liquidity. We are a party to two actions pending against the United States, involving assisted acquisitions made in the early 1980's and supervisory goodwill accounting utilized in connection therewith, which could result in a gain. The ultimate outcomes of such actions are uncertain and there can be no assurance that we will benefit financially from such litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the quarter ended December 31, 2003 to a vote of our security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR ASTORIA FINANCIAL CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On May 17, 2002, our common stock began trading on the New York Stock Exchange, or NYSE, under the symbol "AF." Previously, our common stock traded on The Nasdaq Stock Market, or Nasdaq, under the symbol "ASFC." The table below shows the reported high and low sale prices reported on the NYSE for our common stock during the periods indicated in 2003 and the high and low sale prices reported on the NYSE or the high and low closing prices reported on Nasdaq, as applicable, for our common stock during the periods indicated in 2002.
2003 2002 -------------------------------------- High Low High Low - ------------------------------------------------------------- First Quarter $28.30 $23.23 $31.02(1) $26.34(1) Second Quarter 29.18 23.27 35.17(2) 28.85(1) Third Quarter 34.16 27.00 34.45(2) 23.66(2) Fourth Quarter 38.53 30.88 27.75(2) 21.60(2)
(1) Closing price as reported on Nasdaq (2) Sale price as reported on the NYSE As of March 1, 2004, we had approximately 3,830 shareholders of record. As of December 31, 2003, there were 78,670,254 shares of common stock outstanding. 30 The following schedule summarizes the cash dividends paid per common share for 2003 and 2002.
2003 2002 - ---------------------------------------- First Quarter $0.20 $0.17 Second Quarter 0.22 0.20 Third Quarter 0.22 0.20 Fourth Quarter 0.22 0.20
On January 21, 2004, our Board of Directors declared a quarterly cash dividend of $0.25 per common share, payable on March 1, 2004, to common stockholders of record as of the close of business on February 17, 2004. 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. 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 the liquidation accounts and regulatory capital requirements on Astoria Federal's ability to pay dividends. See Item 1, "Business - Federal Taxation" and Note 13 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. 31 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) 2003 2002 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $22,457,665 $21,697,829 $22,667,706 $22,336,802 $22,696,536 Federal funds sold and repurchase agreements 65,926 510,252 1,309,164 171,525 335,653 Mortgage-backed and other securities available-for-sale 2,654,992 2,792,581 3,549,183 7,703,222 8,862,749 Mortgage-backed and other securities held-to-maturity 5,792,727 5,041,257 4,463,928 1,712,191 1,899,957 Loans held-for-sale, net 23,023 62,669 43,390 15,699 14,156 Loans receivable, net 12,603,866 11,975,815 12,084,976 11,342,364 10,209,716 Mortgage servicing rights, net 17,952 20,411 35,295 40,962 48,369 Deposits 11,186,594 11,067,196 10,903,693 10,071,687 9,554,534 Borrowed funds, net 9,628,171 8,821,180 9,821,795 10,320,350 11,524,349 Stockholders' equity 1,396,531 1,553,998 1,542,586 1,513,163 1,196,912
For the Year Ended December 31, -------------------------------------------------------------- (In Thousands, Except Per Share Data) 2003 2002 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $1,057,291 $1,266,262 $1,438,563 $1,517,934 $1,495,279 Interest expense 677,753 801,838 981,605 1,023,353 957,500 - -------------------------------------------------------------------------------------------------------------------- Net interest income 379,538 464,424 456,958 494,581 537,779 Provision for loan losses -- 2,307 4,028 4,014 4,119 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 379,538 462,117 452,930 490,567 533,660 Non-interest income 119,561 107,407 90,105 69,246 86,696 Non-interest expense: General and administrative 205,877 195,827 178,767 190,040 201,786 Extinguishment of debt -- 2,202 -- -- -- Amortization of goodwill -- -- 19,078 19,078 19,136 - -------------------------------------------------------------------------------------------------------------------- Total non-interest expense 205,877 198,029 197,845 209,118 220,922 - -------------------------------------------------------------------------------------------------------------------- Income before income tax expense and cumulative effect of accounting change 293,222 371,495 345,190 350,695 399,434 Income tax expense 96,376 123,066 120,036 134,146 163,764 - -------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 196,846 248,429 225,154 216,549 235,670 Cumulative effect of accounting change, net of tax -- -- (2,294) -- -- - -------------------------------------------------------------------------------------------------------------------- Net income 196,846 248,429 222,860 216,549 235,670 Preferred dividends declared 4,500 6,000 6,000 6,000 6,000 - -------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 192,346 $ 242,429 $ 216,860 $ 210,549 $ 229,670 ==================================================================================================================== Basic earnings per common share $ 2.52 $ 2.90 $ 2.40 $ 2.20 $ 2.24 Diluted earnings per common share $ 2.49 $ 2.85 $ 2.35 $ 2.16 $ 2.19
32
At or For the Year Ended December 31, -------------------------------------------------------------- 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios and Other Data: Return on average assets 0.87% 1.12% 0.99% 0.97% 1.04% Return on average stockholders' equity 13.26 15.87 14.13 16.70 17.31 Return on average tangible stockholders' equity (1) 15.15 18.00 16.12 20.01 20.90 Average stockholders' equity to average assets 6.55 7.07 7.01 5.81 5.99 Average tangible stockholders' equity to average tangible assets (1)(2) 5.78 6.29 6.19 4.90 5.01 Stockholders' equity to total assets 6.22 7.16 6.81 6.77 5.27 Core deposits to total deposits (3) 50.82 53.44 52.67 48.87 48.41 Net interest rate spread 1.72 2.11 1.91 1.98 2.22 Net interest margin 1.78 2.23 2.12 2.27 2.45 Average interest-earning assets to average interest-bearing liabilities 1.02x 1.03x 1.05x 1.06x 1.05x General and administrative expense to average assets 0.91% 0.88% 0.79% 0.85% 0.89% Efficiency ratio (4) 41.25 34.25 32.68 33.71 32.31 Cash dividends paid per common share $ 0.86 $ 0.77 $ 0.61 $ 0.51 $ 0.48 Dividend payout ratio 34.54% 27.02% 25.96% 23.61% 21.92% Asset Quality Ratios: Non-performing loans to total loans (5) 0.23 0.29 0.31 0.32 0.52 Non-performing loans to total assets (5) 0.13 0.16 0.16 0.16 0.24 Non-performing assets to total assets (5)(6) 0.14 0.16 0.18 0.18 0.26 Allowance for loan losses to non-performing loans 280.10 242.04 221.70 220.88 143.49 Allowance for loan losses to non-accrual loans 285.51 249.53 229.60 226.85 151.77 Allowance for loan losses to total loans 0.66 0.69 0.68 0.70 0.74 Other Data: Number of deposit accounts 963,120 990,873 985,473 972,777 952,514 Mortgage loans serviced for others (in thousands) $1,895,102 $2,671,085 $3,322,087 $3,929,483 $4,414,684 Number of full service banking offices 86 86 86 86 87 Regional lending offices 3 1 1 1 1 Full time equivalent employees 1,971 1,956 1,885 1,862 1,914
(1) Average tangible stockholders' equity represents average stockholders' equity less average goodwill. (2) Average tangible assets represents average assets less average goodwill. (3) Core deposits are comprised of savings, money market, NOW and demand deposit accounts. (4) Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus non-interest income. (5) 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 $3.9 million, $5.0 million, $5.4 million, $5.2 million and $6.7 million at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. (6) Non-performing assets consist of all non-performing loans and real estate owned. 33 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. We are a Delaware corporation organized as the unitary savings and loan association holding company of Astoria Federal and our principal business is the operation of 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 borrowed funds, primarily in one-to-four family mortgage loans, mortgage-backed securities, multi-family mortgage loans and commercial real estate loans. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. Our earnings are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities. During 2003, as the nation continued its recovery from the recession, the national and local real estate markets remained strong and continued to support new and existing home sales. While this has helped us maintain our strong credit quality and purchase mortgage activity, the continued decline in interest rates during the first half of 2003 resulted in an extraordinary increase in refinance and prepayment activity during most of 2003. As a result, we, along with other mortgage originators and investors, were faced with the increased challenge of redeployment of funds in a lower interest rate environment. The rise in interest rates during the second half of 2003 has resulted in a decrease in refinance activity and cash flows. Interest rates, however, remain at historical lows. Additionally, we have experienced continued intense local competition for deposits, particularly money market and checking accounts, from certain local competitors and new market entrants who have offered these accounts at well above market rates. We have not increased the rates we offer on these types of accounts as we do not consider it a cost effective strategy in the current low interest rate environment. As a premier 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. We have been successful in achieving these goals over the past several years and that trend has continued during 2003. The refinance activity we experienced resulted in record loan originations during 2003 which outpaced repayment activity, resulting in growth in our total loan portfolio. This growth was in our multi-family and commercial real estate loan portfolio, which is attributable to our increased emphasis on the origination of these loans over the past several years, partially offset by a decrease in our one-to-four family mortgage loan portfolio, where repayments outpaced originations. Even with the growth in the loan portfolio, our total non-performing assets declined from the prior year. Total deposits also increased, despite the continued competition for deposits we experienced. This increase was attributable to increases in savings accounts, NOW and demand deposit accounts and certificates of deposit, partially offset by a decrease in money market accounts. Additionally, we continued to provide returns to shareholders through increased dividends and our stock repurchases. We had implemented a strategy over the past several years to reposition our balance sheet through decreases in our securities portfolio and our borrowings. While we have been successful with our repositioning strategy over the past several years, the interest rate environment we experienced in 2003 presented us with significant challenges in our ability to continue our repositioning. We significantly 34 increased our purchases of mortgage-backed securities during 2003 in order to effectively redeploy our securities cash flows and excess mortgage cash flows, which resulted in an increase in our securities portfolio. Additionally, we utilized borrowings to fund asset growth during 2003 since, in this low interest rate environment, borrowings offer a low cost alternative to deposit generation as a funding source. As a result, our borrowings also increased. Net income decreased from the prior year. This decrease was primarily attributable to a decrease in interest income resulting from the increase in net premium amortization on our mortgage loan and mortgage-backed securities portfolios as a result of the extraordinarily high levels of repayments we experienced in those portfolios during 2003, and the reinvestment of the cash flows we received in lower yielding assets due to the low interest rate environment. Partially offsetting the decrease in interest income were decreases in interest expense on both deposits and borrowings. The decrease in interest expense on deposits relates primarily to the reduction in rates offered on our deposit products as a result of the low interest rate environment. The decrease in interest expense on borrowings relates to the refinancing of higher cost borrowings which matured throughout 2003 at substantially lower rates. The rise in interest rates during the latter half of 2003 resulted in a reduction in refinance activity and cash flows during the fourth quarter of 2003. With the reduced refinance activity and a projected continuation of a relatively steep U.S. Treasury yield curve, we expect to continue growth in our mortgage loan portfolio in 2004. With mortgage refinance activity significantly reduced, premium amortization should return to more normalized levels. Additionally, we have a sizable amount of high rate borrowings maturing in the first half of 2004, a portion of which have already been refinanced at substantially lower rates and the remainder of which are expected to be repaid or repriced at substantially lower rates. This combination of events is expected to result in robust earnings growth in 2004. 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. Certain assets are carried in our consolidated statements of financial condition at fair value or at the lower of cost or fair value. Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of mortgage servicing rights, or 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 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 35 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. 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. We segment our loan portfolio into like categories by composition and size and perform analyses against each category. The determination of the adequacy of the valuation allowance takes into consideration a variety of factors. These include historical loss experience and delinquency levels and trends. We also consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures. In addition, we evaluate and consider the impact that existing and projected economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. We also evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data; however, our focus is primarily on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. Our allowance coverage percentages are used to estimate the amount of probable losses inherent in our loan portfolio in determining our general valuation allowances. Our evaluations of general valuation allowances are inherently subjective because, even though they are based on objective data, it is management's interpretation of that data that determines the amount of the appropriate allowance. Therefore, we periodically review the actual performance and charge-off history of our portfolio and compare that to our previously determined allowance coverage percentages. In doing so, we evaluate the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to our assumptions and analyses. During 2002 we performed an analysis of the actual charge-off history of our loan portfolio compared to our previously determined allowance coverage percentages. Our analysis indicated that our estimate of losses inherent in our portfolio exceeded our actual charge-off history. In response to the results of that analysis, we adjusted our allowance coverage percentages for our portfolio segments accordingly. Our loss experience in 2003 was consistent with 2002 and, as a result, our 2003 analysis did not indicate that changes in our allowance coverage percentages were required. Our allowance for loan losses to non-performing loans was 280.10% at December 31, 2003, compared to 242.04% at December 31, 2002. Our allowance for loan losses to total loans was 0.66% at December 31, 2003, compared to 0.69% at December 31, 2002. We believe our current allowance coverage percentages are adequate to reflect the risks inherent in our loan portfolio. As indicated above, actual results could differ from our estimate as a result of changes in economic or market conditions. Changes in estimates could result in a material change in the allowance for loan losses. While we believe that the allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, future adjustments may be necessary if economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations. For additional information regarding our allowance for loan losses, see "Provision for Loan Losses" and "Asset Quality." 36 Valuation of MSR MSR are carried at cost and amortized over the estimated remaining lives of the loans serviced. Impairment, if any, is recognized through a valuation allowance. 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 estimated fair value of MSR is based upon quoted market prices of similar loans which we sell servicing released. Purchased MSR are recorded at cost, although we generally do not purchase MSR. 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 based upon an analysis of future cash flows, incorporating numerous assumptions including servicing income, servicing costs, market discount rates, prepayment speeds, 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, 2003, our MSR, net, had an estimated fair value of $18.0 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.34%, a weighted average constant prepayment rate on mortgages of 15.82% and a weighted average life of 4.5 years. At December 31, 2002, our MSR, net, had an estimated fair value of $20.4 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.62%, a weighted average constant prepayment rate on mortgages of 23.11% and a weighted average life of 3.5 years. The decrease in the weighted average constant prepayment rate from 2002 to 2003 reflects the increase in interest rates from December 31, 2002 to December 31, 2003 and the projected decline in future prepayments as of December 31, 2003. 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. 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. As of December 31, 2003, the carrying value of our goodwill totaled $185.2 million. When performing the impairment test, if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. According to SFAS No. 142, "Goodwill and Other Intangible Assets," quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for the measurement, when available. Other acceptable valuation methods include present value measurement or measurements based on multiples of earnings or revenue or similar performance measures. For purposes of our goodwill impairment testing, we identified a single reporting unit. On September 30, 2003 we performed our annual goodwill impairment test. We determined the fair value of our one reporting unit to be in excess of its carrying value by $986.0 million, using the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. Goodwill would be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Differences in the identification of reporting units and the use of valuation techniques could result in materially different evaluations of impairment. 37 Securities Impairment Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive loss/income in stockholders' equity. 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, 2003, 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 carrying value is other than temporary. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other than temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings. At December 31, 2003, we had 120 securities with an estimated fair value totaling $4.26 billion which had an unrealized loss totaling $106.0 million. Of the securities in an unrealized loss position at December 31, 2003, $3.5 million, with an unrealized loss of $48,000, have been in a continuous unrealized loss position for more than one year. We determined the cause of all unrealized losses at December 31, 2003 to be interest rate related, and, as such, have deemed the unrealized losses as temporary. There were no securities write downs during the year ended December 31, 2003. Liquidity and Capital Resources Our primary source of funds is cash provided by principal and interest payments on loans and mortgage-backed and other securities. Principal payments on loans and mortgage-backed securities and proceeds from calls and maturities of other securities totaled $13.42 billion for the year ended December 31, 2003 and $12.15 billion for the year ended December 31, 2002. Management considers both the 2003 and 2002 cash flows to be extraordinarily high. The increase in loan and security repayments was primarily the result of the continued high level of mortgage loan refinance activity, primarily in the first nine months of 2003, caused by the continued low interest rate environment. While medium- and long-term U.S. Treasury rates (maturities of two to ten years) have increased on average 38 basis points from December 31, 2002 to December 31, 2003, average interest rates were lower in 2003 than 2002 and rates were extremely volatile during the second and third quarters of 2003. During the second quarter of 2003 medium- and long-term rates dropped an average of 26 basis points. This created a surge of refinance activity which was greater than that which we had previously experienced. As a result, third quarter cash flows were at record highs. During the third quarter of 2003, medium- and long-term interest rates rose on average 32 basis points resulting in a reduction in cash flows during the fourth quarter of 2003. Even with the rise in interest rates over the prior year, interest rates remain at historical lows. 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 $358.2 million during the year ended December 31, 2003 and $157.4 million during the year ended December 31, 2002. During the year ended December 31, 2003, net borrowings increased $807.0 million and net deposits increased $119.4 million. During the year ended December 31, 2003, we extended $1.70 billion of borrowings with a weighted average rate of 2.55% and a weighted average original term of 3.0 years to help protect against the impact on interest expense of future interest rate increases. All other borrowings that matured in 2003 were rolled over into short-term borrowings. During the year ended December 31, 2002, net borrowings decreased $1.00 billion, while net deposits increased $163.5 million. The decrease in net borrowings was consistent with our strategy of repositioning the balance sheet through, in part, a shift in our liability mix toward deposits, particularly lower costing and less interest rate sensitive core deposits, consisting of savings, money market, NOW and demand deposits. The net increases in deposits for the years ended December 31, 2003 and 2002 reflect our continued emphasis on attracting customer deposits 38 through competitive rates, extensive product offerings and quality service. Despite continued intense local competition for checking accounts, we have been successful in growing our NOW and demand deposit account balances, including our business checking deposits, due in large part to our concerted sales and marketing efforts, including our PEAK Process. See page 50 for further detail regarding deposit activity. Typically, our primary use of funds is for the origination and purchase of mortgage loans. However, during the years ended December 31, 2003 and 2002, despite strong loan originations, our purchases of mortgage-backed securities exceeded our originations and purchases of mortgage loans. During the year ended December 31, 2003, our gross originations and purchases of mortgage loans totaled $7.29 billion, including originations of loans held-for-sale totaling $613.3 million, compared to $5.59 billion, including originations of loans held-for-sale totaling $484.3 million, during the year ended December 31, 2002. The strong levels of loan originations and purchases for the years ended December 31, 2003 and 2002 are attributable to the continued low interest rate environment which has resulted in continued high levels of mortgage refinance activity, particularly in the second half of 2002 and the first nine months of 2003. Purchases of mortgage-backed securities totaled $9.30 billion during the year ended December 31, 2003 and $6.84 billion during the year ended December 31, 2002. The increase in mortgage-backed securities purchases reflects the continued utilization of cash flows in excess of mortgage and other loan fundings arising from the significant refinance activity we have experienced. We maintain liquidity levels to meet our operational needs in the normal course of our business. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks and federal funds sold and repurchase agreements, our most liquid assets, totaled $239.8 million at December 31, 2003, compared to $677.9 million at December 31, 2002. This decrease reflects the net effect of our operating, investing and financing activities, in particular, our use of funds for the purchase of mortgage-backed securities. Borrowings maturing over the next year total $4.75 billion with a weighted average rate of 4.03%. During the 2003 fourth quarter, we entered into forward borrowing commitments totaling $500.0 million, with a weighted average rate of 3.05% and a weighted average term of 3.3 years, and in January 2004 we entered into an additional $700.0 million of forward borrowing commitments, with a weighted average rate of 3.01% and a weighted average term of 3.7 years. The effect of these commitments will be to extend a portion of the $2.81 billion in borrowings, with a weighted average rate of 4.97%, scheduled to mature in the first quarter of 2004. We have the flexibility to either repay or rollover the remaining borrowings as they mature. Refinanced borrowings during the next year are expected to carry lower weighted average rates than those they replace, assuming that interest rates remain at or near their current levels. In addition, we have $2.71 billion in certificates of deposit with a weighted average rate of 2.70% maturing over the next year. 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 and certificate of deposit maturities over the next year and their weighted average rates:
Borrowings Certificates of Deposit ----------------- ----------------------- Weighted Weighted Average Average (Dollars in Millions) Amount Rate Amount Rate - ------------------------------------------------------------------------------ Contractual Maturity: First quarter 2004 (1) $1,310 1.11% $ -- --% First quarter 2004 2,810 4.97 1,065 2.26 Second quarter 2004 500 5.80 751 2.28 Third quarter 2004 20 7.67 371 2.69 Fourth quarter 2004 105 5.98 523 4.19 ------ ------ Total $4,745 4.03 $2,710 2.70 ====== ======
(1) Overnight and other short-term borrowings. 39 The most significant liquidity challenge we face is the variability in cash flows as a result of mortgage refinance activity. As mortgage interest rates decline, customers' refinance activities tend to accelerate causing the cash flow from both our mortgage loan portfolio and our mortgage-backed securities portfolio to accelerate. When mortgage rates increase the opposite tends to occur. In addition, as mortgage interest rates decrease, some customers tend to prefer fixed rate mortgage loan products over variable rate products. Since we generally sell our fifteen year and thirty year fixed rate loan production into the secondary mortgage market, the origination of such products for sale does not significantly reduce our liquidity. 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 (Capital Securities) and senior debt. Holding company debt obligations, which are included in other borrowings, are further described below. Our Capital Securities total $125.0 million, are due 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 Capital Securities are prepayable at par value. The terms of the Capital Securities 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 Capital Securities. Such limitations do not apply, however, to dividends payable in our common stock, or our dividend reinvestment plan, our stock option plans or our shareholders rights plan. We have $100.0 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 per year beginning in 2004. The terms of our $100.0 million 7.67% senior unsecured notes do not preclude our merger or sale of all or substantially all of our assets. 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 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. As of December 31, 2003, 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, separate from a sale or transfer involving Astoria Financial Corporation, 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. Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market demand, interest rates, our capital levels, our ability to pay dividends from Astoria Federal to Astoria Financial Corporation, our credit profile and our business model. 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 2003, Astoria Federal paid dividends to Astoria Financial Corporation totaling $120.0 million, amounting to 55.9% of Astoria Federal's net income for 2003. 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. Additionally, in 2003, we redeemed our 12% Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred 40 Stock. Astoria Financial Corporation paid interest on the Capital Securities and senior unsecured notes totaling $28.9 million in 2003. Our payment of dividends, repurchases of our common stock and the redemption of the Series B Preferred Stock, which are further discussed below, totaled $322.1 million in 2003. 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 must be submitted to the OTS for review. Stockholders' equity decreased to $1.40 billion at December 31, 2003, from $1.55 billion at December 31, 2002. The decrease in stockholders' equity was the result of common stock repurchased of $195.5 million, dividends declared of $70.1 million, a decrease in accumulated other comprehensive income, net of tax, of $56.3 million, which was primarily due to the decrease in the fair value of our mortgage-backed securities available-for-sale, and the redemption of our Series B Preferred Stock totaling $54.5 million. These decreases were partially offset by net income of $196.8 million, the effect of stock options exercised and related tax benefit of $14.9 million and the amortization of the allocated portion of shares held by the Employee Stock Ownership Plan, or ESOP, of $7.2 million. We declared cash dividends on our common stock totaling $65.6 million during the year ended December 31, 2003 and $64.2 million during the year ended December 31, 2002. On January 21, 2004, we declared a quarterly cash dividend of $0.25 per share on shares of our common stock payable on March 1, 2004 to stockholders of record as of the close of business on February 17, 2004. We declared cash dividends on our Series B Preferred Stock totaling $4.5 million during the year ended December 31, 2003 and $6.0 million during the year ended December 31, 2002. On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of our Series B Preferred Stock at a redemption price of $27.25 per share, plus $1.00 per share in accrued and unpaid dividends, for an aggregate redemption price of $28.25 per share. Accrued and unpaid dividends covered the period from June 1, 2003 through September 30, 2003. On October 16, 2002, our Board of Directors approved our ninth stock repurchase plan authorizing the purchase, at management's discretion, of 10,000,000 shares, or approximately 11% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. During the year ended December 31, 2003, we repurchased 7,073,800 shares of our common stock at an aggregate cost of $195.5 million. In total, as of December 31, 2003, we repurchased 7,391,800 shares of our common stock, at an aggregate cost of $203.9 million, under the ninth stock repurchase plan. At December 31, 2003, Astoria Federal's capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 7.37%, leverage capital ratio of 7.37% and total risk-based capital ratio of 15.39%. 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 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. Our off-balance sheet arrangements, which primarily include lending commitments and derivative instruments, are 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 41 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 the purchases of securities, operating lease commitments and forward borrowing commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. Forward borrowing commitments totaled $500.0 million at December 31, 2003 and represent commitments to enter into borrowings at predetermined amounts, interest rates and maturity and settlement dates. We enter into forward borrowing commitments to help protect against the impact of future interest rate increases. Derivative instruments 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 through 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 had commitments to fund loans held-for-sale and commitments to sell loans at December 31, 2003 which are considered derivative instruments. Commitments to sell loans totaled $48.6 million at December 31, 2003 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 a hedge against our pipeline of fixed rate loans which we originate primarily for sale into the secondary market. The following table details our contractual obligations as of December 31, 2003.
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 $8,324,000 $3,435,000 $1,794,000 $2,720,000 $375,000 Minimum rental payments due under non-cancelable operating leases 75,978 6,684 13,193 11,988 44,113 Commitments to originate and purchase loans 572,407 572,407 -- -- -- Commitments to fund unused lines of credit (1) 335,640 335,640 -- -- -- Commitments to purchase securities 99,969 99,969 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total $9,407,994 $4,449,700 $1,807,193 $2,731,988 $419,113 ============================================================================================================================
(1) Unused lines of credit relate primarily to home equity lines of credit. In addition to the contractual obligations previously discussed, at December 31, 2003 we had 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 $640.7 million at December 31, 2003. We also have two collateralized repurchase obligations due to the sale of certain long-term fixed rate municipal revenue bonds and Federal Housing Administration project loans 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 two agreements totaled $46.3 million at December 31, 2003. 42 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 $4.4 million at December 31, 2003. See Notes 1, 11 and 12 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, 2003 and 2002 Financial Condition Total assets increased $759.8 million to $22.46 billion at December 31, 2003, from $21.70 billion at December 31, 2002. The primary reason for the increase in total assets was the increase in mortgage-backed securities and mortgage loans, partially offset by decreases in federal funds sold and repurchase agreements and other securities. This growth was funded primarily through increases in borrowings and deposits. Mortgage loans increased $568.6 million to $12.25 billion at December 31, 2003, from $11.68 billion at December 31, 2002. This increase was primarily due to an increase in our multi-family and commercial real estate loan portfolios, partially offset by a decrease in our one-to-four family mortgage loan portfolio. Gross mortgage loans originated and purchased during the year ended December 31, 2003 totaled $7.29 billion, including originations of loans held-for-sale totaling $613.3 million, of which $5.75 billion were originations and $1.54 billion were purchases. This compares to $4.06 billion of originations and $1.53 billion of purchases for a total of $5.59 billion, including originations of loans held-for-sale totaling $484.3 million, during the year ended December 31, 2002. Mortgage loan repayments increased to $6.11 billion for the year ended December 31, 2003, from $5.34 billion for the year ended December 31, 2002. Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans, which represented 71.1% of our total loan portfolio at December 31, 2003, decreased $238.3 million to $8.97 billion at December 31, 2003, from $9.21 billion at December 31, 2002. This decrease was primarily due to the continued high level of one-to-four family loan repayments during 2003, particularly during the first nine months, which have outpaced our levels of one-to-four family loan originations and purchases. As previously discussed, although medium- and long-term U.S. Treasury rates have increased on average 38 basis points from December 31, 2002 to December 31, 2003, interest rates remain at historical lows and were extremely volatile during the second and third quarters of 2003. The decline in rates during the second quarter of 2003 created a surge of refinance activity which was greater than that which we had previously experienced. The rise in rates during the third quarter of 2003 resulted in a reduction in repayments on our mortgage loans in the 2003 fourth quarter. 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. Our multi-family mortgage loan portfolio increased $630.4 million to $2.23 billion at December 31, 2003, from $1.60 billion at December 31, 2002. Our commercial real estate loan portfolio increased $135.7 million to $880.3 million at December 31, 2003, from $744.6 million at December 31, 2002. Multi-family and commercial real estate loan originations totaled $1.65 billion for the year ended December 31, 2003 and $1.01 billion for the year ended December 31, 2002. This increase reflects the increase in refinance activity, our emphasis on this type of lending and the competitive rates we offer on these types of loans. Prepayment activity within our multi-family and commercial real estate loan portfolio 43 increased in 2003 as compared to 2002, however, such activity is not as significant as that which we have experienced in our one-to-four family mortgage loan portfolio due in part to the prepayment penalties associated with these loans. Our new multi-family and commercial real estate loan originations are similar in type to the loans currently in our portfolio. The average loan balance of loans in our combined multi-family and commercial real estate portfolio continues to be less than $1.0 million. Our portfolio of consumer and other loans increased by $57.5 million to $430.1 million at December 31, 2003, from $372.6 million at December 31, 2002. This increase is primarily in home equity lines of credit as a result of the continued strong housing market and the low interest rate environment. Mortgage-backed securities increased $864.5 million to $8.24 billion at December 31, 2003, from $7.38 billion at December 31, 2002. This increase was primarily the result of purchases of REMICs and CMOs totaling $9.30 billion, partially offset by principal payments received of $6.87 billion, sales of $1.40 billion, net premium amortization of $71.0 million and a decrease of $93.4 million in the net unrealized gain on our available-for-sale portfolio. This increase in mortgage-backed securities reflects our use of excess cash flows, as well as cash flows from increased deposits and borrowings, for the purchase of these securities. The decrease in the net unrealized gain on our mortgage-backed securities available-for-sale portfolio is primarily due to the substantial turnover of securities in our portfolio resulting in a decrease in the average coupon rate of the portfolio, coupled with the increase in interest rates from December 31, 2002 to December 31, 2003. Other securities decreased $250.6 million to $203.7 million at December 31, 2003, from $454.3 million at December 31, 2002, primarily due to $201.9 million in securities which were called or matured and sales of $45.6 million. The continued low interest rate environment in 2003 resulted in a significant portion of our remaining callable investment securities being called, primarily in the first half of 2003. Federal funds sold and repurchase agreements decreased $444.4 million to $65.9 million at December 31, 2003, from $510.3 million at December 31, 2002, primarily due to our use of funds for the purchase of mortgage-backed securities. Other assets increased $29.0 million to $118.4 million at December 31, 2003, primarily due to an increase in the net deferred tax asset which was related to the decrease in the fair value of our mortgage-backed securities available-for-sale. Deposits increased $119.4 million to $11.19 billion at December 31, 2003, from $11.07 billion at December 31, 2002. The increase in deposits was primarily due to an increase of $348.4 million in certificates of deposit to $5.50 billion at December 31, 2003, from $5.15 billion at December 31, 2002, an increase of $126.7 million in savings accounts to $2.96 billion at December 31, 2003 and an increase of $110.1 million in NOW and demand deposit accounts to $1.49 billion at December 31, 2003. These increases were partially offset by a decrease of $465.8 million in our money market accounts to $1.23 billion at December 31, 2003, from $1.70 billion at December 31, 2002. The increase in our certificates of deposit was primarily the result of our efforts to extend the maturities of our certificates of deposit through promotional rates and targeted marketing and sales efforts in the prevailing low interest rate environment. During 2003, $3.45 billion of certificates of deposit, with an average rate of 2.31% and an average maturity at inception of thirteen months, matured and $3.60 billion of certificates of deposit were issued or repriced, with an average rate of 1.93% and an average maturity at inception of sixteen months. The decrease in our money market accounts is attributable to continued intense competition for these accounts. As previously discussed, certain local competitors have continued to offer well above market rates for money market and checking accounts. We have not increased the rates we offer on these accounts because we do not consider it a cost effective strategy. However, despite the continued intense competition for checking accounts, we have been successful in increasing our NOW and demand deposit account balances, including our business checking deposits, due in large part to our concerted sales and marketing efforts, including our PEAK Process. 44 Reverse repurchase agreements increased $950.0 million to $7.24 billion at December 31, 2003, from $6.29 billion at December 31, 2002. FHLB-NY advances decreased $140.0 million to $1.92 billion at December 31, 2003, from $2.06 billion at December 31, 2002. The overall increase in borrowings was a cost effective strategy to fund asset growth. As previously discussed, during the year ended December 31, 2003, we extended $1.70 billion of borrowings with a weighted average rate of 2.55% and a weighted average original term of 3.0 years to help protect against the impact on interest expense of future interest rate increases. All other borrowings that matured in 2003 were rolled over into short-term borrowings. During the 2003 fourth quarter, we entered into forward borrowing commitments totaling $500.0 million, with a weighted average rate of 3.05% and a weighted average term of 3.3 years, and in January 2004 we entered into an additional $700.0 million of forward borrowing commitments, with a weighted average rate of 3.01% and a weighted average term of 3.7 years, to replace a portion of the $2.81 billion in borrowings, with a weighted average rate of 4.97%, scheduled to mature in the first quarter of 2004. Stockholders' equity decreased to $1.40 billion at December 31, 2003, from $1.55 billion at December 31, 2002. The decrease in stockholders' equity was the result of common stock repurchased of $195.5 million, dividends declared of $70.1 million, a decrease in accumulated other comprehensive income, net of tax, of $56.3 million, which was primarily due to the decrease in the fair value of our mortgage-backed securities available-for-sale, and the redemption of our Series B Preferred Stock totaling $54.5 million. These decreases were partially offset by net income of $196.8 million, the effect of stock options exercised and related tax benefit of $14.9 million and the amortization of the allocated portion of shares held by the ESOP of $7.2 million. Results of Operations General Net income for the year ended December 31, 2003 decreased $51.6 million to $196.8 million, from $248.4 million for the year ended December 31, 2002. Diluted earnings per common share totaled $2.49 per share for the year ended December 31, 2003 and $2.85 per share for the year ended December 31, 2002. Return on average assets decreased to 0.87% for the year ended December 31, 2003, from 1.12% for the year ended December 31, 2002. Return on average stockholders' equity decreased to 13.26% for the year ended December 31, 2003, from 15.87% for the year ended December 31, 2002. Return on average tangible stockholders' equity, which represents average stockholders' equity less average goodwill, decreased to 15.15% for the year ended December 31, 2003, from 18.00% for the year ended December 31, 2002. The decreases in net income and the related return ratios for the year ended December 31, 2003 were primarily the result of the decrease in net interest income which is discussed further below. 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, 2003, net interest income decreased $84.9 million to $379.5 million, from $464.4 million for the year ended December 31, 2002. The net interest margin decreased to 1.78% for the year ended December 31, 2003, from 2.23% for the year ended December 31, 2002. The decreases in net interest income and the net interest margin were the result of a decrease in interest income, partially offset by a decrease in interest expense, primarily due to the more rapid decline in the 45 yields on interest-earning assets than the decline in the costs of interest-bearing liabilities and the impact of repurchases of our common stock over the past year. The decrease in the yield on interest-earning assets is primarily the result of the high level of mortgage loan and mortgage-backed securities repayments as a result of the continued low interest rate environment, particularly for medium- and long-term instruments for which rates continued to decline throughout 2002 and the first half of 2003, as previously discussed, resulting in reinvestment in those assets at lower rates. These high levels of repayments have also resulted in accelerated premium amortization which has further contributed to the decline in the yields on these portfolios. Net premium amortization on our mortgage-backed securities and mortgage loan portfolios increased $60.4 million to $113.0 million for the year ended December 31, 2003, from $52.6 million for the year ended December 31, 2002. The decrease in interest expense was primarily attributable to the decrease in our cost of funds, which is due to the repayment and refinancing of various higher cost borrowings, along with the downward repricing of deposits. The average balance of net interest-earning assets decreased $206.7 million to $428.3 million for the year ended December 31, 2003, from $635.0 million for the year ended December 31, 2002. The decrease in the average balance of net interest-earning assets was the result of an increase of $686.1 million in the average balance of total interest-bearing liabilities to $20.89 billion for the year ended December 31, 2003, from $20.20 billion for the year ended December 31, 2002, partially offset by an increase of $479.4 million in the average balance of total interest-earning assets to $21.32 billion for the year ended December 31, 2003, from $20.84 billion for the year ended December 31, 2002. The primary reasons for the decrease in net interest-earning assets are the repurchases of our common stock over the past year, an increase in the monthly mortgage-backed securities principal payments receivable due to the accelerated mortgage-backed securities cash flow, and the $100.0 million premium paid in the first quarter of 2002 to purchase additional BOLI. The net interest rate spread decreased to 1.72% for the year ended December 31, 2003, from 2.11% for the year ended December 31, 2002. The average yield on interest-earning assets decreased to 4.96% for the year ended December 31, 2003, from 6.08% for the year ended December 31, 2002. The average cost of interest-bearing liabilities decreased to 3.24% for the year ended December 31, 2003, from 3.97% for the year ended December 31, 2002. The changes in the yields on interest-earning assets and the costs of interest-bearing liabilities for the year ended December 31, 2003 were a result of the continued low interest rate environment previously discussed. The changes in average interest-earning assets and interest-bearing liabilities and their related yields and costs are discussed in greater detail under "Interest Income" and "Interest Expense." Analysis of Net Interest Income The following 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, 2003, 2002 and 2001. 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. 46
For the Year Ended December 31, ----------------------------------------------------------------------- 2003 2002 ----------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Cost Balance Interest Cost - ---------------------------------------------------------------------------------------------------------------- Assets: Interest-earning assets: Mortgage loans (1): One-to-four family $ 8,990,636 $ 466,544 5.19% $10,077,810 $ 626,251 6.21% Multi-family, commercial real estate and construction 2,757,481 203,785 7.39 2,072,805 162,677 7.85 Consumer and other loans (1) 410,095 19,247 4.69 307,103 17,623 5.74 ----------- ---------- ----------- ---------- Total loans 12,158,212 689,576 5.67 12,457,718 806,551 6.47 Mortgage-backed securities (2) 8,491,108 337,222 3.97 6,599,887 377,623 5.72 Other securities (2)(3) 529,592 28,955 5.47 1,011,280 69,211 6.84 Federal funds sold and repurchase agreements 136,272 1,538 1.13 766,906 12,877 1.68 ----------- ---------- ----------- ---------- Total interest-earning assets 21,315,184 1,057,291 4.96 20,835,791 1,266,262 6.08 ---------- ---------- Goodwill 185,151 185,151 Other non-interest-earning assets 1,172,962 1,116,863 ----------- ----------- Total assets $22,673,297 $22,137,805 =========== =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,907,541 13,198 0.45 $ 2,754,000 29,096 1.06 Money market 1,403,363 9,934 0.71 1,876,107 32,512 1.73 NOW and demand deposit 1,469,805 1,526 0.10 1,269,866 3,176 0.25 Certificates of deposit 5,419,725 200,593 3.70 5,203,610 223,216 4.29 ----------- ---------- ----------- ---------- Total deposits 11,200,434 225,251 2.01 11,103,583 288,000 2.59 Borrowed funds 9,686,459 452,502 4.67 9,097,198 513,838 5.65 ----------- ---------- ----------- ---------- Total interest-bearing liabilities 20,886,893 677,753 3.24 20,200,781 801,838 3.97 ---------- ---------- Non-interest-bearing liabilities 302,311 372,050 ----------- ----------- Total liabilities 21,189,204 20,572,831 Stockholders' equity 1,484,093 1,564,974 ----------- ----------- Total liabilities and stockholders' equity $22,673,297 $22,137,805 =========== =========== Net interest income/net interest rate spread (4) $ 379,538 1.72% $ 464,424 2.11% ========== ==== ========== ==== Net interest-earning assets/ net interest margin (5) $ 428,291 1.78% $ 635,010 2.23% =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.02x 1.03x =========== =========== For the Year Ended December 31, ---------------------------------- 2001 ---------------------------------- Average Average Yield/ (Dollars in Thousands) Balance Interest Cost - --------------------------------------------------------------------------- Assets: Interest-earning assets: Mortgage loans (1): One-to-four family $10,069,593 $ 694,596 6.90% Multi-family, commercial real estate and construction 1,487,504 124,163 8.35 Consumer and other loans (1) 206,903 17,853 8.63 ----------- ---------- Total loans 11,764,000 836,612 7.11 Mortgage-backed securities (2) 7,282,666 462,621 6.35 Other securities (2)(3) 1,519,647 107,315 7.06 Federal funds sold and repurchase agreements 940,394 32,015 3.40 ----------- ---------- Total interest-earning assets 21,506,707 1,438,563 6.69 ---------- Goodwill 195,191 Other non-interest-earning assets 813,033 ----------- Total assets $22,514,931 =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,495,532 46,283 1.85 Money market 1,734,232 65,484 3.78 NOW and demand deposit 1,075,524 5,097 0.47 Certificates of deposit 5,223,163 283,125 5.42 ----------- ---------- Total deposits 10,528,451 399,989 3.80 Borrowed funds 10,014,736 581,616 5.81 ----------- ---------- Total interest-bearing liabilities 20,543,187 981,605 4.78 ---------- Non-interest-bearing liabilities 394,302 ----------- Total liabilities 20,937,489 Stockholders' equity 1,577,442 ----------- Total liabilities and stockholders' equity $22,514,931 =========== Net interest income/net interest rate spread (4) $ 456,958 1.91% ========== ==== Net interest-earning assets/ net interest margin (5) $ 963,520 2.12% =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.05x ===========
(1) Mortgage 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) Other securities include Federal Home Loan Bank of New York stock. (4) 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. (5) Net interest margin represents net interest income divided by average interest-earning assets. 47 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, 2003 Year Ended December 31, 2002 Compared to Compared to Year Ended December 31, 2002 Year Ended December 31, 2001 -------------------------------- -------------------------------- Increase (Decrease) Increase (Decrease) -------------------------------- -------------------------------- (In Thousands) Volume Rate Net Volume Rate Net - --------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans: One-to-four family $(63,312) $ (96,395) $(159,707) $ 572 $ (68,917) $ (68,345) Multi-family, commercial real estate and construction 51,111 (10,003) 41,108 46,338 (7,824) 38,514 Consumer and other loans 5,224 (3,600) 1,624 6,934 (7,164) (230) Mortgage-backed securities 92,179 (132,580) (40,401) (41,296) (43,702) (84,998) Other securities (28,339) (11,917) (40,256) (34,857) (3,247) (38,104) Federal funds sold and repurchase agreements (8,110) (3,229) (11,339) (5,114) (14,024) (19,138) - --------------------------------------------------------------------------------------------------------- Total 48,753 (257,724) (208,971) (27,423) (144,878) (172,301) - --------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings 1,564 (17,462) (15,898) 4,342 (21,529) (17,187) Money market (6,760) (15,818) (22,578) 4,998 (37,970) (32,972) NOW and demand deposit 449 (2,099) (1,650) 783 (2,704) (1,921) Certificates of deposit 8,994 (31,617) (22,623) (1,057) (58,852) (59,909) Borrowed funds 31,804 (93,140) (61,336) (52,113) (15,665) (67,778) - --------------------------------------------------------------------------------------------------------- Total 36,051 (160,136) (124,085) (43,047) (136,720) (179,767) - --------------------------------------------------------------------------------------------------------- Net change in net interest income $ 12,702 $ (97,588) $ (84,886) $ 15,624 $ (8,158) $ 7,466 =========================================================================================================
Interest Income Interest income for the year ended December 31, 2003 decreased $209.0 million to $1.06 billion, from $1.27 billion for the year ended December 31, 2002. This decrease was primarily the result of a decrease in the average yield on interest-earning assets to 4.96% for the year ended December 31, 2003, from 6.08% for the year ended December 31, 2002, partially offset by an increase of $479.4 million in the average balance of interest-earning assets to $21.32 billion for the year ended December 31, 2003, from $20.84 billion for the year ended December 31, 2002. The decrease in the average yield on interest-earning assets was due to decreases in the average yields on all asset categories, primarily our mortgage-backed securities and one-to-four family mortgage loans. The declines in medium- and long-term U.S. Treasury rates during 2002 and the first half of 2003 resulted in continued high levels of repayments on our mortgage-backed securities and one-to-four family mortgage loan portfolios and accelerated premium amortization. The increase in the average balance of interest-earning assets was primarily due to increases in the average balances of mortgage-backed securities and multi-family, commercial real estate and construction loans, partially offset by decreases in the average balances of one-to-four family mortgage loans, federal funds sold and repurchase agreements and other securities. 48 Interest income on one-to-four family mortgage loans decreased $159.8 million to $466.5 million for the year ended December 31, 2003, from $626.3 million for the year ended December 31, 2002, which was the result of a decrease in the average yield to 5.19% for the year ended December 31, 2003, from 6.21% for the year ended December 31, 2002, coupled with a decrease of $1.09 billion 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 continued low interest rate environment as higher rate loans were repaid and replaced with lower yielding new originations and purchases, coupled with the lower repricing of ARM loans. Additionally, the yield has been negatively impacted by accelerated loan premium amortization, discussed previously, as a result of the increased refinance activity. The decrease in the average balance of one-to-four family mortgage loans reflects the extraordinarily high level of repayment activity, due to refinancings, particularly in the second half of 2002 and continuing through the first nine months of 2003, partially offset by originations and purchases of one-to-four family mortgage loans. The previously discussed increase in medium- and long-term U.S. Treasury rates during the third quarter of 2003 resulted in a reduction in the one-to-four family mortgage refinance activity which reduced the repayments on our mortgage loans in the 2003 fourth quarter. With mortgage refinance activity significantly reduced and a projected continuation of a relatively steep U.S. Treasury yield curve, premium amortization expense should return to more normalized levels and we expect to resume growth in our one-to-four family mortgage loan portfolio during 2004. Interest income on multi-family, commercial real estate and construction loans increased $41.1 million to $203.8 million for the year ended December 31, 2003, from $162.7 million for the year ended December 31, 2002, which was primarily the result of an increase of $684.7 million in the average balance of such loans, partially offset by a decrease in the average yield to 7.39% for the year ended December 31, 2003, from 7.85% for the year ended December 31, 2002. The increase in the average balance of multi-family, commercial real estate and construction loans reflects our increased emphasis on originations of such loans, coupled with the fact that repayment activity within this portfolio is 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 growth in this portfolio resulting from lower yielding new originations due to the impact of the continued low interest rate environment. The yield on multi-family, commercial real estate and construction loans has not declined to the same extent as the yield on one-to-four family mortgage loans primarily as a result of the lower level of repayment activity within this portfolio as well as the additional income from prepayment penalties received on loans which have prepaid. Prepayment penalties totaled $16.0 million for the year ended December 31, 2003 and $4.9 million for the year ended December 31, 2002. Interest income on mortgage-backed securities decreased $40.4 million to $337.2 million for the year ended December 31, 2003, from $377.6 million for the year ended December 31, 2002. This decrease was the result of a decrease in the average yield to 3.97% for the year ended December 31, 2003, from 5.72% for the year ended December 31, 2002, partially offset by an increase of $1.89 billion in the average balance of the portfolio. The decrease in the average yield on mortgage-backed securities reflects the substantial turnover we have experienced in this portfolio as a result of the continued low interest rate environment as higher yielding securities were repaid and replaced with lower yielding securities, coupled with accelerated premium amortization. Net premium amortization on mortgage-backed securities increased $57.3 million to $71.0 million for the year ended December 31, 2003, from $13.7 million for the year ended December 31, 2002. The increase in the average balance of mortgage-backed securities was the result of increased levels of purchases of REMICs and CMOs during the second half of 2002 and throughout 2003 to effectively deploy our cash flows in excess of mortgage and other loan fundings, partially offset by increased levels of principal repayments. At December 31, 2003 we had $8.06 billion in REMIC and CMO mortgage-backed securities, which comprised 95.5% of our total securities portfolio, substantially all of which had fixed rates. The amortized cost of our fixed rate REMICs and CMOs totaled $8.11 billion at December 31, 2003. Included in this total is $2.53 billion of securities which have a remaining gross premium of $26.9 million, a weighted average current coupon of 5.04%, a weighted average collateral coupon of 6.10% and a weighted average life of 2.6 years. The remaining $5.58 billion of these securities have a remaining gross discount of $18.5 million, a weighted average current coupon of 4.14%, a weighted 49 average collateral coupon of 5.80% and a weighted average life of 3.5 years. Included in the totals for discount securities are $617.7 million of securities at par. Interest income on other securities decreased $40.2 million to $29.0 million for the year ended December 31, 2003, from $69.2 million for the year ended December 31, 2002. This decrease resulted from a decrease of $481.7 million in the average balance of this portfolio, coupled with a decrease in the average yield to 5.47% for the year ended December 31, 2003, from 6.84% for the year ended December 31, 2002, primarily due to higher yielding securities being called throughout 2002 and the first half of 2003 as a result of the continued low interest rate environment. Interest income on other securities includes dividends on FHLB-NY stock. Dividends on FHLB-NY stock totaled $10.6 million for the year ended December 31, 2003 and $10.7 million for the year ended December 31, 2002. The FHLB-NY suspended dividend payments to stockholders in the fourth quarter of 2003, due to losses in its securities portfolio, but resumed payment in January 2004, at a rate of 1.45%, as compared to a rate of 5.05% paid in July 2003, the last dividend payment prior to the FHLB-NY's dividend suspension. Interest income on federal funds sold and repurchase agreements decreased $11.3 million as a result of the $630.6 million decrease in the average balance of the portfolio, coupled with a decrease in the average yield to 1.13% for the year ended December 31, 2003, from 1.68% for the year ended December 31, 2002. Interest Expense Interest expense for the year ended December 31, 2003 decreased $124.0 million to $677.8 million, from $801.8 million for the year ended December 31, 2002. This decrease was primarily the result of a decrease in the average cost of interest-bearing liabilities to 3.24% for the year ended December 31, 2003, from 3.97% for the year ended December 31, 2002, partially offset by an increase of $686.1 million in the average balance of interest-bearing liabilities to $20.89 billion for the year ended December 31, 2003, from $20.20 billion for the year ended December 31, 2002. The decrease in the average cost of our interest-bearing liabilities reflects the impact of the continued low interest rate environment on the cost of our deposits and borrowings. The increase in the average balance of interest-bearing liabilities was attributable to increases in the average balances of borrowings and deposits. Interest expense on deposits decreased $62.7 million, to $225.3 million for the year ended December 31, 2003, from $288.0 million for the year ended December 31, 2002, reflecting a decrease in the average cost of deposits to 2.01% for the year ended December 31, 2003, from 2.59% for the year ended December 31, 2002, slightly offset by an increase of $96.9 million in the average balance of total deposits. The decrease in the average cost of total deposits was driven by decreases in rates in all deposit categories as a result of the continued low interest rate environment. The increase in the average balance of total deposits was primarily the result of increases in the average balances of certificates of deposit, NOW and demand deposit accounts and savings accounts, partially offset by a decrease in the average balance of money market accounts. Interest expense on certificates of deposit decreased $22.6 million resulting from a decrease in the average cost to 3.70% for the year ended December 31, 2003, from 4.29% for the year ended December 31, 2002, partially offset by a $216.1 million increase in the average balance. The increase in the average balance of certificates of deposit was primarily the result of our efforts to extend the maturities of our certificates of deposit through promotional rates and targeted marketing and sales efforts in the prevailing low interest rate environment. During 2003, $3.45 billion of certificates of deposit, with an average rate of 2.31% and an average maturity at inception of thirteen months, matured and $3.60 billion of certificates of deposit were issued or repriced, with an average rate of 1.93% and an average maturity at inception of sixteen months. Interest expense on money market accounts decreased $22.6 million reflecting a decrease in the average cost to 0.71% for the year ended December 31, 2003, from 1.73% for the year ended December 31, 50 2002, coupled with a decrease of $472.7 million in the average balance of such accounts. Interest paid on money market accounts is on a tiered basis with 82.7% of the balance at December 31, 2003 in the highest tier (accounts with balances of $50,000 and higher). The decrease in the average balance of money market accounts is attributable to the continued intense competition for these accounts, previously discussed. Interest expense on savings accounts decreased $15.9 million which was attributable to a decrease in the average cost to 0.45% for the year ended December 31, 2003, from 1.06% for the year ended December 31, 2002, partially offset by an increase of $153.5 million in the average balance. Interest expense on NOW and demand deposit accounts decreased $1.7 million as a result of a decrease in the average cost to 0.10% for the year ended December 31, 2003, from 0.25% for the year ended December 31, 2002, slightly offset by an increase of $199.9 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 borrowed funds for the year ended December 31, 2003 decreased $61.3 million to $452.5 million, from $513.8 million for year ended December 31, 2002, resulting from a decrease in the average cost of borrowings to 4.67% for the year ended December 31, 2003, from 5.65% for the year ended December 31, 2002, partially offset by an increase of $589.3 million in the average balance. The decrease in the average cost of borrowings is the result of the refinancing of higher cost borrowings as they matured at substantially lower rates. The increase in the average balance of borrowed funds is a result of our issuance of $250.0 million senior unsecured notes during the 2002 fourth quarter and our use of short-term borrowings during the year to fund our loan originations and securities purchases. Provision for Loan Losses During the year ended December 31, 2003, no provision for loan losses was recorded. The provision for loan losses totaled $2.3 million for the year ended December 31, 2002. The decrease in the provision for loan losses is due to an analysis performed during 2002 of the actual charge-off history of our loan portfolio compared to our previously determined allowance coverage percentages. 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 analysis indicated that our estimate of losses inherent in our portfolio exceeded our actual charge-off history. In response to the results of that analysis, we adjusted our allowance coverage percentages for our portfolio segments accordingly. We review our allowance coverage percentages on a quarterly basis. Our 2003 analyses did not indicate that changes in our allowance coverage percentages were required. We believe our current allowance coverage percentages are adequate to reflect the risks inherent in our loan portfolio. The allowance for loan losses totaled $83.1 million at December 31, 2003, and $83.5 million at December 31, 2002. Net loan charge-offs totaled $425,000 for the year ended December 31, 2003 compared to $1.0 million for the year ended December 31, 2002. Non-performing loans decreased $4.8 million to $29.7 million at December 31, 2003, from $34.5 million at December 31, 2002. The allowance for loan losses as a percentage of non-performing loans increased to 280.10% at December 31, 2003, from 242.04% at December 31, 2002, primarily due to the decrease in non-performing loans from December 31, 2002 to December 31, 2003. The allowance for loan losses as a percentage of total loans decreased to 0.66% at December 31, 2003 from 0.69% at December 31, 2002. For further discussion of non-performing loans and allowance for loan losses, see "Critical Accounting Policies" and "Asset Quality." Non-Interest Income Non-interest income for the year ended December 31, 2003 increased $12.2 million, to $119.6 million, from $107.4 million for the year ended December 31, 2002. The increase in non-interest income was primarily due to increases in mortgage banking income, net, and other non-interest income, partially offset by a decrease in net gain on sales of securities. 51 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 $12.6 million to net mortgage banking income of $10.3 million for the year ended December 31, 2003, from net mortgage banking loss of $2.3 million for the year ended December 31, 2002. This increase is primarily due to the change in the valuation allowance adjustments for the impairment of MSR, to a recovery recorded for the year ended December 31, 2003 compared to a provision recorded for the year ended December 31, 2002, and an increase in net gain on sales of loans, partially offset by a decrease in loan servicing fees and an increase in amortization of MSR. We recorded a recovery in the valuation allowance of MSR of $3.1 million for the year ended December 31, 2003 compared to a provision of $10.8 million for the year ended December 31, 2002. The recovery in the valuation allowance of MSR for the year ended December 31, 2003 is a result of a decrease in projected loan prepayment speeds at December 31, 2003, compared to the projected loan prepayment speeds used in valuing our MSR at December 31, 2002. The decrease in projected loan prepayment speeds reflects the increase in medium- and long-term interest rates during the second half of 2003. Net gain on sales of loans increased $5.5 million to $12.1 million for the year ended December 31, 2003 from $6.6 million for the year ended December 31, 2002. The increase in net gain on sales of loans was primarily due to more favorable pricing opportunities during the year ended December 31, 2003 as compared to the year ended December 31, 2002 and an increase in the volume of fixed rate loans originated and sold into the secondary market during 2003. Loan servicing fees, which include all contractual and ancillary servicing revenue we receive, decreased $4.2 million to $7.9 million for the year ended December 31, 2003, from $12.1 million for the year ended December 31, 2002, primarily as a result of the decrease in the balance of loans serviced for others to $1.90 billion at December 31, 2003, from $2.67 billion at December 31, 2002. The decrease in the balance of loans serviced for others was due to increased repayments in that portfolio in the continued low interest rate environment which have exceeded the level of new servicing volume from loan sales. Amortization of MSR increased $2.6 million to $12.8 million for the year ended December 31, 2003, from $10.2 million for the year ended December 31, 2002. The increase in MSR amortization is attributable to the continued high level of mortgage loan repayments, particularly during the first nine months of 2003. Other non-interest income increased $4.9 million to $14.5 million for the year ended December 31, 2003, from $9.6 million for the year ended December 31, 2002. This increase was 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 the receipt of a $3.8 million net insurance settlement in 2002 regarding a lawsuit. Net gain on sales of securities decreased $3.5 million to $7.3 million for the year ended December 31, 2003, from $10.8 million for the year ended December 31, 2002. During 2003, we sold mortgage-backed and other securities with an amortized cost of $1.45 billion. During 2002, we sold mortgage-backed securities with an amortized cost of $438.6 million. Non-Interest Expense Non-interest expense for the year ended December 31, 2003 totaled $205.9 million, an increase of $7.9 million from $198.0 million for the year ended December 31, 2002. This increase was primarily due to an increase of $10.1 million in general and administrative expense to $205.9 million for the year ended December 31, 2003, from $195.8 million for the year ended December 31, 2002, partially offset by a $2.2 million prepayment penalty incurred in December 2002 on the prepayment of a $100.0 million reverse repurchase agreement. The increase in general and administrative expense was primarily due to increases in occupancy, equipment and systems expense and compensation and benefits expense. Occupancy, equipment and systems expense increased $6.8 million to $59.9 million for the year ended December 31, 2003, from $53.1 million for the year ended December 31, 2002, due to increases in building and furniture, fixtures and equipment expense, data processing and depreciation, as a result of facilities and systems enhancements over the past year, and increases in rent and utilities expense. 52 Compensation and benefits expense increased $3.6 million to $110.3 million for the year ended December 31, 2003, from $106.7 million for the year ended December 31, 2002. The increase was primarily attributable to increases in pension and other postretirement benefits expense, partially offset by a decrease in ESOP expense. The increase in pension expense is primarily related to the decrease in the value of our pension assets which was a result of the decline in the equities markets during 2002. The decrease in ESOP expense is primarily attributable to a reduction in the number of shares of our common stock allocated to participant accounts, due to an increase in the market value of our common stock during the period used for the calculations, during the year ended December 31, 2003, compared to the year ended December 31, 2002. Although non-interest expense increased in 2003, 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 0.91% for the year ended December 31, 2003, from 0.88% for the year ended December 31, 2002, primarily due to the increase in general and administrative expense, partially offset by the increase in average assets. The efficiency ratio, which represents general and administrative expense divided by the sum of net interest income plus non-interest income, increased to 41.25% for the year ended December 31, 2003, from 34.25% for the year ended December 31, 2002, primarily due to the decrease in net interest income, coupled with the increase in general and administrative expense. The increase in general and administrative expense and the decrease in net interest income for the year ended December 31, 2003 compared to the year ended December 31, 2002 were discussed previously. Income Tax Expense For the year ended December 31, 2003, income tax expense totaled $96.4 million, representing an effective tax rate of 32.9%, compared to $123.1 million, representing an effective tax rate of 33.1%, for the year ended December 31, 2002. Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2002 and 2001 Financial Condition Total assets decreased $969.9 million to $21.70 billion at December 31, 2002, from $22.67 billion at December 31, 2001. The primary reason for the decrease in total assets was the decrease in federal funds sold and repurchase agreements. Federal funds sold and repurchase agreements decreased $798.9 million to $510.3 million at December 31, 2002, from $1.31 billion at December 31, 2001. The unusually high level of liquidity at December 31, 2001 reflected the increased cash flows from loan and security repayments which we held and used, in part, to both help fund our mortgage application pipeline at December 31, 2001 and to repay a portion of borrowings which matured, primarily during the first quarter of 2002. Mortgage loans decreased $244.0 million to $11.68 billion at December 31, 2002, from $11.92 billion at December 31, 2001. This decrease was primarily due to the extraordinarily high level of mortgage loan repayments in 2002, partially offset by an increase in gross mortgage loans originated and purchased in 2002 as compared to 2001. Mortgage loan repayments increased to $5.34 billion for the year ended December 31, 2002, from $3.46 billion for the year ended December 31, 2001. Gross mortgage loans originated and purchased during the year ended December 31, 2002 totaled $5.59 billion, including originations of loans held-for-sale totaling $484.3 million, of which $4.06 billion were originations and $1.53 billion were purchases. This compares to $3.13 billion of originations and $1.43 billion of purchases for a total of $4.56 billion, including originations of loans held-for-sale totaling $405.7 million, during the year ended December 31, 2001. The increase in mortgage loan repayments, originations and purchases was primarily a result of the lower interest rate environment during 2002 compared to 2001, which increased the level of mortgage refinance activity in 2002. 53 Our one-to-four family mortgage loans, which represented 76.9% of our total loan portfolio at December 31, 2002, decreased $895.7 million to $9.21 billion at December 31, 2002, from $10.11 billion at December 31, 2001. As noted above, this decrease was primarily due to the extraordinarily high level of one-to-four family mortgage loan repayments as a result of refinance activity in the prevailing interest rate environment. While we continue to be primarily a one-to-four family mortgage lender, we increased our emphasis on multi-family and commercial real estate loan originations. Our multi-family mortgage loans, which tend to be less susceptible to prepayment risk than our one-to-four family loans, increased $505.7 million to $1.60 billion at December 31, 2002, from $1.09 billion at December 31, 2001. Similarly, our commercial real estate loans increased $146.3 million to $744.6 million at December 31, 2002, from $598.3 million at December 31, 2001. Our multi-family and commercial real estate loan originations in 2002 were similar in type to the loans in our portfolio at December 31, 2001. Our portfolio of consumer and other loans increased by $132.4 million to $372.6 million at December 31, 2002, from $240.2 million at December 31, 2001. This increase was primarily in home equity lines of credit as a result of the strong housing market and the low interest rate environment. Mortgage-backed securities increased $305.5 million to $7.38 billion at December 31, 2002, from $7.07 billion at December 31, 2001. This increase was primarily the result of purchases of $6.84 billion of REMICs and CMOs, partially offset by principal payments received of $6.09 billion and sales of $438.6 million. During the year ended December 31, 2001, our purchases of mortgage-backed securities totaled $2.03 billion and principal payments received totaled $3.01 billion. There were no security sales during the year ended December 31, 2001. Other securities decreased $484.8 million to $454.3 million at December 31, 2002, from $939.1 million at December 31, 2001, primarily due to $573.2 million in securities which were called or matured, partially offset by the net accretion of discounts of $41.4 million, purchases of other securities totaling $31.0 million and a decrease in the net unrealized loss on securities available-for-sale of $16.0 million. The continued decline in interest rates in 2002 resulted in a significant portion of our callable investment securities being called. The improvement in the fair value of our other securities available-for-sale portfolio was related to the decrease in medium-term market interest rates that occurred from December 31, 2001 to December 31, 2002. BOLI increased $116.1 million to $358.9 million at December 31, 2002, from $242.8 million at December 31, 2001, primarily as a result of an additional $100.0 million premium paid in the first quarter of 2002 to purchase additional BOLI. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as non-interest income and insurance proceeds are recorded as a reduction of the cash surrender value. Other assets decreased $23.3 million to $89.4 million at December 31, 2002, from $112.7 million at December 31, 2001, primarily due to a decrease in the net deferred tax asset which was primarily related to a decrease in the net unrealized loss on securities available-for-sale. During 2002, we continued shifting our liability emphasis from borrowings to deposits, particularly lower costing core deposits. Deposits increased $163.5 million to $11.07 billion at December 31, 2002, from $10.90 billion at December 31, 2001. The increase in deposits was primarily due to an increase of $170.8 million in core deposits to $5.91 billion at December 31, 2002, from $5.74 billion at December 31, 2001 which was attributable to our continued emphasis on deposit generation through competitive rates, extensive product offerings and quality service. While total core deposits increased, our money market accounts, which are a component of core deposits, decreased $256.7 million to $1.70 billion at December 31, 2002, from $1.96 billion at December 31, 2001. The decrease in our money market accounts can be attributed to increased competition for money market and checking accounts. Certain local competitors, as well as recent entrants into the local market, have offered well above market rates for these types of deposits. We have not increased the rates we offer on these accounts because we do not consider it a cost effective strategy. Offsetting this decrease in our money market accounts were increases in savings accounts of $244.1 million and NOW and demand deposit 54 accounts of $183.3 million. Despite increased local competition for checking accounts, we were successful in increasing the number of NOW and demand deposit accounts opened in 2002 due in large part to our PEAK process and an integrated checking account promotion, which were introduced in the first and second quarters of 2002, respectively. Reverse repurchase agreements decreased $1.10 billion to $6.29 billion at December 31, 2002, from $7.39 billion at December 31, 2001. FHLB-NY advances increased $150.0 million to $2.06 billion at December 31, 2002, from $1.91 billion at December 31, 2001. Other borrowings, net, decreased $50.6 million to $472.2 million at December 31, 2002, from $522.8 million at December 31, 2001. The net decrease in other borrowings was the result of the maturity of a $300.0 million medium-term note in June 2002, partially offset by the issuance of $250.0 million of senior unsecured notes during the quarter ended December 31, 2002. The decrease in borrowings reflects management's decision to utilize excess cash flow to repay various borrowings which matured during the year ended December 31, 2002. Stockholders' equity increased to $1.55 billion at December 31, 2002, from $1.54 billion at December 31, 2001. The increase in stockholders' equity was the result of net income of $248.4 million, the effect of stock options exercised and related tax benefit of $22.3 million, an increase in accumulated other comprehensive income, net of tax, of $11.8 million and the amortization of the allocated portion of shares held by the ESOP of $10.2 million. These increases were partially offset by common stock repurchased of $211.1 million and dividends declared of $70.2 million. Results of Operations General Net income for the year ended December 31, 2002 increased $25.5 million to $248.4 million, from $222.9 million for the year ended December 31, 2001. For the year ended December 31, 2002, diluted earnings per common share increased to $2.85 per share, from $2.35 per share for the year ended December 31, 2001. Return on average assets increased to 1.12% for the year ended December 31, 2002, from 0.99% for the year ended December 31, 2001. Return on average stockholders' equity increased to 15.87% for the year ended December 31, 2002, from 14.13% for the year ended December 31, 2001. Return on average tangible stockholders' equity increased to 18.00% for the year ended December 31, 2002, from 16.12% for the year ended December 31, 2001. The results of operations for the year ended December 31, 2002 include the benefit derived from the adoption of SFAS No. 142. SFAS No. 142 eliminated goodwill amortization which totaled $19.1 million, or $0.21 per diluted common share, for the year ended December 31, 2001. The results of operations for the year ended December 31, 2001 also include a $2.3 million, after tax, charge for the cumulative effect of accounting change related to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," effective January 1, 2001. See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of the impact of the implementation of SFAS No. 142, SFAS No. 133 and SFAS No. 138. Net Interest Income For the year ended December 31, 2002, net interest income increased $7.4 million to $464.4 million, from $457.0 million for the year ended December 31, 2001. This increase was primarily attributable to an increase in the net interest margin to 2.23% for the year ended December 31, 2002, from 2.12% for the year ended December 31, 2001. The increase in the net interest margin was primarily due to the decrease in the cost of funds due to the downward repricing of deposits as a result of the lower interest rate environment which persisted since June of 2001, along with the repayment of various higher cost borrowings. The average balance of net interest-earning assets decreased $328.5 million to $635.0 million at December 31, 2002, from $963.5 million at December 31, 2001. The decrease in the 55 average balance of net interest-earning assets was the result of a decrease of $670.9 million in the average balance of total interest-earning assets to $20.84 billion for the year ended December 31, 2002, from $21.51 billion for the year ended December 31, 2001, partially offset by a decrease of $342.4 million in the average balance of total interest-bearing liabilities to $20.20 billion for the year ended December 31, 2002, from $20.54 billion for the year ended December 31, 2001. The net interest rate spread increased to 2.11% for the year ended December 31, 2002, from 1.91% for the year ended December 31, 2001. The change in the net interest rate spread was the result of a decrease in the average cost of interest-bearing liabilities to 3.97% for the year ended December 31, 2002, from 4.78% for the year ended December 31, 2001, partially offset by a decrease in the average yield on interest-earning assets to 6.08% for the year ended December 31, 2002, from 6.69% for the year ended December 31, 2001. The changes in such costs and yields were a result of the lower interest rate environment, in 2002 as compared to 2001, previously discussed. 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, 2002 decreased $172.3 million to $1.27 billion, from $1.44 billion for the year ended December 31, 2001. This decrease was the result of a decrease in the average yield on interest-earning assets to 6.08% for the year ended December 31, 2002, from 6.69% for the year ended December 31, 2001, coupled with a decrease of $670.9 million in the average balance of interest-earning assets to $20.84 billion for the year ended December 31, 2002, from $21.51 billion for the year ended December 31, 2001. The decrease in the average yield on interest-earning assets was due to the decreases in the average yields on all asset categories as a result of the lower interest rate environment during the year ended December 31, 2002 than that which existed during the year ended December 31, 2001. The decrease in the average balance of interest-earning assets was primarily due to decreases in the average balances of mortgage-backed and other securities, resulting from principal repayments, maturities, calls and sales, and a decrease in the average balance of federal funds sold and repurchase agreements, partially offset by increases in the average balances of mortgage loans, primarily multi-family, commercial real estate and construction loans, and consumer and other loans. Also contributing to the decrease in the average balance of interest-earning assets was the purchase of an additional $100.0 million of BOLI in the first quarter of 2002. The decrease and shift in the average balances of interest-earning assets reflects our decision over the past several years to limit balance sheet growth and reposition the balance sheet by emphasizing mortgage lending. Interest income on one-to-four family mortgage loans decreased $68.3 million to $626.3 million for the year ended December 31, 2002, from $694.6 million for the year ended December 31, 2001, which was primarily the result of a decrease in the average yield to 6.21% for the year ended December 31, 2002, from 6.90% for the year ended December 31, 2001, slightly offset by an increase of $8.2 million in the average balance of such loans. The slight increase in the average balance of one-to-four family mortgage loans reflects the strong level of originations and purchases in 2002, substantially offset by the extraordinarily high level of repayment activity, due to refinancings, particularly in the second half of 2002. Interest income on multi-family, commercial real estate and construction loans increased $38.5 million to $162.7 million for the year ended December 31, 2002, from $124.2 million for the year ended December 31, 2001, which was primarily the result of an increase of $585.3 million in the average balance of such loans, partially offset by a decrease in the average yield to 7.85% for the year ended December 31, 2002, from 8.35% for the year ended December 31, 2001. The increase in the average balance of multi-family, commercial real estate and construction loans reflects the increase in originations of such loans, coupled with the fact that we have not experienced significant repayment activity within this portfolio in 2002 in part due to the prepayment penalties associated with these loans. The increase in the average balance of total mortgage loans reflects our continued emphasis on the origination of mortgage loans. The decrease in the average yields on mortgage loans reflects the lower interest rate environment during 2002 as compared to 2001 as higher rate loans were repaid and replaced with lower yielding new originations and purchases and ARM loans repriced. Additionally, 56 the yield is also negatively impacted by accelerated loan premium amortization as a result of the increased refinance activity. Interest income on consumer and other loans decreased $230,000 for the year ended December 31, 2002 compared to the year ended December 31, 2001 resulting from a decrease in the average yield to 5.74% for the year ended December 31, 2002, from 8.63% for the year ended December 31, 2001, partially offset by an increase of $100.2 million in the average balance of this portfolio. The changes in interest income on consumer and other loans were primarily attributable to home equity lines of credit which represented 86.5% of this portfolio at December 31, 2002. The decrease in the average yield on consumer and other loans was primarily the result of a decrease 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 decreased 475 basis points during the year ended December 31, 2001 and 50 basis points during the year ended December 31, 2002. The increase in the average balance of consumer and other loans was due to the increase in home equity lines of credit as a result of the strong housing market combined with low interest rates during 2002 and 2001. Interest income on mortgage-backed securities decreased $85.0 million to $377.6 million for the year ended December 31, 2002, from $462.6 million for the year ended December 31, 2001. This decrease was the result of a decrease in the average yield to 5.72% for the year ended December 31, 2002, from 6.35% for the year ended December 31, 2001, coupled with a decrease of $682.8 million in the average balance of the portfolio. Similar to mortgage loans, the decrease in the average yield on mortgage-backed securities reflects the lower interest rate environment during 2002 as higher yielding securities were repaid and replaced with lower yielding purchases and security premium amortization accelerated. The decrease in the average balance of mortgage-backed securities was the result of our strategy of repositioning the balance sheet over the past several years, increased levels of principal repayments due to the lower interest rate environment which has existed since June 2001 and sales of securities during the second half of 2002. Interest income on other securities decreased $38.1 million to $69.2 million for the year ended December 31, 2002, from $107.3 million for the year ended December 31, 2001. This decrease resulted from a decrease of $508.4 million in the average balance of this portfolio, primarily due to higher yielding securities being called throughout 2001 and 2002 as a result of the declining interest rate environment. As a result of the decrease in the balance of higher yielding securities, the average yield decreased to 6.84% for the year ended December 31, 2002, from 7.06% for the year ended December 31, 2001. Interest income on federal funds sold and repurchase agreements decreased $19.1 million as a result of a decrease in the average yield to 1.68% for the year ended December 31, 2002, from 3.40% for the year ended December 31, 2001, coupled with a decrease of $173.5 million in the average balance of the portfolio. Interest Expense Interest expense for the year ended December 31, 2002 decreased $179.8 million to $801.8 million, from $981.6 million for the year ended December 31, 2001. This decrease was primarily the result of a decrease in the average cost of interest-bearing liabilities to 3.97% for the year ended December 31, 2002, from 4.78% for the year ended December 31, 2001, coupled with a decrease of $342.4 million in the average balance of interest-bearing liabilities to $20.20 billion for the year ended December 31, 2002, from $20.54 billion for the year ended December 31, 2001. The decrease in the overall average cost of our interest-bearing liabilities reflects the impact of the lower interest rate environment, which has prevailed since June 2001 and throughout 2002, primarily on the cost of our deposits. The decrease in the average balance of interest-bearing liabilities was attributable to a decrease in borrowings, due to the repayment of matured borrowings, partially offset by an increase in deposits, which reflects our decision over the past several years to reposition the balance sheet through, in part, a shift in our liability mix toward lower costing and less interest rate sensitive core deposits. 57 Interest expense on deposits decreased $112.0 million, to $288.0 million for the year ended December 31, 2002, from $400.0 million for the year ended December 31, 2001, reflecting a decrease in the average cost of deposits to 2.59% for the year ended December 31, 2002, from 3.80% for the year ended December 31, 2001, partially offset by an increase of $575.1 million in the average balance of total deposits. The decrease in the average cost of total deposits was driven by decreases in rates in all deposit categories, primarily on our certificates of deposit and money market accounts, as a result of the lower interest rate environment which has continued into 2002. The increase in the average balance of total deposits was primarily the result of increases in the average balances of savings, NOW and demand deposit and money market accounts, partially offset by a slight decrease in the average balance of certificates of deposit. Interest expense on certificates of deposit decreased $59.9 million resulting from a decrease in the average cost to 4.29% for the year ended December 31, 2002, from 5.42% for the year ended December 31, 2001, coupled with a $19.6 million decrease in the average balance. Interest expense on money market accounts decreased $33.0 million reflecting a decrease in the average cost to 1.73% for the year ended December 31, 2002, from 3.78% for the year ended December 31, 2001, partially offset by an increase of $141.9 million in the average balance of such accounts. Interest paid on money market accounts is on a tiered basis with 87.1% of the balance at December 31, 2002 in the highest tier. Interest expense on savings accounts decreased $17.2 million which was attributable to a decrease in the average cost to 1.06% for the year ended December 31, 2002, from 1.85% for the year ended December 31, 2001, partially offset by an increase of $258.5 million in the average balance. Interest expense on NOW and demand deposit accounts decreased $1.9 million as a result of a decrease in the average cost to 0.25% for the year ended December 31, 2002, from 0.47% for the year ended December 31, 2001, partially offset by an increase of $194.3 million in the average balance. The increases in the average balances of savings and NOW and demand deposit accounts are consistent with our emphasis on deposit generation. Interest expense on borrowed funds for the year ended December 31, 2002 decreased $67.8 million to $513.8 million, from $581.6 million for year ended December 31, 2001, resulting from a decrease of $917.5 million in the average balance, coupled with a decrease in the average cost of borrowings to 5.65% for the year ended December 31, 2002, from 5.81% for the year ended December 31, 2001. During the year ended December 31, 2002, $1.90 billion in borrowings with an average rate of 6.81% matured, of which $1.40 billion were repaid and $500.0 million were rolled into short-term borrowings at substantially lower rates. Additionally, we issued $250.0 million of 5.75% senior unsecured notes during the quarter ended December 31, 2002. Provision for Loan Losses Provision for loan losses decreased $1.7 million, to $2.3 million for the year ended December 31, 2002 compared to $4.0 million for the year ended December 31, 2001. During the third quarter of 2002, we performed an analysis of the actual charge-off history of our loan portfolio compared to our previously determined allowance coverage percentages. 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 analysis indicated that our estimate of losses inherent in our portfolio exceeded our actual charge-off history during the 2002 economic downturn. In response to the results of that analysis, we adjusted our allowance coverage percentages for our portfolio segments accordingly. As a result of our analysis, no provision for loan losses was recorded for the 2002 fourth quarter. The allowance for loan losses increased to $83.5 million at December 31, 2002, from $82.3 million at December 31, 2001. Net loan charge-offs totaled $1.0 million for the year ended December 31, 2002 compared to $1.7 million for the year ended December 31, 2001. Non-performing loans decreased $2.6 58 million to $34.5 million at December 31, 2002, from $37.1 million at December 31, 2001. The allowance for loan losses as a percentage of non-performing loans increased to 242.04% at December 31, 2002, from 221.70% at December 31, 2001 primarily due to the decrease in non-performing loans from December 31, 2001 to December 31, 2002. The allowance for loan losses as a percentage of total loans was 0.69% at December 31, 2002 and 0.68% at December 31, 2001. For further discussion of non-performing loans and allowance for loan losses, see "Critical Accounting Policies" and "Asset Quality." Non-Interest Income Non-interest income for the year ended December 31, 2002 increased $17.3 million, to $107.4 million, from $90.1 million for the year ended December 31, 2001. The increase in non-interest income was primarily due to increases in net gain on sales of securities, customer service fees and income from BOLI, partially offset by a decrease in mortgage banking income, net. Customer service fees increased $8.2 million to $60.2 million for the year ended December 31, 2002, from $52.0 million for the year ended December 31, 2001. The increase in customer service fees was primarily attributable to an increase in the number of NOW and demand deposit accounts, which was primarily due to an integrated checking account promotion initiated in the second quarter of 2002 and continued focus on our retail sales initiatives, including the introduction of our PEAK Process in the first quarter of 2002. Mortgage banking income, net, decreased $9.8 million to net mortgage banking loss of $2.3 million for the year ended December 31, 2002, compared to net mortgage banking income of $7.5 million for the year ended December 31, 2001. This decrease was primarily due to increases in the provision for the valuation allowance of MSR and the amortization of MSR, coupled with a decrease in loan servicing fees. These changes were partially offset by an increase in the gain on sales of loans. The valuation allowance adjustments for the impairment of MSR increased $9.5 million to $10.8 million for the year ended December 31, 2002, from $1.3 million for the year ended December 31, 2001. This increase was related to the current and forecasted lower interest rate environment and projected accelerated loan prepayment speeds at December 31, 2002 as compared to December 31, 2001. Amortization of mortgage servicing rights increased $655,000 to $10.2 million for the year ended December 31, 2002, from $9.6 million for the year ended December 31, 2001. Loan servicing fees decreased $3.0 million to $12.1 million for the year ended December 31, 2002, from $15.1 million for the year ended December 31, 2001. This decrease in loan servicing fees was the result of a decrease in the balance of loans serviced for others to $2.67 billion at December 31, 2002, from $3.32 billion at December 31, 2001. The decrease in the balance of loans serviced for others was the result of runoff in that portfolio, due to repayments in the lower interest rate environment exceeding the level of new servicing volume from loan sales. Net gain on sales of loans increased $3.3 million to $6.6 million for the year ended December 31, 2002, from $3.3 million for the year ended December 31, 2001. The increase in net gain on sales of loans was primarily due to an increase in the volume of fixed rate loans originated and sold into the secondary market during 2002. The lower interest rate environment in 2002 as compared to 2001 resulted in a significant increase in refinance activity and greater demand for fixed rate loans, the majority of which are not retained for our portfolio. Net gain on sales of securities totaled $10.8 million for the year ended December 31, 2002. During the second half of 2002, we sold mortgage-backed securities with an amortized cost of $438.6 million. These gains were used as a natural hedge to offset MSR valuation allowance adjustments caused by the impairment of MSR discussed previously. There were no sales of securities in 2001. Income from BOLI increased $4.6 million to $21.4 million for the year ended December 31, 2002, from $16.8 million for the year ended December 31, 2001. As discussed previously, during the first quarter of 2002 we purchased an additional $100.0 million of BOLI. 59 Other non-interest income increased $2.7 million to $9.6 million for the year ended December 31, 2002, from $6.9 million for the year ended December 31, 2001. This increase was primarily due to the receipt in 2002 of a $3.8 million net insurance settlement regarding a lawsuit, partially offset by income recognized in 2001 related to the dissolution of a trust account previously established for certain former executives. Non-Interest Expense Non-interest expense for the year ended December 31, 2002 totaled $198.0 million, an increase of $184,000 from $197.8 million for the year ended December 31, 2001. This increase was primarily due to an increase of $17.0 million in general and administrative expense to $195.8 million for the year ended December 31, 2002, from $178.8 million for the year ended December 31, 2001, coupled with a $2.2 million prepayment penalty incurred in December 2002 on the prepayment of a $100.0 million reverse repurchase agreement. These increases were substantially offset by the elimination of goodwill amortization upon adoption of SFAS No. 142 effective January 1, 2002, which totaled $19.1 million for the year ended December 31, 2001. The increase in general and administrative expense was primarily due to an increase in compensation and benefits expense. Compensation and benefits expense increased $13.9 million to $106.7 million for the year ended December 31, 2002, from $92.8 million for the year ended December 31, 2001. This increase was attributable to staff additions, primarily in our retail banking network, and normal annual increases in salaries, coupled with an increase in pension and other postretirement benefits expense of $3.4 million and an increase in ESOP expense of $2.4 million for the year ended December 31, 2002 as compared to the year ended December 31, 2001. The increase in pension expense is primarily related to the decrease in the value of our pension assets which is a result of the continued decline in the equities markets during 2002. The increase in ESOP expense was due to the increase in eligible compensation, coupled with the higher average market value of our common stock during the year ended December 31, 2002 compared to the year ended December 31, 2001. Other expense increased $2.6 million to $29.2 million for the year ended December 31, 2002, from $26.6 million for the year ended December 31, 2001, primarily due to a decrease in the fair value of our $300.0 million notional amount of interest rate cap agreements. The interest rate caps, which did not qualify for hedge accounting treatment, were purchased in the second half of 2001 as protection against interest rate increases during the next several years as part of management's interest rate risk strategy. Our percentage of general and administrative expense to average assets increased to 0.88% for the year ended December 31, 2002, from 0.79% for the year ended December 31, 2001. The efficiency ratio increased to 34.25% for the year ended December 31, 2002, from 32.68% for the year ended December 31, 2001. The increases in these ratios are attributable to the increase in general and administrative expense for the year ended December 31, 2002 compared to the year ended December 31, 2001. Income Tax Expense For the year ended December 31, 2002, income tax expense was $123.1 million, representing an effective tax rate of 33.1%, compared to $120.0 million, representing an effective tax rate of 34.8%, for the year ended December 31, 2001. The reduction in the effective tax rate for the year ended December 31, 2002 was primarily due to the adoption of SFAS No. 142, which eliminated the amortization of goodwill which was not deductible for tax purposes. Asset Quality Our non-performing assets continue to remain at very low levels in relation to both the size of our loan portfolio and relative to our peers. Non-performing assets decreased $4.3 million to $31.3 million at December 31, 2003, from $35.6 million at December 31, 2002. The ratio of non-performing loans to 60 total loans decreased to 0.23% at December 31, 2003, from 0.29% at December 31, 2002. The ratio of non-performing assets to total assets decreased to 0.14% at December 31, 2003, from 0.16% at December 31, 2002. See Item 1, "Business" for further discussion of our asset quality. Non-Performing Assets The following table sets forth information regarding non-performing assets. In addition to the non-performing loans, we had $839,000 of potential problem loans at December 31, 2003 compared to $1.5 million at December 31, 2002. Such loans are 60-89 days delinquent as shown on page 62.
At December 31, ----------------------------------------------- (Dollars in Thousands) 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------- Non-accrual delinquent mortgage loans (1) $28,321 $31,997 $34,848 $34,332 $48,830 Non-accrual delinquent consumer and other loans 792 1,485 991 903 1,626 Mortgage loans delinquent 90 days or more and still accruing interest (2) 563 1,035 1,277 952 2,913 - ------------------------------------------------------------------------------------------------- Total non-performing loans 29,676 34,517 37,116 36,187 53,369 Real estate owned, net (3) 1,635 1,091 2,987 3,801 5,080 - ------------------------------------------------------------------------------------------------- Total non-performing assets $31,311 $35,608 $40,103 $39,988 $58,449 ================================================================================================= Non-performing loans to total loans 0.23% 0.29% 0.31% 0.32% 0.52% Non-performing loans to total assets 0.13 0.16 0.16 0.16 0.24 Non-performing assets to total assets 0.14 0.16 0.18 0.18 0.26
(1) Consists primarily of loans secured by one-to-four family properties. (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, and are primarily secured by one-to-four family properties. (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 $1.9 million for the year ended December 31, 2003 and $2.3 million for each of the years ended December 31, 2002 and 2001. This compares to actual payments recorded as interest income, with respect to such loans, of $1.2 million for the year ended December 31, 2003, $1.6 million for the year ended December 31, 2002 and $1.8 million for the year ended December 31, 2001. 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 $3.9 million at December 31, 2003, $5.0 million at December 31, 2002, $5.4 million at December 31, 2001, $5.2 million at December 31, 2000 and $6.7 million at December 31, 1999. 61 Delinquent Loans The following table shows a comparison of delinquent loans at December 31, 2003, 2002 and 2001.
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, 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% At December 31, 2002: Mortgage loans: One-to-four family 12 $ 417 185 $30,130 Multi-family 1 192 6 2,114 Commercial real estate 2 324 1 788 Consumer and other loans 85 571 131 1,485 - ------------------------------------------------------------------------------- Total delinquent loans 100 $1,504 323 $34,517 =============================================================================== Delinquent loans to total loans 0.01% 0.29% At December 31, 2001: Mortgage loans: One-to-four family 20 $1,269 222 $31,991 Multi-family 1 84 5 1,860 Commercial real estate 5 1,395 4 1,752 Construction -- -- 1 522 Consumer and other loans 102 491 104 991 - ------------------------------------------------------------------------------- Total delinquent loans 128 $3,239 336 $37,116 =============================================================================== Delinquent loans to total loans 0.03% 0.31%
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, 2003. There were no assets classified as loss at December 31, 2003.
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 -- $ -- 140 $22,734 4 $289 Multi-family 6 6,703 14 4,918 -- -- Commercial real estate 5 9,025 5 2,629 -- -- Construction 2 1,234 -- -- -- -- Consumer and other loans 2 239 91 806 -- -- - -------------------------------------------------------------------------------------------- Total loans 15 17,201 250 31,087 4 289 Real estate owned: One-to-four family -- -- 8 1,635 -- -- - -------------------------------------------------------------------------------------------- Total classified assets 15 $17,201 258 $32,722 4 $289 ============================================================================================
62 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) 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Allowance for losses on loans: Balance at beginning of year $83,546 $82,285 $79,931 $76,578 $74,403 Provision charged to operations -- 2,307 4,028 4,014 4,119 Charge-offs: One-to-four family (194) (325) (506) (963) (1,554) Multi-family -- (83) (3) (8) (12) Commercial real estate -- (268) (464) -- (686) Construction -- (281) -- -- (159) Consumer and other loans (1,142) (1,251) (1,554) (1,678) (4,298) - ------------------------------------------------------------------------------------------------ Total charge-offs (1,336) (2,208) (2,527) (2,649) (6,709) - ------------------------------------------------------------------------------------------------ Recoveries: One-to-four family 111 241 263 802 1,540 Multi-family -- 83 -- 136 270 Commercial real estate 20 291 -- 496 1,591 Construction -- -- 9 79 -- Consumer and other loans 780 547 581 475 1,364 - ------------------------------------------------------------------------------------------------ Total recoveries 911 1,162 853 1,988 4,765 - ------------------------------------------------------------------------------------------------ Net charge-offs (425) (1,046) (1,674) (661) (1,944) - ------------------------------------------------------------------------------------------------ Balance at end of year $83,121 $83,546 $82,285 $79,931 $76,578 ================================================================================================ Net charge-offs during the year to average loans outstanding during the year 0.00% 0.01% 0.01% 0.01% 0.02% Allowance for loan losses to total loans at end of year 0.66 0.69 0.68 0.70 0.74 Allowance for loan losses to non-performing loans at end of year 280.10 242.04 221.70 220.88 143.49 Allowance for losses on REO: Balance at beginning of year $ 4 $ -- $ 3 $ 171 $ 689 Provision (recovery) recorded to operations 4 4 (64) (109) (38) Charge-offs (8) -- (17) (113) (587) Recoveries -- -- 78 54 107 - ------------------------------------------------------------------------------------------------ Balance at end of year $ -- $ 4 $ -- $ 3 $ 171 ================================================================================================
63 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 increases in the reserves allocated to multi-family and commercial real estate loans reflect the overall increases in the balances of those portfolios. 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, --------------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------- % 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 $39,614 71.13% $45,485 76.86% $49,122 83.59% Multi-family 16,440 17.69 12,449 13.35 8,612 9.05 Commercial real estate 11,006 6.98 10,099 6.21 8,529 4.95 Construction 1,695 0.79 786 0.47 1,329 0.42 Consumer and other loans 14,366 3.41 14,727 3.11 14,693 1.99 - ------------------------------------------------------------------------------------------------------- Total allowance for loan losses $83,121 100.00% $83,546 100.00% $82,285 100.00% =======================================================================================================
At December 31, --------------------------------------------- 2000 1999 --------------------------------------------- % of Loans % of Loans to to (Dollars in Thousands) Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------- One-to-four family $49,826 86.79% $44,556 88.07% Multi-family 6,721 7.07 5,086 6.02 Commercial real estate 7,771 4.23 8,440 3.89 Construction 573 0.30 2,325 0.34 Consumer and other loans 15,040 1.61 16,171 1.68 - ------------------------------------------------------------------------------- Total allowance for loan losses $79,931 100.00% $76,578 100.00% ===============================================================================
Impact of Accounting Standards and Interpretations On January 12, 2004, the FASB issued Staff Position No. 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which allows companies to recognize or defer recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Act, for annual financial statements of fiscal years ending after December 7, 2003. The Medicare Act introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. These provisions of the Medicare Act will affect accounting measurements. We have elected to defer accounting for the effects of the Medicare Act. The specific authoritative guidance on accounting for the federal subsidy is pending and the issued guidance could require us to change previously reported information. As a result, we have not yet determined the impact of the Medicare Act on our financial condition or results of operations. In December 2003, the FASB issued a revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements Nos. 87, 88 and 106," or SFAS No. 132(R). SFAS No. 132(R) requires additional disclosures to those in the original statement about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) also amends Accounting Principles Board, or APB, Opinion No. 28, "Interim Financial Reporting," to require interim disclosure of the components of net periodic benefit cost and, if significantly different from previously disclosed amounts, the amounts of contributions and projected contributions to fund pension plans and other postretirement benefit plans. SFAS No. 132(R) is effective for financial statements for fiscal years ending after December 15, 2003, except for disclosure of estimated future benefit payments which is effective for fiscal years ending after June 15, 2004. The interim-period disclosures required by SFAS No. 132(R) are effective for interim periods beginning after December 15, 2003. As the provisions of 64 SFAS No. 132(R) are disclosure related, the adoption of SFAS No. 132(R) had no impact on our financial condition or results of operations. The revised disclosures are provided in Note 16 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (referred to as "variable interest entities"). When issued, FIN 46 was to be applied immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest entities in which an enterprise held a variable interest that it acquired before February 1, 2003, FIN 46 was to be applied in the first fiscal year or interim period beginning after June 15, 2003, and could have been applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. In October 2003, the FASB issued a Staff Position which delayed the effective date of FIN 46 for a public entity until the end of the first interim or annual period ending after December 15, 2003, provided that the variable interest entity was created before February 1, 2003 and the public entity had not issued financial statements reporting that variable interest entity in accordance with FIN 46, other than certain disclosures required by paragraph 26 of FIN 46. In December 2003, the FASB issued FIN 46(R) which replaced FIN 46. The transition guidance for public entities requires the application of either FIN 46 or FIN 46(R) to all variable interest entities in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003. However, all public entities are required to fully implement FIN 46(R) no later than the end of the first reporting period ending after March 15, 2004. We have chosen to apply FIN 46 as of December 31, 2003. The adoption of the currently effective provisions of FIN 46 did not have a material impact on our financial condition or results of operations. Effective January 1, 2004, we adopted FIN 46(R), which requires us to deconsolidate our wholly-owned subsidiary Astoria Capital Trust I. The impact of this deconsolidation on financial statements for periods ending after March 15, 2004 will be to increase consolidated total assets by $3.9 million, reflecting our investment in the common securities of Astoria Capital Trust I, and increase consolidated total borrowings by $3.9 million, reflecting the difference between the aggregate principal amount of the junior subordinated debentures we issued to Astoria Capital Trust I and the aggregate principal amount of Capital Securities issued by Astoria Capital Trust I in the private placement completed in 1999. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN 45, which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. FIN 45 also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 were effective for financial statements of interim or annual periods ending after December 15, 2002. The recognition and measurement provisions are applicable prospectively to guarantees issued or modified after December 31, 2002. The adoption of the recognition and measurement provisions of FIN 45 did not have a material impact on our financial condition or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, and should generally be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with 65 their respective effective dates. In addition, the provisions of SFAS No. 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which requires issuers of certain financial instruments, falling within the scope of SFAS No. 150, with characteristics of both liabilities and equity to be classified and measured as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption, SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle. Restatement is not permitted. The adoption of SFAS No. 150 did not have a material impact on our financial condition or results of operations. 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 table on page 68, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003 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 66 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 they 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. The Gap Table includes $2.18 billion of callable borrowings classified according to their maturity dates, primarily in the more than three years to five 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 $161.9 million classified according to their maturity dates, of which $141.6 million 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 low interest rate environment. As indicated in the Gap Table, our one-year cumulative gap at December 31, 2003 was negative 6.83%. This compares to a one-year cumulative gap of 18.15% at December 31, 2002, as previously reported. The December 31, 2002 Gap Table includes callable securities classified according to their call dates. We have determined that the callable securities remaining in our portfolio at December 31, 2003 will not likely be called and, as such, have changed our classification of these securities to maturity dates in the December 31, 2003 Gap Table. Our one-year cumulative gap at December 31, 2002 would have been 16.79% if callable securities had been classified according to their maturity dates. The decrease in our one-year cumulative gap is primarily attributable to a shift in borrowings maturing in 2004 which were classified in the more than one year to three years category at December 31, 2002 and are classified in the one year or less category at December 31, 2003. Also contributing to the decrease in our one-year cumulative gap is a decrease in mortgage-backed securities repayment assumptions, which is reflective of the current coupon rates and average lives of the securities in our portfolio at December 31, 2003. 67
At December 31, 2003 ------------------------------------------------------------------ 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) $ 4,270,775 $3,066,651 $3,312,926 $1,522,945 $12,173,297 Consumer and other loans (1) 407,897 23,103 -- -- 431,000 Federal funds sold and repurchase agreements 65,926 -- -- -- 65,926 Mortgage-backed and other securities available-for-sale and FHLB stock 898,369 789,032 546,351 714,695 2,948,447 Mortgage-backed and other securities held-to-maturity 1,503,003 1,959,651 1,175,942 1,141,750 5,780,346 - ------------------------------------------------------------------------------------------------------------- Total interest-earning assets 7,145,970 5,838,437 5,035,219 3,379,390 21,399,016 Net unamortized purchase premiums and deferred costs (2) 31,012 21,828 21,984 11,093 85,917 - ------------------------------------------------------------------------------------------------------------- Net interest-earning assets (3) 7,176,982 5,860,265 5,057,203 3,390,483 21,484,933 - ------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings 162,882 325,763 325,763 2,144,607 2,959,015 Money market 1,049,608 19,280 19,280 144,603 1,232,771 NOW and demand deposit 42,842 85,683 85,683 1,279,202 1,493,410 Certificates of deposit 2,710,436 1,870,550 813,270 107,142 5,501,398 Borrowed funds 4,744,564 1,792,226 2,718,596 372,785 9,628,171 - ------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 8,710,332 4,093,502 3,962,592 4,048,339 20,814,765 - ------------------------------------------------------------------------------------------------------------- Interest sensitivity gap (1,533,350) 1,766,763 1,094,611 (657,856) $ 670,168 ============================================================================================================= Cumulative interest sensitivity gap $(1,533,350) $ 233,413 $1,328,024 $ 670,168 ============================================================================================================= Cumulative interest sensitivity gap as a percentage of total assets (6.83)% 1.04% 5.91% 2.98% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 82.40% 101.82% 107.92% 103.22%
(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. NII Sensitivity Analysis In managing IRR, we also use an internal income simulation model for our NII sensitivity analyses. These analyses measure changes in projected net interest income over various time periods resulting from hypothetical changes in interest rates. The interest rate scenarios most commonly analyzed reflect gradual and reasonable changes over a specified time period, which is typically one year. The base net interest income projection utilizes similar assumptions as those reflected in the Gap Table, assumes that cash flows are reinvested in similar assets and liabilities and that interest rates as of the reporting date remain constant over the projection period. For each alternative interest rate scenario, corresponding changes in the cash flow and repricing assumptions of each financial instrument are made to determine the impact on net interest income. Assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points and remain at that level thereafter, our projected net interest income for the twelve month period beginning January 1, 2004 would decrease by approximately 0.54% from the base projection. At December 31, 2002, in the up 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2003 would have increased by approximately 1.10% from the base projection. The current low interest rate environment prevents us from performing an income simulation 68 for a decline in interest rates of the same magnitude and timing as our rising interest rate simulation, since certain asset yields, liability costs, and related indexes are below 2.00%. 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, 2004 would decrease by approximately 3.46% from the base projection. At December 31, 2002, in the down 100 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2003 would have decreased by approximately 1.09% from the base projection. During the prevailing interest rate environment of the past two years, which has been characterized by significant declines in market interest rates, we have experienced very high levels of loan and mortgage-backed securities prepayments. These very high levels of prepayments continued during the first nine months of 2003. During that time, we continued to reprice our interest-bearing liabilities, although we were not able to do so to the same degree as our interest-earning assets. Interest rates began rising during the second half of 2003 and, as a result, we experienced a significant decline in mortgage loan and mortgage-backed securities cash flows, due to the decline in repayment activity, which also resulted in a decrease in premium amortization. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, if market interest rates remain at their present levels for a prolonged period of time the repricing of our liabilities will exceed the repricing of our assets and the reduced refinance activity will result in reduced premium amortization, resulting in a positive impact on our results of operations. 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 change 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, but are not limited to, BOLI, MSR, defined benefit pension costs and the mark to market adjustments on certain derivative instruments. 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 index on page 75. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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, 2003. 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. 69 There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION Information regarding directors and executive officers who are not directors of the Registrant 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, and is incorporated herein by reference. 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. 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, and is incorporated herein by reference. 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" and information relating to compensation plans, including individual compensation arrangements, under which equity securities of Astoria Financial Corporation are authorized for issuance is included in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, and is incorporated herein by reference. 70 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accounting 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements See Index to Consolidated Financial Statements on page 75. 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) Reports on Form 8-K filed during the last quarter of the Registrant's fiscal year ended December 31, 2003 (1) Report on Form 8-K dated November 10, 2003 which includes under Item 9 of Form 8-K a press release dated November 5, 2003 announcing our participation in the 2003 Financial Services Conference sponsored by Sandler O'Neill & Partners, L.P. on November 13, 2003 and a written presentation which was made available at the 2003 Financial Services Conference, on our investor relations website and to interested investors and analysts during the quarter ended December 31, 2003. This report has been furnished but not filed pursuant to Regulation FD. (2) Report on Form 8-K dated October 16, 2003 which includes under Item 12 of Form 8-K a press release dated October 16, 2003 which includes highlights of our financial results for the quarter ended September 30, 2003. This report has been furnished but not filed pursuant to Regulation G. (3) Report on Form 8-K dated October 15, 2003 which includes under Item 5 of Form 8-K a press release dated October 15, 2003 announcing the retirement of a senior lending officer and the appointment of a new senior lending officer. 71 (4) Report on Form 8-K dated October 1, 2003 which includes under Item 5 of Form 8-K a press release dated October 1, 2003 announcing the completion of the redemption of our 12% Noncumulative Perpetual Preferred Stock, Series B. (c) Exhibits See Index of Exhibits on page 114. 72 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 12, 2004 ----------------------------------------------- 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 12, 2004 ----------------------------------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer /s/ Monte N. Redman March 12, 2004 ----------------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer /s/ Gerard C. Keegan March 12, 2004 ----------------------------------------------- Gerard C. Keegan Vice Chairman, Chief Administrative Officer and Director /s/ Andrew M. Burger March 12, 2004 ----------------------------------------------- Andrew M. Burger Director /s/ Denis J. Connors March 12, 2004 ----------------------------------------------- Denis J. Connors Director /s/ Thomas J. Donahue March 12, 2004 ----------------------------------------------- Thomas J. Donahue Director /s/ Peter C. Haeffner, Jr. March 12, 2004 ----------------------------------------------- Peter C. Haeffner, Jr. Director /s/ Ralph F. Palleschi March 12, 2004 ----------------------------------------------- Ralph F. Palleschi Director
73 /s/ Lawrence W. Peters March 12, 2004 ----------------------------------------------- Lawrence W. Peters Director /s/ Thomas V. Powderly March 12, 2004 ----------------------------------------------- Thomas V. Powderly Director /s/ Leo J. Waters March 12, 2004 ----------------------------------------------- Leo J. Waters Director /s/ Donald D. Wenk March 12, 2004 ----------------------------------------------- Donald D. Wenk Director
74 CONSOLIDATED FINANCIAL STATEMENTS OF ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX
Page ---- Consolidated Financial Statements Independent Auditors' Report............................................. 76 Consolidated Statements of Financial Condition at December 31, 2003 and 2002............................................ 77 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001...................................... 78 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001........... 79 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001...................................... 80 Notes to Consolidated Financial Statements............................... 81
75 INDEPENDENT AUDITORS' REPORT 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 as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 1(i) and 10 to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ KPMG LLP New York, New York March 5, 2004 76 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31, ------------------------- (In Thousands, Except Share Data) 2003 2002 - ---------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 173,828 $ 167,605 Federal funds sold and repurchase agreements 65,926 510,252 Available-for-sale securities: Encumbered 1,997,953 2,096,619 Unencumbered 657,039 695,962 - ---------------------------------------------------------------------------------------------------- 2,654,992 2,792,581 Held-to-maturity securities, fair value of $5,809,117 and $5,100,565, respectively: Encumbered 5,508,864 4,059,947 Unencumbered 283,863 981,310 - ---------------------------------------------------------------------------------------------------- 5,792,727 5,041,257 Federal Home Loan Bank of New York stock, at cost 213,450 247,550 Loans held-for-sale, net 23,023 62,669 Loans receivable 12,686,987 12,059,361 Allowance for loan losses (83,121) (83,546) - ---------------------------------------------------------------------------------------------------- Loans receivable, net 12,603,866 11,975,815 Mortgage servicing rights, net 17,952 20,411 Accrued interest receivable 77,956 88,908 Premises and equipment, net 160,089 157,297 Goodwill 185,151 185,151 Bank owned life insurance 370,310 358,898 Other assets 118,395 89,435 - ---------------------------------------------------------------------------------------------------- Total assets $22,457,665 $21,697,829 ==================================================================================================== LIABILITIES: Deposits $11,186,594 $11,067,196 Reverse repurchase agreements 7,235,000 6,285,000 Federal Home Loan Bank of New York advances 1,924,000 2,064,000 Other borrowings, net 469,171 472,180 Mortgage escrow funds 108,635 104,353 Accrued expenses and other liabilities 137,734 151,102 - ---------------------------------------------------------------------------------------------------- Total liabilities 21,061,134 20,143,831 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 5,000,000 shares authorized: Series A (1,225,000 shares authorized and -0- shares issued and outstanding) -- -- Series B (2,000,000 shares authorized; -0- and 2,000,000 shares issued and outstanding, respectively) -- 2,000 Common stock, $.01 par value; (200,000,000 shares authorized; 110,996,592 shares issued; and 78,670,254 and 84,805,817 shares outstanding, respectively) 1,110 1,110 Additional paid-in capital 798,583 840,186 Retained earnings 1,481,546 1,368,062 Treasury stock (32,326,338 and 26,190,775 shares, at cost, respectively) (811,993) (639,579) Accumulated other comprehensive (loss) income (46,489) 9,800 Unallocated common stock held by ESOP (4,760,054 and 5,018,500 shares, respectively) (26,226) (27,581) - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 1,396,531 1,553,998 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $22,457,665 $21,697,829 ====================================================================================================
See accompanying Notes to Consolidated Financial Statements. 77 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, --------------------------------------- (In Thousands, Except Share Data) 2003 2002 2001 - ----------------------------------------------------------------------------------------------- Interest income: Mortgage loans: One-to-four family $ 466,544 $ 626,251 $ 694,596 Multi-family, commercial real estate and construction 203,785 162,677 124,163 Consumer and other loans 19,247 17,623 17,853 Mortgage-backed securities 337,222 377,623 462,621 Other securities 28,955 69,211 107,315 Federal funds sold and repurchase agreements 1,538 12,877 32,015 - ----------------------------------------------------------------------------------------------- Total interest income 1,057,291 1,266,262 1,438,563 - ----------------------------------------------------------------------------------------------- Interest expense: Deposits 225,251 288,000 399,989 Borrowed funds 452,502 513,838 581,616 - ----------------------------------------------------------------------------------------------- Total interest expense 677,753 801,838 981,605 - ----------------------------------------------------------------------------------------------- Net interest income 379,538 464,424 456,958 Provision for loan losses -- 2,307 4,028 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 379,538 462,117 452,930 - ----------------------------------------------------------------------------------------------- Non-interest income: Customer service fees 59,841 60,190 52,027 Other loan fees 7,556 7,696 6,864 Net gain on sales of securities 7,346 10,772 -- Mortgage banking income, net 10,291 (2,261) 7,515 Income from bank owned life insurance 19,978 21,398 16,848 Other 14,549 9,612 6,851 - ----------------------------------------------------------------------------------------------- Total non-interest income 119,561 107,407 90,105 - ----------------------------------------------------------------------------------------------- Non-interest expense: General and administrative: Compensation and benefits 110,349 106,704 92,823 Occupancy, equipment and systems 59,892 53,125 52,390 Federal deposit insurance premiums 1,896 1,996 1,996 Advertising 5,833 4,806 4,947 Other 27,907 29,196 26,611 - ----------------------------------------------------------------------------------------------- Total general and administrative 205,877 195,827 178,767 Extinguishment of debt -- 2,202 -- Amortization of goodwill -- -- 19,078 - ----------------------------------------------------------------------------------------------- Total non-interest expense 205,877 198,029 197,845 - ----------------------------------------------------------------------------------------------- Income before income tax expense and cumulative effect of accounting change 293,222 371,495 345,190 Income tax expense 96,376 123,066 120,036 - ----------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 196,846 248,429 225,154 Cumulative effect of accounting change, net of tax -- -- (2,294) - ----------------------------------------------------------------------------------------------- Net income $ $196,846 $ 248,429 $ 222,860 =============================================================================================== Basic earnings per common share: Income before accounting change $ 2.52 $ 2.90 $ 2.43 Cumulative effect of accounting change, net of tax -- -- (0.03) - ----------------------------------------------------------------------------------------------- Net basic earnings per common share $ 2.52 $ 2.90 $ 2.40 =============================================================================================== Diluted earnings per common share: Income before accounting change $ 2.49 $ 2.85 $ 2.38 Cumulative effect of accounting change, net of tax -- -- (0.03) - ----------------------------------------------------------------------------------------------- Net diluted earnings per common share $ 2.49 $ 2.85 $ 2.35 =============================================================================================== Basic weighted average common shares 76,383,304 83,514,927 90,450,157 Diluted weighted average common and common equivalent shares 77,294,705 84,919,651 92,174,012
See accompanying Notes to Consolidated Financial Statements. 78 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
Additional Preferred Common Paid-in (In Thousands, Except Share Data) Total Stock Stock Capital - -------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $1,513,163 $ 2,000 $1,110 $806,802 Comprehensive income: Net income 222,860 -- -- -- Other comprehensive income, net of tax: Net unrealized gain on securities 115,091 -- -- -- Amortization of unrealized loss on securities transferred to held-to-maturity 3,985 -- -- -- ---------- Comprehensive income 341,936 ---------- Common stock repurchased (10,303,600 shares) (289,087) -- -- -- Dividends on common and preferred stock and amortization of purchase premium (61,321) -- -- (1,304) Exercise of stock options and related tax benefit (1,783,236 shares issued) 29,890 -- -- 10,791 Amortization relating to allocation of ESOP stock 8,005 -- -- 6,363 - -------------------------------------------------------------------------------------------------- Balance at December 31, 2001 1,542,586 2,000 1,110 822,652 Comprehensive income: Net income 248,429 -- -- -- Other comprehensive income (loss), net of tax: Net unrealized gain on securities 5,340 -- -- -- Amortization of unrealized loss on securities transferred to held-to-maturity 8,317 -- -- -- Net unrealized loss on cash flow hedge (1,871) -- -- -- Minimum pension liability adjustment (19) -- -- -- ---------- Comprehensive income 260,196 ---------- Common stock repurchased (7,283,400 shares) (211,103) -- -- -- Dividends on common and preferred stock and amortization of purchase premium (70,160) -- -- (1,304) Exercise of stock options and related tax benefit (1,322,473 shares issued) 22,256 -- -- 10,514 Amortization relating to allocation of ESOP stock 10,223 -- -- 8,324 - -------------------------------------------------------------------------------------------------- Balance at December 31, 2002 1,553,998 2,000 1,110 840,186 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 net unrealized loss on cash flow hedge 191 -- -- -- Minimum pension liability adjustment (29) -- -- -- ---------- Comprehensive income 140,557 ---------- Common stock repurchased (7,073,800 shares) (195,471) -- -- -- Redemption of preferred stock (54,500) (2,000) -- (52,500) Dividends on common and preferred stock and amortization of purchase premium (70,076) -- -- (978) Exercise of stock options and related tax benefit (938,237 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 $ -- $1,110 $798,583 ================================================================================================== Accumulated Unallocated Other Common Retained Treasury Comprehensive Stock Held (In Thousands, Except Share Data) Earnings Stock (Loss) Income by ESOP - ---------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $1,059,048 $(203,632) $(121,043) $(31,122) Comprehensive income: Net income 222,860 -- -- -- Other comprehensive income, net of tax: Net unrealized gain on securities -- -- 115,091 -- Amortization of unrealized loss on securities transferred to held-to-maturity -- -- 3,985 -- Comprehensive income Common stock repurchased (10,303,600 shares) -- (289,087) -- -- Dividends on common and preferred stock and amortization of purchase premium (60,017) -- -- -- Exercise of stock options and related tax benefit (1,783,236 shares issued) (14,149) 33,248 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,642 - ---------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 1,207,742 (459,471) (1,967) (29,480) Comprehensive income: Net income 248,429 -- -- -- Other comprehensive income (loss), net of tax: Net unrealized gain on securities -- -- 5,340 -- Amortization of unrealized loss on securities transferred to held-to-maturity -- -- 8,317 -- Net unrealized loss on cash flow hedge -- -- (1,871) -- Minimum pension liability adjustment -- -- (19) -- Comprehensive income Common stock repurchased (7,283,400 shares) -- (211,103) -- -- Dividends on common and preferred stock and amortization of purchase premium (68,856) -- -- -- Exercise of stock options and related tax benefit (1,322,473 shares issued) (19,253) 30,995 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,899 - ---------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 1,368,062 (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 net unrealized loss on cash flow hedge -- -- 191 -- Minimum pension liability adjustment -- -- (29) -- Comprehensive income Common stock repurchased (7,073,800 shares) -- (195,471) -- -- Redemption of preferred stock -- -- -- -- Dividends on common and preferred stock and amortization of purchase premium (69,098) -- -- -- Exercise of stock options and related tax benefit (938,237 shares issued) (14,264) 23,057 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,355 - ---------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $1,481,546 $(811,993) $ (46,489) $(26,226) ==========================================================================================================
See accompanying Notes to Consolidated Financial Statements. 79 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, --------------------------------------- (In Thousands) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 196,846 $ 248,429 $ 222,860 Adjustments to reconcile net income to net cash provided by operating activities: Net premium amortization on mortgage loans and mortgage-backed securities 113,031 52,602 22,495 Net amortization (accretion) on other securities, consumer and other loans and borrowings 981 (40,133) (57,279) Net provision for loan and real estate losses 4 2,311 3,964 Depreciation and amortization 12,474 10,581 12,648 Net gain on sales of loans and securities (19,482) (17,417) (3,276) Gain on sale of joint venture real estate investment (10,058) -- -- Originations of loans held-for-sale (616,804) (486,516) (409,943) Proceeds from sales and principal repayments of loans held-for-sale 668,586 473,882 385,528 Amortization of goodwill -- -- 19,078 Cumulative effect of accounting change, net of tax -- -- 2,294 Amortization relating to allocation of ESOP stock 7,172 10,223 8,005 Decrease in accrued interest receivable 10,952 7,365 13,166 Mortgage servicing rights amortization and valuation allowance, net of capitalized amounts 2,459 14,884 5,667 Income from bank owned life insurance, net of insurance proceeds received (11,412) (16,147) 8,814 Decrease in other assets 12,376 15,980 9,060 Decrease in accrued expenses and other liabilities (8,929) (118,623) (20,858) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 358,196 157,421 222,223 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Originations of loans receivable (5,468,504) (3,870,703) (2,923,361) Loan purchases through third parties (1,550,100) (1,546,535) (1,438,257) Principal payments on loans receivable 6,344,694 5,478,798 3,583,935 Purchases of mortgage-backed securities held-to-maturity (5,521,833) (4,608,574) (1,741,702) Purchases of mortgage-backed securities available-for-sale (3,780,394) (2,235,329) (288,811) Purchases of other securities held-to-maturity -- (9,978) -- Purchases of other securities available-for-sale (600) (21,022) (2,005) Principal payments on mortgage-backed securities held-to-maturity 4,660,847 3,745,503 1,434,395 Principal payments on mortgage-backed securities available-for-sale 2,209,760 2,348,406 1,571,022 Proceeds from calls and maturities of other securities held-to-maturity 68,613 316,980 475,019 Proceeds from calls and maturities of other securities available-for-sale 133,280 256,211 220,431 Proceeds from sales of mortgage-backed securities available-for-sale 1,406,954 449,327 -- Proceeds from sales of other securities available-for-sale 50,056 -- -- Net redemptions of FHLB stock 34,100 2,900 34,800 Proceeds from sales of real estate owned, net 1,528 3,643 6,235 Purchases of premises and equipment, net of proceeds from sales (15,266) (18,125) (7,819) Net proceeds from sale of joint venture real estate investment 10,140 -- -- Purchase of bank owned life insurance -- (100,000) -- - -------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (1,416,725) 191,502 923,882 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 119,398 163,503 831,995 Net increase (decrease) in borrowings with original terms of three months or less 810,000 500,000 (50,000) Net proceeds from borrowings with original terms greater than three months 1,700,000 496,883 103,030 Repayments of borrowings with original terms greater than three months (1,700,000) (2,000,450) (553,122) Net increase (decrease) in mortgage escrow funds 4,282 (12,042) (92) Cash paid for cash flow hedging instrument -- (3,297) -- Common stock repurchased (195,471) (211,103) (289,087) Cash dividends paid to stockholders (72,076) (70,160) (61,321) Redemption of preferred stock (54,500) -- -- Cash received for options exercised 8,793 11,742 19,099 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 620,426 (1,124,924) 502 - -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (438,103) (776,001) 1,146,607 Cash and cash equivalents at beginning of year 677,857 1,453,858 307,251 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 239,754 $ 677,857 $ 1,453,858 ========================================================================================================================== Supplemental disclosures: Cash paid during the year: Interest $ 680,504 $ 815,627 $ 983,890 ========================================================================================================================== Income taxes $ 88,478 $ 112,652 $ 88,133 ========================================================================================================================== Additions to real estate owned $ 2,075 $ 1,971 $ 5,585 ========================================================================================================================== Securities transferred from available-for-sale to held-to-maturity $ -- $ -- $ 2,878,767 ==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 80 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 accounting principles generally accepted in the United States of America, 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 our wholly-owned subsidiaries: Astoria Federal Savings and Loan Association, and its subsidiaries, or Astoria Federal; Astoria Capital Trust I; and AF Insurance Agency, Inc. As used in this annual report, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries, including Astoria Federal, Astoria Capital Trust I and AF Insurance Agency, Inc., depending on the context. All significant inter-company accounts and transactions have been eliminated in consolidation. 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 $39.3 million at December 31, 2003 and $37.2 million at December 31, 2002. (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, 2003, 2002 and 2001, 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. 81 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 governmental agencies or other investors on a servicing released or retained basis. Generally, the sale of such loans is arranged through a master commitment on a mandatory delivery or best efforts basis. In addition, student loans are sold to the United States 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 by charges to operations. 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 of the loans. (f) Loans Receivable, net 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 when loans become 90 days delinquent as to their interest 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 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, net We recognize as separate assets the rights to service mortgage loans. The right to service loans for others is generally obtained by either the sale of loans with servicing retained or the open market purchase of MSR. 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 estimated fair value of MSR is based upon quoted market prices of similar loans which we sell servicing released. Purchased MSR are recorded at cost, although we generally do not purchase MSR. The cost of MSR is amortized over the estimated remaining lives of the loans serviced. MSR are carried at cost, and impairment, if any, is recognized through a valuation allowance. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. 82 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 assumptions including servicing income, servicing costs, market discount rates, prepayment speeds, 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. (h) Premises and Equipment, net Land is carried at cost. Buildings and improvements, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. 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 Effective January 1, 2002, we ceased recording amortization of goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets." Goodwill is presumed to have an indefinite useful life and is not amortized, but rather tested, at least annually, for impairment. 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 one reporting unit. If the fair value of our one reporting unit exceeds its carrying amount, further evaluation is not necessary. However, if the fair value of our one 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. Prior to January 1, 2002, goodwill was amortized using the straight line method over varying periods of up to fifteen years and was periodically evaluated for impairment in response to changes in circumstances and events. (j) Bank Owned Life Insurance, or BOLI BOLI is carried at its cash surrender value and is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as non-interest income in the consolidated statements of income and insurance proceeds received are recorded as a reduction of the cash surrender value. (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 $1.6 million at December 31, 2003 and $1.1 million at December 31, 2002. (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. 83 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (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 and the assets or liabilities being hedged are recognized in our results of operations. For cash flow hedges, changes in the fair values of the derivative instruments are reported in other comprehensive income. 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. 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 losses or gains on the hedged item). The ineffective portion of any hedge is recognized in our results of operations. We also have derivative instruments with no hedging designations. Changes in the fair values of these derivatives that do not qualify for hedge accounting treatment are recognized as income or expense in our results of operations. We do not use derivatives for trading purposes. Net interest income is increased or decreased by amounts receivable or payable with respect to our derivatives which qualify for hedge accounting treatment. Other non-interest expense is increased or decreased by amortization and the changes in fair value of our derivatives which do not qualify for hedge accounting treatment. (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. (o) Earnings Per Common Share, or EPS Basic EPS is computed by dividing net income less preferred dividends 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. Diluted EPS is computed using the same method as basic EPS, but reflects the potential dilution that would occur if stock options were exercised and converted into common stock. The dilutive effect of unexercised stock options is calculated using the treasury stock method. When applying the treasury stock method, our average stock price is utilized, and we add to the proceeds of assumed option exercises the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options. (p) Employee Benefits Astoria Federal has a qualified, non-contributory defined benefit pension plan, or the 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 84 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Act, was signed into law. The Medicare Act introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. These provisions of the Medicare Act will affect accounting measurements. On January 12, 2004, the Financial Accounting Standards Board, or FASB, issued Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which allows companies to recognize or defer recognizing the effects of the Medicare Act in annual financial statements for fiscal years ending after December 7, 2003. We have elected to defer accounting for the effects of the Medicare Act in our 2003 consolidated financial statements. Any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the effects of the Medicare Act. The specific authoritative guidance on accounting for the federal subsidy is pending and, when issued, could require us to change previously reported information. 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 Option Plans We apply the intrinsic value method of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock option plans. Accordingly, no stock-based employee compensation cost is reflected in net income, as all options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and EPS if we had applied the fair value recognition provisions of 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) 2003 2002 2001 - ------------------------------------------------------------------------------- Net income: As reported $196,846 $248,429 $222,860 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 5,417 4,338 3,797 -------- -------- -------- Pro forma $191,429 $244,091 $219,063 ======== ======== ======== Basic earnings per common share: As reported $ 2.52 $ 2.90 $ 2.40 ======== ======== ======== Pro forma $ 2.45 $ 2.85 $ 2.36 ======== ======== ======== Diluted earnings per common share: As reported $ 2.49 $ 2.85 $ 2.35 ======== ======== ======== Pro forma $ 2.41 $ 2.80 $ 2.31 ======== ======== ========
85 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (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 $132.6 million during the year ended December 31, 2003 and $183.5 million during the year ended December 31, 2002. The maximum amount of such agreements outstanding at any month end was $272.3 million during the year ended December 31, 2003 and $279.9 million during the year ended December 31, 2002. As of December 31, 2003, three repurchase agreements totaling $65.9 million were outstanding. As of December 31, 2002, three repurchase agreements totaling $279.9 million were outstanding. The fair value of the securities held under these agreements was $68.4 million as of December 31, 2003 and $286.8 million as of December 31, 2002. None of the securities held under these agreements were sold or repledged during the years ended December 31, 2003 and 2002. (3) Securities The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2003 and 2002 are as follows:
At December 31, 2003 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: Agency pass-through certificates (1) $ 161,199 $ 5,575 $ (50) $ 166,724 REMICs and CMOs: Agency issuance (1) 2,297,884 610 (70,643) 2,227,851 Non-agency issuance 109,669 170 (6,099) 103,740 - ----------------------------------------------------------------------------------------------- Total mortgage-backed securities 2,568,752 6,355 (76,792) 2,498,315 - ----------------------------------------------------------------------------------------------- Other securities: Obligations of the U.S. Government and agencies 1,738 36 (7) 1,767 FNMA and FHLMC preferred stock 140,015 96 (8,750) 131,361 Corporate debt and other securities 21,991 1,562 (4) 23,549 - ----------------------------------------------------------------------------------------------- Total other securities 163,744 1,694 (8,761) 156,677 - ----------------------------------------------------------------------------------------------- Total securities available-for-sale $2,732,496 $ 8,049 $(85,553) $2,654,992 =============================================================================================== Held-to-maturity: Mortgage-backed securities: Agency pass-through certificates (1) $ 14,345 $ 984 $ -- $ 15,329 REMICs and CMOs: Agency issuance (1) 4,958,633 30,955 (15,272) 4,974,316 Non-agency issuance 772,728 4,436 (5,143) 772,021 - ----------------------------------------------------------------------------------------------- Total mortgage-backed securities 5,745,706 36,375 (20,415) 5,761,666 - ----------------------------------------------------------------------------------------------- Other securities: Obligations of states and political subdivisions 37,038 -- -- 37,038 Corporate debt securities 9,983 430 -- 10,413 - ----------------------------------------------------------------------------------------------- Total other securities 47,021 430 -- 47,451 - ----------------------------------------------------------------------------------------------- Total securities held-to-maturity $5,792,727 $36,805 $(20,415) $5,809,117 ===============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored agencies. 86 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2002 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: Agency pass-through certificates (1) $ 241,146 $ 8,369 $ (56) $ 249,459 REMICs and CMOs: Agency issuance (1) 608,076 8,561 (85) 616,552 Non-agency issuance 1,581,475 7,001 (854) 1,587,622 - ----------------------------------------------------------------------------------------------- Total mortgage-backed securities 2,430,697 23,931 (995) 2,453,633 - ----------------------------------------------------------------------------------------------- Other securities: Obligations of the U.S. Government and agencies 132,011 1,437 -- 133,448 FNMA and FHLMC preferred stock 140,015 667 (4,000) 136,682 Corporate debt and other securities 67,854 1,492 (528) 68,818 - ----------------------------------------------------------------------------------------------- Total other securities 339,880 3,596 (4,528) 338,948 - ----------------------------------------------------------------------------------------------- Total securities available-for-sale $2,770,577 $27,527 $(5,523) $2,792,581 =============================================================================================== Held-to-maturity: Mortgage-backed securities: Agency pass-through certificates (1) $ 24,534 $ 1,656 $ -- $ 26,190 REMICs and CMOs: Agency issuance (1) 3,595,244 51,348 (569) 3,646,023 Non-agency issuance 1,306,113 8,619 (1,383) 1,313,349 - ----------------------------------------------------------------------------------------------- Total mortgage-backed securities 4,925,891 61,623 (1,952) 4,985,562 - ----------------------------------------------------------------------------------------------- Other securities: Obligations of the U.S. Government and agencies 65,776 242 -- 66,018 Obligations of states and political subdivisions 39,611 -- -- 39,611 Corporate debt securities 9,979 -- (605) 9,374 - ----------------------------------------------------------------------------------------------- Total other securities 115,366 242 (605) 115,003 - ----------------------------------------------------------------------------------------------- Total securities held-to-maturity $5,041,257 $61,865 $(2,557) $5,100,565 ===============================================================================================
(1) Includes FNMA and FHLMC securities which are U.S. Government sponsored agencies. 87 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The table below sets forth the estimated fair value of securities with gross unrealized losses at December 31, 2003, segregated between securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer.
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: Agency pass-through certificates $ 1,437 $ (10) $2,264 $(40) $ 3,701 $ (50) REMICs and CMOs: Agency issuance 2,101,805 (70,643) -- -- 2,101,805 (70,643) Non-agency issuance 93,059 (6,095) 655 (4) 93,714 (6,099) Other securities: Obligations of the U.S. Government and agencies 593 (7) -- -- 593 (7) FNMA and FHLMC preferred stock 91,250 (8,750) -- -- 91,250 (8,750) Corporate debt and other securities -- -- 550 (4) 550 (4) - ----------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities available-for-sale $2,288,144 $(85,505) $3,469 $(48) $2,291,613 $(85,553) ======================================================================================================================= Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: Agency issuance $1,523,519 $(15,272) $ -- $ -- $1,523,519 $(15,272) Non-agency issuance 447,004 (5,143) -- -- 447,004 (5,143) - ----------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities held-to-maturity $1,970,523 $(20,415) $ -- $ -- $1,970,523 $(20,415) =======================================================================================================================
At December 31, 2003, we had 120 securities which had an unrealized loss. Of the securities in an unrealized loss position at December 31, 2003, 87.3%, based on estimated fair value, are obligations of U.S. Government sponsored agencies. 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. At December 31, 2003, substantially all of the securities in an unrealized loss position had a fixed interest rate. We generally view changes in fair value caused by changes in interest rates as temporary. To date, the duration of the impairment of our securities is short. The impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, the life of the investments and the high credit quality. During the year ended December 31, 2003, proceeds from sales of securities from the available-for-sale portfolio were $1.46 billion and gross realized gains were $14.6 million and gross realized losses were $7.3 million. During the year ended December 31, 2002, proceeds from sales of securities from the available-for-sale portfolio were $449.3 million and gross realized gains were $10.8 million. There were no sales of securities from the available-for-sale portfolio during the year ended December 31, 2001. The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturity, excluding mortgage-backed securities, are shown on page 89. 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. As of December 31, 2003, the amortized cost of the callable securities in our portfolio totaled $161.9 million, of which $141.6 million are callable within one year and at various times thereafter. 88 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At December 31, 2003 --------------------- Estimated Amortized Fair (In Thousands) Cost Value - -------------------------------------------------------------------------------- Available-for-sale: Due in one year or less $ 500 $ 506 Due after one year through five years 1,738 1,767 Due after five years through ten years 500 493 Due after ten years 20,891 22,450 - -------------------------------------------------------------------------------- Total available-for-sale $23,629 $25,216 ================================================================================ Held-to-maturity: Due after one year through five years $ 9,983 $10,413 Due after five years through ten years 754 754 Due after ten years 36,284 36,284 - -------------------------------------------------------------------------------- Total held-to-maturity $47,021 $47,451 ================================================================================
The balance of accrued interest receivable for mortgage-backed securities totaled $30.7 million at December 31, 2003 and $34.1 million at December 31, 2002. The balance of accrued interest receivable for other securities totaled $656,000 at December 31, 2003 and $1.4 million at December 31, 2002. (4) Loans Receivable, net Loans receivable, net, are summarized as follows:
At December 31, ------------------------- (In Thousands) 2003 2002 - ------------------------------------------------------------------------------- Mortgage loans: One-to-four family $ 8,971,048 $ 9,209,360 Multi-family 2,230,414 1,599,985 Commercial real estate 880,296 744,623 Construction 99,046 56,475 - ------------------------------------------------------------------------------- 12,180,804 11,610,443 Net deferred loan origination costs 2,315 2,983 Net unamortized premiums 65,653 66,734 - ------------------------------------------------------------------------------- Total mortgage loans 12,248,772 11,680,160 - ------------------------------------------------------------------------------- Consumer and other loans: Home equity 386,846 323,494 Other 43,300 49,144 - ------------------------------------------------------------------------------- 430,146 372,638 Net deferred loan origination costs 7,433 6,033 Net unamortized premiums 636 530 - ------------------------------------------------------------------------------- Total consumer and other loans 438,215 379,201 - ------------------------------------------------------------------------------- Total loans 12,686,987 12,059,361 Allowance for loan losses (83,121) (83,546) - ------------------------------------------------------------------------------- Loans receivable, net $12,603,866 $11,975,815 ===============================================================================
Accrued interest receivable on all loans totaled $46.6 million at December 31, 2003 and $53.4 million at December 31, 2002. Included in loans receivable were non-accrual loans totaling $29.1 million at December 31, 2003 and $33.5 million at December 31, 2002. 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 $1.9 million for the year ended December 31, 2003 and $2.3 million for each of the years ended December 31, 2002 and 2001. This compares to actual payments recorded as interest income, with respect to such loans, of $1.2 million for the year ended December 31, 2003, $1.6 million for the year ended December 31, 2002, and $1.8 million for the year ended December 31, 2001. Loans delinquent 90 days or more and still accruing interest totaled $563,000 at December 31, 2003 and $1.0 million at December 31, 2002. These loans are delinquent 90 days or more as to their maturity date but not their interest due. 89 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes information regarding our impaired mortgage loans:
At December 31, 2003 ----------------------------------- Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - -------------------------------------------------------------------------------- One-to-four family $ 3,796 $ (198) $ 3,598 Multi-family, commercial real estate and construction 7,794 (1,157) 6,637 - -------------------------------------------------------------------------------- Total impaired mortgage loans $11,590 $(1,355) $10,235 ================================================================================
At December 31, 2002 ----------------------------------- Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - -------------------------------------------------------------------------------- One-to-four family $ 5,680 $ (220) $ 5,460 Multi-family, commercial real estate and construction 10,882 (1,380) 9,502 - -------------------------------------------------------------------------------- Total impaired mortgage loans $16,562 $(1,600) $14,962 ================================================================================
Our average recorded investment in impaired loans was $15.4 million for the year ended December 31, 2003, $15.7 million for the year ended December 31, 2002 and $17.2 million for the year ended December 31, 2001. Interest income recognized on impaired loans, which was not materially different from cash-basis interest income, amounted to $597,000 for the year ended December 31, 2003, $1.3 million for the year ended December 31, 2002 and $1.1 million for the year ended December 31, 2001. (5) Allowance for Loan Losses Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - -------------------------------------------------------------------------------- Balance at beginning of year $83,546 $82,285 $79,931 Provision charged to operations -- 2,307 4,028 Charge-offs (net of recoveries of $911, $1,162 and $853, respectively) (425) (1,046) (1,674) - -------------------------------------------------------------------------------- Balance at end of year $83,121 $83,546 $82,285 ================================================================================
(6) Mortgage Servicing Rights We service mortgage loans for investors with aggregate unpaid principal balances of $1.90 billion at December 31, 2003 and $2.67 billion at December 31, 2002, which are not reflected in the accompanying consolidated statements of financial condition. MSR activity is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - -------------------------------------------------------------------------------- Amortized cost at beginning of year $35,093 $39,196 $43,532 Additions 7,225 6,090 5,202 Amortization (12,766) (10,193) (9,538) - -------------------------------------------------------------------------------- Amortized cost at end of year 29,552 35,093 39,196 Valuation allowance (11,600) (14,682) (3,901) - -------------------------------------------------------------------------------- MSR, net $17,952 $20,411 $35,295 ================================================================================
At December 31, 2003, our MSR, net, had an estimated fair value of $18.0 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.34%, a weighted average constant 90 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) prepayment rate on mortgages of 15.82% and a weighted average life of 4.5 years. At December 31, 2002, our MSR, net, had an estimated fair value of $20.4 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.62%, a weighted average constant prepayment rate on mortgages of 23.11% and a weighted average life of 3.5 years. As of December 31, 2003, estimated future MSR amortization through 2008, based on the prepayment assumptions utilized in the December 31, 2003 MSR valuation, is as follows: $6.7 million for 2004, $5.3 million for 2005, $4.0 million for 2006, $3.0 million for 2007 and $2.3 million for 2008. 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) 2003 2002 2001 - -------------------------------------------------------------------------------- Loan servicing fees $ 7,851 $ 12,068 $15,108 Net gain on sales of loans 12,124 6,645 3,276 Amortization of MSR (12,766) (10,193) (9,538) Recovery of (provision for) valuation allowance on MSR 3,082 (10,781) (1,331) - -------------------------------------------------------------------------------- Total mortgage banking income, net $ 10,291 $ (2,261) $ 7,515 ================================================================================
(7) Deposits Deposits are summarized as follows:
At December 31, --------------------------------------------------------------------- 2003 2002 --------------------------------------------------------------------- Weighted Weighted Average Percent Average Percent (Dollars in Thousands) Rate Balance of Total Rate Balance of Total - --------------------------------------------------------------------------------------------------- Core deposits: Savings 0.40% $ 2,959,015 26.45% 0.50% $ 2,832,291 25.59% Money market 0.55 1,232,771 11.02 1.00 1,698,552 15.35 NOW 0.10 914,423 8.17 0.25 805,255 7.28 Non-interest bearing NOW and demand deposit -- 578,987 5.18 -- 578,060 5.22 ----------- ------ ----------- ------ Total core deposits 5,685,196 50.82 5,914,158 53.44 Certificates of deposit 3.55 5,501,398 49.18 3.95 5,153,038 46.56 - --------------------------------------------------------------------------------------------------- Total deposits 1.92% $11,186,594 100.00% 2.14% $11,067,196 100.00% ===================================================================================================
The aggregate amount of certificates of deposit with balances equal to or greater than $100,000 was $1.06 billion at December 31, 2003 and $870.8 million at December 31, 2002. Certificates of deposit at December 31, 2003 have scheduled maturities as follows:
Weighted Percent Average of Year Rate Balance Total - -------------------------------------------------------------------------------- (In Thousands) 2004 2.70% $2,710,436 49.27% 2005 4.52 898,575 16.33 2006 4.18 971,975 17.67 2007 4.49 693,783 12.61 2008 3.67 119,487 2.17 2009 and thereafter 4.99 107,142 1.95 - -------------------------------------------------------------------------------- Total certificates of deposit 3.55% $5,501,398 100.00% ================================================================================
91 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Interest expense on deposits is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - -------------------------------------------------------------------- Savings $ 13,198 $ 29,096 $ 46,283 Money market 9,934 32,512 65,484 Interest-bearing NOW 1,526 3,176 5,097 Certificates of deposit 200,593 223,216 283,125 - -------------------------------------------------------------------- Total interest expense on deposits $225,251 $288,000 $399,989 ====================================================================
(8) Borrowed Funds Borrowed funds are summarized as follows:
At December 31, --------------------------------------------- 2003 2002 --------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Amount Rate Amount Rate - ----------------------------------------------------------------------------- Reverse repurchase agreements $7,235,000 4.62% $6,285,000 5.39% FHLB-NY advances 1,924,000 2.32 2,064,000 4.42 Other borrowings, net 469,171 7.21 472,180 7.22 - ----------------------------------------------------------------------------- Total borrowed funds, net $9,628,171 4.29% $8,821,180 5.26% =============================================================================
Reverse Repurchase Agreements At December 31, 2003 and 2002, all of the outstanding reverse repurchase agreements had original contractual maturities between one and ten years and were primarily secured by mortgage-backed securities or U.S. Government agency 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. The following is a summary of information relating to reverse repurchase agreements:
At December 31, ----------------------- (In Thousands) 2003 2002 - ------------------------------------------------------------------------------------ Amortized cost of collateral (including accrued interest): Mortgage-backed securities $7,624,752 $6,003,205 Obligations of the U.S. Government and agencies -- 190,892 Mortgage loans 151,268 442,288 Fair value of collateral (including accrued interest): Mortgage-backed securities 7,573,095 6,065,980 Obligations of the U.S. Government and agencies -- 192,429 Mortgage loans 155,377 463,337
At or For the Year Ended December 31, ------------------------------------- (Dollars in Thousands) 2003 2002 2001 - ----------------------------------------------------------------------------------------- Average balance during the year $6,642,945 $6,840,342 $7,586,370 Maximum balance at any month end during the year 7,235,000 7,285,000 7,785,000 Balance outstanding at end of the year 7,235,000 6,285,000 7,385,000 Weighted average interest rate during the year 5.01% 5.47% 5.57% Weighted average interest rate at end of the year 4.62 5.39 5.56
In December 2002, we prepaid a $100.0 million reverse repurchase agreement which had a fixed interest rate of 5.82%. We incurred a $2.2 million prepayment penalty which is classified as a component of non-interest expense on our consolidated statement of income. 92 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Reverse repurchase agreements at December 31, 2003 have contractual maturities as follows:
Year Amount - ---------------------- (In Thousands) 2004 $3,155,000 2005 500,000 2006 1,000,000 2007 450,000 2008 2,130,000 - ---------------------- Total $7,235,000 ======================
Of the $3.16 billion of reverse repurchase agreements maturing in 2004, $1.45 billion are due in less than 30 days, $1.10 billion are due in 30 to 90 days and $605.0 million are due after 90 days. At December 31, 2003, $2.59 billion of reverse repurchase agreements are callable in 2004 and at various times thereafter, of which $2.18 billion mature after December 31, 2004. 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) 2003 2002 2001 - ----------------------------------------------------------------------------------------- Average balance during the year $2,574,091 $1,853,534 $1,893,967 Maximum balance at any month end during the year 3,517,000 2,364,000 2,064,000 Balance outstanding at end of the year 1,924,000 2,064,000 1,914,000 Weighted average interest rate during the year 3.30% 5.54% 5.99% Weighted average interest rate at end of the year 2.32 4.42 6.10
FHLB-NY advances at December 31, 2003 have contractual maturities as follows:
Year Amount - ---------------------- (In Thousands) 2004 $1,570,000 2005 250,000 2006 4,000 2007 100,000 - ---------------------- Total $1,924,000 ======================
Of the $1.57 billion of FHLB-NY advances maturing in 2004, $1.31 billion are due in less than 30 days, and $260.0 million are due in 30 to 90 days. At December 31, 2003, we had available a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $100.0 million. Both lines of credit are generally priced at the federal funds rate plus 10.0 basis points and reprice daily. Other Borrowings, net 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 Securities and Exchange Commission, or 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 $246.8 million at December 31, 2003 and $246.5 million at December 31, 2002. 93 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 per year beginning in 2004. The carrying amount of the 7.67% senior unsecured notes, net of deferred costs, was $99.4 million at December 31, 2003 and $99.2 million at December 31, 2002. On October 28, 1999, our wholly-owned finance subsidiary, Astoria Capital Trust I, issued $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, Series A, referred to as the Series A Capital Securities. Effective April 26, 2000, $120.0 million aggregate liquidation amount of the Series A Capital Securities were exchanged for a like amount of 9.75% Capital Securities due November 1, 2029, Series B, also issued by Astoria Capital Trust I, referred to as the Series B Capital Securities. The Series A Capital Securities and Series B Capital Securities have substantially identical terms except that the Series B Capital Securities have been registered with the SEC. Together they are referred to as the Capital Securities. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement. The Capital Securities 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 Capital Securities are prepayable at par value. In November 2002, we entered into two interest rate swap agreements, designated as fair value hedges, that had the effect of converting the Capital Securities from a 9.75% fixed rate instrument into a variable rate, LIBOR-based instrument. The carrying amount of the Capital Securities has been adjusted to fair value to satisfy hedge accounting requirements. See Note 11 for additional information on the interest rate swap agreements. The carrying amount of the Capital Securities, net of deferred costs and including fair value hedge adjustments, was $123.0 million at December 31, 2003 and $126.4 million at December 31, 2002. Effective January 1, 2004, we adopted revised FASB Interpretation No. 46, or FIN 46(R), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," which requires us to deconsolidate our wholly-owned subsidiary Astoria Capital Trust I. The impact of this deconsolidation on financial statements for periods ending after March 15, 2004 will be to increase consolidated total assets by $3.9 million, reflecting our investment in the common securities of Astoria Capital Trust I, and increase consolidated total borrowings by $3.9 million, reflecting the difference between the aggregate principal amount of the junior subordinated debentures we issued to Astoria Capital Trust I and the aggregate principal amount of Capital Securities issued by Astoria Capital Trust I in the private placement completed in 1999. Additionally, we will redesignate the two interest rate swap agreements as fair value hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust I. Other borrowings at December 31, 2003 have contractual maturities as follows:
Year Amount - ------------------------------------ (In Thousands) 2004 $ 20,000 2005 20,000 2006 20,000 2007 20,000 2008 20,000 2009 and thereafter 375,000 - ------------------------------------ Total $475,000 ====================================
Interest expense on borrowed funds is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - -------------------------------------------------------------------------------- Reverse repurchase agreements $337,057 $379,377 $428,435 FHLB-NY advances 85,629 103,232 114,014 Other borrowings 29,816 31,229 39,167 - -------------------------------------------------------------------------------- Total interest expense on borrowed funds $452,502 $513,838 $581,616 ================================================================================
94 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (9) Stockholders' Equity On October 1, 2003 we redeemed all of our 2,000,000 outstanding shares of 12% Noncumulative Perpetual Preferred Stock, Series B, or Series B Preferred Stock, at a redemption price of $27.25 per share, plus $1.00 per share in accrued and unpaid dividends, for an aggregate redemption price of $28.25 per share. Accrued and unpaid dividends covered the period from June 1, 2003 through September 30, 2003. These shares were issued in 1997 in connection with the acquisition of The Greater New York Savings Bank, or The Greater. The Series B Preferred Stock had a par value of $1.00 per share and a liquidation preference of $25.00 per share. On October 16, 2002, our Board of Directors approved our ninth stock repurchase plan authorizing the purchase, at management's discretion, of 10,000,000 shares, or approximately 11% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. During 2003, we repurchased 7,073,800 shares of our common stock at an aggregate cost of $195.5 million. In total, as of December 31, 2003, 7,391,800 shares of our common stock, at an aggregate cost of $203.9 million, have been repurchased under the ninth stock repurchase plan. 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 1,225,000 shares of our Series A Preferred Stock for the Rights Plan. We have a dividend reinvestment and stock purchase plan, or the Plan. Pursuant to the Plan, which became effective on December 1, 1995, 300,000 shares of authorized and unissued 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. At the time of its conversion from a federally-chartered mutual savings and loan association to a federally-chartered capital stock savings and loan association, Astoria Federal established a liquidation account with a balance equal to the retained earnings reflected in its June 30, 1993 statement of financial condition. As part of the acquisitions of Long Island Bancorp, Inc., or LIB, The Greater, and Fidelity New York, FSB, Astoria Federal established liquidation accounts equal to the account balances previously maintained by these acquired institutions for eligible account holders. These liquidation accounts are reduced to the extent that eligible account holders reduce their qualifying deposits. In the unlikely event of a complete liquidation of Astoria Federal, each eligible account holder will be entitled to receive a distribution from the liquidation accounts in an amount proportionate to the current adjusted qualifying balances for accounts then held. Astoria Federal is not permitted to declare or pay dividends on its capital stock or repurchase any of its outstanding stock if it would cause Astoria Federal's stockholders' equity to be reduced below the amounts required for the liquidation accounts or applicable regulatory capital requirements. (10) Goodwill Effective January 1, 2002, we ceased recording goodwill amortization which had amounted to approximately $19.1 million annually, or approximately $0.21 per diluted common share based on diluted weighted average common and common equivalent shares outstanding for the year ended December 31, 2001. On September 30, 2003 we performed our annual goodwill impairment test and determined the fair value of our one reporting unit to be in excess of its carrying value. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. There has been no indication of goodwill impairment since our adoption of SFAS No. 142. 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. 95 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table reconciles reported net income and earnings per share to net income and earnings per share excluding the amortization of goodwill.
For the Year Ended December 31, ------------------------------- (In Thousands, Except Per Share Data) 2003 2002 2001 - -------------------------------------------------------------------------------- Net income: Reported net income $196,846 $248,429 $222,860 Add back: goodwill amortization -- -- 19,078 - -------------------------------------------------------------------------------- Adjusted net income $196,846 $248,429 $241,938 - -------------------------------------------------------------------------------- Basic earnings per common share: Reported net income $ 2.52 $ 2.90 $ 2.40 Goodwill amortization -- -- 0.21 - -------------------------------------------------------------------------------- Adjusted net income $ 2.52 $ 2.90 $ 2.61 ================================================================================ Diluted earnings per common share: Reported net income $ 2.49 $ 2.85 $ 2.35 Goodwill amortization -- -- 0.21 - -------------------------------------------------------------------------------- Adjusted net income $ 2.49 $ 2.85 $ 2.56 ================================================================================
(11) 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 through dealing only with counterparties with the highest credit ratings, establishing counterparty exposure limits and monitoring procedures. Fair Value Hedges In 2002, we entered into two interest swap agreements designated and accounted for as fair value hedges aggregating $125.0 million (notional amount) to effectively convert our $125.0 million Capital Securities from a fixed to a variable rate instrument to protect the fair value of our Capital Securities due to changes in interest rates. 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 and other critical terms of these derivative instruments match the terms of the Capital Securities and as such, at inception and going forward, we assume no ineffectiveness in accounting for these hedges. As a result, no net gains or losses have been recognized in earnings with respect to these hedges. A $621,000 liability was recorded at December 31, 2003 and a $3.0 million asset was recorded at December 31, 2002 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 Capital Securities to recognize the change in their fair value. See Note 8 for additional information regarding our Capital Securities. Cash Flow Hedges In September of 2002, in connection with our 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 to fix the U.S. treasury benchmark component of the eventual pricing on the notes. The 5.75% senior unsecured notes were priced based on the prevailing applicable treasury rate plus a spread, which were determined at the time the offering was finalized. The critical terms of the agreement were negotiated to match the terms of the forecasted transaction and as such, at inception and through the date the note pricing was finalized, we assumed no ineffectiveness. Changes in the fair value of the agreement were recorded in accumulated other comprehensive loss/income. The agreement was settled at the same time as the notes and the unrealized loss, net of taxes, 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 unrealized loss, net of taxes, in accumulated other comprehensive loss/income totaled $1.7 million at December 31, 2003 and $1.9 million at December 31, 2002. The unrealized loss, net of tax, to be reclassified to our results of operations during 2004 totals $191,000. See Note 8 for additional information regarding our 5.75% senior unsecured notes. 96 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Free-Standing Derivative Instruments In 2002 and 2001 we purchased interest rate cap agreements to provide a global hedge against rising interest rates and subsequent increases in our cost of funds. In an interest rate cap agreement, we receive the excess of a designated market interest rate (three-month LIBOR) over a specified strike rate, as applied to the specified notional amount, in exchange for the payment of a premium to a counterparty. The interest rate cap agreements, which did not qualify for hedge accounting treatment, are included in other assets at their fair values. Changes in the fair values of the agreements are included in non-interest expense. The agreements have various maturity dates from July 2004 to January 2005. The following is a summary of information relating to the interest rate cap agreements:
At or For the Year Ended December 31, ------------------------------------- (Dollars in Thousands) 2003 2002 2001 - -------------------------------------------------------------------------------- Notional amount $300,000 $300,000 $250,000 Estimated fair value -- 95 3,394 Non-interest expense (income) 95 3,824 (597) Weighted average cap rate 5.25% 5.25% 5.20%
In connection with our mortgage banking activities, we had certain free-standing derivative instruments at December 31, 2003 and 2002. 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. Upon adoption of SFAS No. 133 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133," on January 1, 2001, we held interest rate swaps, which we entered into in 1998, with a notional amount of $450.0 million hedging the fair value of medium term notes which totaled $450.0 million. As a result of the implementation of SFAS No. 133 and SFAS No. 138, we recognized a $2.3 million charge, net of taxes, in January 2001 as a cumulative effect of a change in accounting principle. The medium term notes matured in 2001 and 2002 and the interest rate swaps were terminated. (12) Commitments and Contingencies Lease Commitments At December 31, 2003, 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 $7.2 million for the year ended December 31, 2003, $5.6 million for the year ended December 31, 2002 and $5.3 million for the year ended December 31, 2001. The minimum rental payments due under the terms of the non-cancelable operating leases as of December 31, 2003, which have not been reduced by minimum sublease rentals of $34.0 million due in the future under non-cancelable subleases, are summarized below:
Year Amount - ------------------------------------ (In Thousands) 2004 $ 6,684 2005 6,678 2006 6,515 2007 6,205 2008 5,783 2009 and thereafter 44,113 - ------------------------------------ $75,978 ====================================
97 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Outstanding Commitments We had outstanding commitments as follows:
At December 31, ------------------- (In Thousands) 2003 2002 - -------------------------------------------------------------------------------- Mortgage loans - commitments to extend credit $520,743 $675,879 Mortgage loans - commitments to purchase 51,664 68,813 Home equity loans - unused lines of credit 268,555 226,334 Consumer and commercial loans - unused lines of credit 67,085 110,602 Commitments to sell loans 48,568 125,538 Commitments to purchase securities 99,969 504,016 Forward borrowing commitments 500,000 --
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. Forward borrowing commitments represent commitments to enter into borrowings at predetermined amounts, interest rates and maturity and settlement dates. Assets Sold with Recourse We are obligated under various recourse provisions associated with certain first mortgage loans we sold. The principal balance of loans sold with recourse amounted to $640.7 million at December 31, 2003 and $561.7 million at December 31, 2002. We do not believe that our recourse obligations subject us to risk of material loss. We have two 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 two agreements totaled $46.3 million at December 31, 2003 and $48.2 million at December 31, 2002. Various agency mortgage-backed securities, with an amortized cost of $67.3 million and a fair value of $69.4 million at December 31, 2003, have been pledged as collateral. Guarantees FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN 45, addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. FIN 45 also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. 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 $4.4 million at December 31, 2003 and $474,000 at December 31, 2002. The fair value of these obligations is immaterial at December 31, 2003 and 2002. 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 98 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 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 ultimate outcomes of such actions are uncertain and there can be no assurance that we will benefit financially from such litigation. (13) Income Taxes Income tax expense attributable to income before cumulative effect of accounting change is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - ---------------------------------------------------------------------------------- Current Federal $93,383 $104,401 $104,710 State and local 5,107 6,273 5,278 - ---------------------------------------------------------------------------------- Total current 98,490 110,674 109,988 - ---------------------------------------------------------------------------------- Deferred Federal (547) 11,126 7,833 State and local (1,567) 1,266 2,215 - ---------------------------------------------------------------------------------- Total deferred (2,114) 12,392 10,048 - ---------------------------------------------------------------------------------- Total income tax expense attributable to income before cumulative effect of accounting change $96,376 $123,066 $120,036 ==================================================================================
Total income tax expense differed from the amounts computed by applying the federal income tax rate to income before cumulative effect of accounting change as a result of the following:
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - --------------------------------------------------------------------------------------- Expected income tax expense at statutory federal rate $102,628 $130,023 $120,820 State and local taxes, net of federal tax benefit 2,301 4,901 4,870 Amortization of goodwill -- -- 6,677 Tax exempt income (7,889) (8,451) (6,897) Reversal of deferred tax valuation allowance (3,396) -- (6,141) Other, net 2,732 (3,407) 707 - --------------------------------------------------------------------------------------- Total income tax expense attributable to income before cumulative effect of accounting change $ 96,376 $123,066 $120,036 =======================================================================================
99 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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) 2003 2002 - -------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $ 4,698 $ 12,318 Allowances and tax reserves 21,296 21,699 Compensation and benefits 10,468 13,253 Tax credits 3,129 3,129 Mark-to-market - IRC Section 475 1,865 2,567 Net unrealized loss on securities available-for-sale 32,470 -- Accrued acquisition related expenses -- 841 Other 3,722 3,915 - -------------------------------------------------------------------------------- Total gross deferred tax assets 77,648 57,722 Valuation allowance -- (3,396) - -------------------------------------------------------------------------------- Deferred tax assets 77,648 54,326 - -------------------------------------------------------------------------------- Deferred tax liabilities: Book premiums in excess of tax (6,090) (7,727) Net unrealized gains on securities available-for-sale -- (8,493) Mortgage loans (16,535) (25,956) Premises and equipment (6,686) (5,145) Basis difference in home equity investment -- (1,465) Mortgage servicing rights (894) (1,022) Other -- (70) - -------------------------------------------------------------------------------- Total gross deferred tax liabilities (30,205) (49,878) - -------------------------------------------------------------------------------- Net deferred tax assets $ 47,443 $ 4,448 ================================================================================
We believe that future results of operations will be sufficient to enable us to recognize our net deferred tax assets. The reduction in the valuation allowance for deferred tax assets of $3.4 million in 2003 relates to the increased probability of the recognition of certain deferred tax assets resulting from the closure of previous New York City and New York State tax periods. At December 31, 2003, we had alternative minimum tax credit carryforwards for federal tax purposes of approximately $3.1 million. Federal income tax net operating loss carryforwards of approximately $13.4 million will expire in 2012. Astoria Federal's retained earnings at December 31, 2003 and 2002 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. 100 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (14) Earnings Per Common Share The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31, --------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted (In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3) - ------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change $196,846 $196,846 $248,429 $248,429 $225,154 $225,154 Preferred dividends declared (4,500) (4,500) (6,000) (6,000) (6,000) (6,000) - ------------------------------------------------------------------------------------------------------- 192,346 192,346 242,429 242,429 219,154 219,154 Cumulative effect of accounting change, net of tax -- -- -- -- (2,294) (2,294) - ------------------------------------------------------------------------------------------------------- Net income available to common shareholders $192,346 $192,346 $242,429 $242,429 $216,860 $216,860 ======================================================================================================= Total weighted average basic common shares outstanding 76,383 76,383 83,515 83,515 90,450 90,450 Effect of dilutive securities: Options -- 912 -- 1,405 -- 1,724 - ------------------------------------------------------------------------------------------------------- Total weighted average diluted common shares outstanding 76,383 77,295 83,515 84,920 90,450 92,174 ======================================================================================================= Earnings per common share: Income before cumulative effect of accounting change $ 2.52 $ 2.49 $ 2.90 $ 2.85 $ 2.43 $ 2.38 Cumulative effect of accounting change, net of tax -- -- -- -- (0.03) (0.03) - ------------------------------------------------------------------------------------------------------- Net earnings per common share $ 2.52 $ 2.49 $ 2.90 $ 2.85 $ 2.40 $ 2.35 =======================================================================================================
(1) Options to purchase 1,000,800 shares of common stock at prices between $29.88 per share and $36.60 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. (2) Options to purchase 30,000 shares of common stock at $29.88 per share were outstanding as of December 31, 2002, 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, 2002. (3) Options to purchase 514,304 shares of common stock at prices between $28.31 per share and $29.88 per share were outstanding as of December 31, 2001, 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, 2001. 101 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (15) Comprehensive Income The components of accumulated other comprehensive (loss) income at December 31, 2003 and 2002 and the changes during the year ended December 31, 2003 are as follows:
At Current At December 31, Period December 31, (In Thousands) 2002 Change 2003 - --------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities available-for-sale $ 12,465 $(57,226) $(44,761) Net unrealized loss on securities transferred to held-to-maturity (775) 775 -- Net unrealized loss on cash flow hedge (1,871) 191 (1,680) Minimum pension liability adjustment (19) (29) (48) - --------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $ 9,800 $(56,289) $(46,489) ===============================================================================================================
The components of other comprehensive (loss) income, other than net income, are as follows:
Before Tax Tax After Tax (In Thousands) Amount Benefit (Expense) Amount - ------------------------------------------------------------------------------------------------------------------- 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 losses included in net income from net unrealized loss on cash flow hedge 330 (139) 191 Minimum pension liability adjustment (50) 21 (29) - ------------------------------------------------------------------------------------------------------------------- Other comprehensive loss $(97,134) $ 40,845 $(56,289) =================================================================================================================== For the Year Ended December 31, 2002 Net unrealized gains on securities available-for-sale: Net unrealized holding gains on securities arising during the year $ 20,002 $ (7,459) $ 12,543 Reclassification adjustment for gains included in net income (10,772) 3,569 (7,203) ------------------------------------------ 9,230 (3,890) 5,340 Amortization of net unrealized loss on securities transferred to held-to-maturity 14,350 (6,033) 8,317 Net unrealized loss on cash flow hedge: Unrealized loss arising during the year (3,297) 1,386 (1,911) Reclassification adjustment for losses included in net income 69 (29) 40 ------------------------------------------ (3,228) 1,357 (1,871) Minimum pension liability adjustment (32) 13 (19) - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 20,320 $ (8,553) $ 11,767 =================================================================================================================== For the Year Ended December 31, 2001 Net unrealized holding gains on securities arising during the year $ 198,905 $(83,814) $115,091 Amortization of net unrealized loss on securities transferred to held-to-maturity 6,875 (2,890) 3,985 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 205,780 $(86,704) $119,076 ===================================================================================================================
102 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (16) 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) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------- ------------------------ Change in benefit obligation: Benefit obligation at beginning of year $145,136 $132,879 $ 15,520 $ 13,446 Service cost 2,700 2,142 360 305 Interest cost 9,570 9,263 995 1,031 Amendments -- (185) -- -- Actuarial loss 16,774 9,969 1064 2,146 Benefits paid (8,686) (8,932) (1,553) (1,408) - ------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 165,494 145,136 16,386 15,520 - ------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 128,893 152,554 -- -- Actual return on plan assets 29,128 (15,576) -- -- Employer contribution 609 847 1,553 1,408 Benefits paid (8,686) (8,932) (1,553) (1,408) - ------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 149,944 128,893 -- -- - ------------------------------------------------------------------------------------------------------------- Funded status (15,550) (16,243) (16,386) (15,520) Unrecognized net actuarial loss (gain) 38,585 44,349 (2,526) (3,742) Unrecognized prior service cost 855 1,015 165 205 Unrecognized transition asset (35) (139) -- -- - ------------------------------------------------------------------------------------------------------------- Net amount recognized $ 23,855 $ 28,982 $(18,747) $(19,057) ============================================================================================================= Amounts recognized in the consolidated statements of financial condition consist of: Prepaid benefit cost $ 38,981 $ 43,003 $ -- $ -- Accrued benefit liability (15,330) (14,248) (18,747) (19,057) Intangible asset 122 195 -- -- Accumulated other comprehensive loss (pre-tax basis) 82 32 -- -- - ------------------------------------------------------------------------------------------------------------- Net amount recognized $ 23,855 $ 28,982 $(18,747) $(19,057) =============================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was $149.5 million at December 31, 2003 and $132.8 million at December 31, 2002. The measurement dates for our defined benefit pension plans and other postretirement benefit plan were December 31. Assumptions used to determine the benefit obligation:
Rate of Discount Rate Compensation Increase ------------- --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Pension Benefit Plans: Astoria Federal Pension Plan 6.00% 6.75% 5.00% 5.00% Astoria Federal Excess Benefit and Supplemental Benefit Plans 6.00 6.00 8.00 8.00 Astoria Federal Directors' Retirement Plan 6.00 6.00 4.00 4.00 The Greater Directors' Retirement Plan 6.00 6.00 N/A N/A LIB Directors' Retirement Plan 6.00 6.00 N/A N/A Other Postretirement Benefit Plan: Astoria Federal Retiree Health Care Plan 6.00 6.75 N/A N/A
103 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The components of net periodic cost (benefit) are as follows:
Other Postretirement Pension Benefits Benefits ------------------------------- ------------------------------- For the Year Ended December 31, For the Year Ended December 31, ------------------------------- ------------------------------- (In Thousands) 2003 2002 2001 2003 2002 2001 - ------------------------------------------------------------------------------ ------------------------------- Service cost $ 2,700 $ 2,142 $ 1,925 $ 360 $ 305 $ 187 Interest cost 9,570 9,263 8,979 995 1,031 895 Expected return on plan assets (9,956) (11,866) (13,331) -- -- -- Amortization of prior service cost (benefit) 160 161 (403) 40 41 41 Recognized net actuarial loss (gain) 3,368 46 (367) (152) (219) (437) Amortization of transition asset (104) (104) (104) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Net periodic cost (benefit) $ 5,738 $ (358) $ (3,301) $1,243 $1,158 $ 686 ================================================================================================================
Assumptions used to determine the net periodic cost (benefit):
Expected Return Rate of Discount Rate on Plan Assets Compensation Increase ------------- --------------- --------------------- 2003 2002 2003 2002 2003 2002 ---- ---- ---- ----- ---- ---- Pension Benefit Plans: Astoria Federal Pension Plan 6.75% 7.25% 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 6.75 7.25 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, --------------- 2003 2002 - --------------------------------------------------------------- Health care cost trend rate assumed for next year 8.00% 8.50% 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 $ 149 $ (122) Effect on the postretirement benefit obligation 1,278 (1,049)
104 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Included in the tables of Pension Benefits on page 103 and 104 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) 2003 2002 - -------------------------------------------------------------------------------- Projected benefit obligation $17,884 $16,324 Accumulated benefit obligation 12,907 11,776
The following table sets forth the asset allocations, by asset category, for the Astoria Federal Pension Plan:
Plan Assets At December 31, --------------- 2003 2002 - ------------------------------------------------------------------------------- Asset Category: Equity securities 12.96% 11.16% Other (1) 87.04 88.84 - ------------------------------------------------------------------------------- Total 100.00% 100.00% ===============================================================================
(1) 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. Equity securities include Astoria Financial Corporation common stock with a fair value of $19.2 million, or 12.8% of total plan assets, at December 31, 2003 and $14.0 million, or 10.9% of total plan assets, at December 31, 2002. We expect to contribute $648,000 to our unfunded defined benefit pension plans and $1.5 million to our other postretirement benefit plan to cover expected benefit payments in 2004. 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 $12,000 for the calendar year ended December 31, 2003. Matching contributions, if any, may be made at the discretion of Astoria Federal. No such contributions were made for 2003, 2002 and 2001. Participants vest immediately in their own contributions and after a period of five years for Astoria Federal contributions. 105 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. Dividends paid on unallocated shares, which reduced Astoria Federal's contribution to the ESOP, totaled $4.3 million for the year ended December 31, 2003 and $4.1 million for the year ended December 31, 2002. The ESOP loans had an aggregate outstanding principal balance of $34.7 million at December 31, 2003 and $35.7 million at December 31, 2002. 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 258,438 for the year ended December 31, 2003, 345,518 for the year ended December 31, 2002 and 279,546 for the year ended December 31, 2001. As of December 31, 2003, 4,760,054 shares which had a fair value of $177.1 million remain unallocated. In addition to shares allocated, Astoria Federal makes an annual cash contribution to participant accounts. This cash contribution totaled $1.6 million for the year ended December 31, 2003, $1.4 million for the year ended December 31, 2002 and $1.3 million for the year ended December 31, 2001, and will total not less than $1.2 million each year through 2009. After 2009, an annual cash contribution equal to all dividends paid on unallocated shares remaining will be made through the maturity or repayment of the loans. We recorded compensation expense relating to the ESOP of $8.8 million for the year ended December 31, 2003, $11.7 million for the year ended December 31, 2002 and $9.3 million for the year ended December 31, 2001, 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. (17) Stock Option Plans In 2003, we adopted the 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, or the 2003 Employee Option 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 option 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 issuance under the 2003 Employee Option Plan was 3,250,000 and the number of shares reserved for issuance under the 1999 Directors' Option Plan was 350,000. At December 31, 2003, there were 2,445,200 remaining shares reserved for issuance of future grants under the 1999 Directors Option Plan and the 2003 Employee Option Plan. Remaining shares reserved for issuance of future grants under the 1999 Directors Option Plan and the 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation were 520,400 shares at December 31, 2002 and 1,949,500 shares at December 31, 2001. Options granted under the 2003 Employee Option Plan have a maximum term of ten years and vest three years after the grant date. Under option plans involving grants to employees, in the event the optionee terminates his/her employment due to death, disability, retirement or in the event we experience a change in control, or a threatened change in control, as defined and specified in such plans, all options granted immediately vest and are exercisable. Under option plans involving grants to outside directors, all options granted have a maximum term of ten years and are exercisable immediately on their grant date, except options granted under the 1993 Stock Option Plan for Outside Directors, which vested over three years. 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. 106 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Activity in our option plans is summarized as follows:
For the Year Ended December 31, --------------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------- 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: 6,841,884 $21.48 6,893,950 $17.59 7,657,202 $14.95 Granted 1,019,800 36.15 1,429,100 27.03 1,094,700 25.21 Forfeited (5,460) (26.34) (2,800) (24.84) (58,890) (21.36) Expired -- -- (151,802) (6.91) (116) (19.19) Exercised (959,229) (9.90) (1,326,564) (8.94) (1,798,946) (10.86) --------- ---------- ---------- Outstanding at end of year 6,896,995 25.25 6,841,884 21.48 6,893,950 17.59 ========= ========== ========== Options exercisable at end of year 2,671,595 20.44 2,451,284 17.65 3,314,250 12.70
The following table summarizes information about our stock options outstanding at December 31, 2003:
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 - ------------------------------------------------------------------------------------------------ $ 5.00 to $18.00 1,221,431 4.54 years $14.52 1,221,431 $14.52 18.38 to 24.84 1,686,140 5.98 23.96 689,140 22.67 25.16 to 25.44 1,117,700 7.22 25.25 148,400 25.24 26.24 to 27.00 1,385,100 8.40 27.00 96,800 27.00 27.29 to 36.60 1,486,624 8.06 33.91 515,824 28.86 --------- --------- $ 5.00 to $36.60 6,896,995 6.86 25.25 2,671,595 20.44 ========= =========
The following table summarizes the per share weighted-average fair value of stock 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, ------------------------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------------------------ Weighted Weighted Weighted Options Average Options Average Options Average Granted Fair Value Granted Fair Value Granted Fair Value - -------------------------------------------------------------------------------------------- Employees 975,800 1,385,100 1,042,700 Outside directors 44,000 44,000 52,000 --------- --------- --------- 1,019,800 $9.09 1,429,100 $5.85 1,094,700 $6.48 ========= ===== ========= ===== ========= =====
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, --------------------------------------- 2003 2002 2001 --------------------------------------- Dividend yield 2.43% 2.94% 2.35% Expected stock price volatility 28.81 26.21 26.06 Risk-free interest rate based upon equivalent-term U.S. Treasury rates 3.16 3.29 4.45 Expected option lives 5.96 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 judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing 107 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) model also contains certain inherent limitations when applied to options which are not immediately exercisable and are not traded on public markets. (18) 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, 2003, 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, 2003 ------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - -------------------------------------------------------------------------------------- Tangible $334,495 1.50% $1,643,540 7.37% $1,309,045 5.87% Leverage 891,986 4.00 1,643,540 7.37 751,554 3.37 Risk-based 897,770 8.00 1,726,661 15.39 828,891 7.39
At December 31, 2002 ------------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - -------------------------------------------------------------------------------------- Tangible $318,529 1.50% $1,536,305 7.23% $1,217,776 5.73% Leverage 849,412 4.00 1,536,305 7.23 686,893 3.23 Risk-based 839,271 8.00 1,619,851 15.44 780,580 7.44
Astoria Federal's Tier I risked-based capital ratio was 14.65% at December 31, 2003 and 14.64% at December 31, 2002. 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 Federal Deposit Insurance Corporation shall be considered a "well capitalized" institution. As of December 31, 2003 and 2002, Astoria Federal was a "well capitalized" institution. (19) 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. 108 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes the carrying amounts and estimated fair values of our financial instruments.
At December 31, ----------------------------------------------------- 2003 2002 ----------------------------------------------------- Carrying Estimated Carrying Estimated (In Thousands) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------- Financial Assets: Federal funds sold and repurchase agreements $ 65,926 $ 65,926 $ 510,252 $ 510,252 Securities available-for-sale 2,654,992 2,654,992 2,792,581 2,792,581 Securities held-to-maturity 5,792,727 5,809,117 5,041,257 5,100,565 FHLB-NY stock 213,450 213,450 247,550 247,550 Loans held-for-sale 23,023 23,517 62,669 63,870 Loans receivable, net 12,603,866 12,947,778 11,975,815 12,548,717 MSR, net 17,952 17,981 20,411 20,413 Interest rate caps -- -- 95 95 Interest rate swaps -- -- 2,998 2,998 Financial Liabilities: Deposits 11,186,594 11,341,683 11,067,196 11,279,584 Borrowed funds, net 9,628,171 10,052,553 8,821,180 9,466,988 Interest rate swaps 621 621 -- --
Methods and assumptions used to estimate fair values are as follows: Federal funds sold and repurchase agreements The carrying amounts of federal funds sold and 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 approximates the carrying amount. Loans held-for-sale Fair values of loans held-for-sale were estimated based on current secondary market prices for loans with similar terms. Loans receivable, net Fair values of loans are calculated 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 mentioned previously, 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 those fair values obtained from formal trading marketplaces. 109 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) MSR, net The fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating numerous assumptions including servicing income, servicing costs, market discount rates, prepayment speeds, default rates and other market driven data. Interest rate caps and swaps Fair values for interest rate caps and 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 are based on discounted contractual cash flows using rates which approximate the rates we offer for deposits of similar remaining maturities. Borrowed funds, 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, (2) commitments to sell residential mortgage loans for which fair values were estimated based on current secondary market prices for commitments with similar terms and (3) commitments to purchase securities and forward borrowing commitments for which fair values were based on securities dealers' estimated market values. Due to the short-term nature of our outstanding commitments, the fair values of these commitments are immaterial to our financial condition. (20) Condensed Parent Company Only Financial Statements The following condensed parent company only financial statements reflect our investments in our wholly-owned subsidiaries, Astoria Federal, Astoria Capital Trust I and AF Insurance Agency, Inc. using the equity method of accounting: Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31, ----------------------- (In Thousands) 2003 2002 - -------------------------------------------------------------------------------- Assets: Cash $ -- $ 3 Federal funds sold and repurchase agreements 65,926 279,867 Other securities available-for-sale 139 143 ESOP loans receivable 34,720 35,662 Accrued interest receivable 9 22 Other assets 1,741 3,506 Investment in Astoria Federal 1,796,233 1,742,031 Investment in Astoria Capital Trust I 3,929 3,929 Investment in AF Insurance Agency, Inc. 1,885 1,210 - -------------------------------------------------------------------------------- Total assets $1,904,582 $2,066,373 ================================================================================ Liabilities and stockholders' equity: Other borrowings $ 473,037 $ 476,046 Other liabilities 6,118 3,980 Dividends payable -- 2,000 Amounts due to subsidiaries 28,896 30,349 Stockholders' equity 1,396,531 1,553,998 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,904,582 $2,066,373 ================================================================================
110 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Astoria Financial Corporation - Condensed Statements of Income
For the Year Ended December 31, ------------------------------- (In Thousands) 2003 2002 2001 - --------------------------------------------------------------------------------------------- Interest income: Federal funds sold, repurchase agreements and other securities $ 1,500 $ 2,990 $ 2,837 ESOP loans receivable 2,140 2,226 2,292 - --------------------------------------------------------------------------------------------- Total interest income 3,640 5,216 5,129 Interest expense on borrowed funds 30,193 22,644 18,861 - --------------------------------------------------------------------------------------------- Net interest expense 26,553 17,428 13,732 - --------------------------------------------------------------------------------------------- Non-interest income (1,074) 1,330 -- Cash dividends from subsidiaries 120,377 60,377 502,935 - --------------------------------------------------------------------------------------------- Non-interest expense: Compensation and benefits 1,736 1,521 1,380 Other 2,323 1,721 1,554 - --------------------------------------------------------------------------------------------- Total non-interest expense 4,059 3,242 2,934 - --------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed (overdistributed) earnings of subsidiaries 88,691 41,037 486,269 Income tax benefit 12,970 7,885 6,757 - --------------------------------------------------------------------------------------------- Income before equity in undistributed (overdistributed) earnings of subsidiaries 101,661 48,922 493,026 - --------------------------------------------------------------------------------------------- Equity in undistributed (overdistributed) earnings of subsidiaries (1) 95,185 199,507 (270,166) - --------------------------------------------------------------------------------------------- Net income $196,846 $248,429 $ 222,860 =============================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended December 31, 2001 represents dividends paid to us in excess of our subsidiaries' current year earnings. 111 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) 2003 2002 2001 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 196,846 $ 248,429 $ 222,860 Adjustments to reconcile net income to net cash provided by operating activities: Equity in (undistributed) overdistributed earnings of subsidiaries (95,185) (199,507) 270,166 Decrease (increase) in accrued interest receivable 13 62 (57) Amortization of premiums and deferred costs 1,070 512 589 (Increase) decrease in other assets net of other liabilities and amounts due subsidiaries (82) 7,654 5,777 - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 102,662 57,150 499,335 - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Principal payments on ESOP loans receivable 942 1,514 1,022 Proceeds from maturities of securities available-for sale -- -- 500 - ------------------------------------------------------------------------------------------------------ Net cash provided by investing activities 942 1,514 1,522 - ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from borrowings with original terms greater than three months -- 246,433 99,030 Repayments of borrowings with original terms greater than three months -- -- (40,000) Cash paid for cash flow hedging instrument -- (3,297) -- Common stock repurchased (195,471) (211,103) (289,087) Redemption of preferred stock (54,500) -- -- Cash received for options exercised 8,793 11,742 19,099 Cash dividends paid to stockholders (76,370) (74,258) (64,752) - ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (317,548) (30,483) (275,710) - ------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (213,944) 28,181 225,147 Cash and cash equivalents at beginning of the year 279,870 251,689 26,542 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of the year $ 65,926 $ 279,870 $ 251,689 ======================================================================================================
112 Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S (Unaudited)
For the Year Ended December 31, 2003 ----------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------- Interest income $282,566 $269,233 $247,255 $258,237 Interest expense 173,558 172,982 167,623 163,590 - ----------------------------------------------------------------------------------------------- Net interest income 109,008 96,251 79,632 94,647 Provision for loan losses -- -- -- -- - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 109,008 96,251 79,632 94,647 Non-interest income 25,895 31,543 33,880 28,243 - ----------------------------------------------------------------------------------------------- Total income 134,903 127,794 113,512 122,890 - ----------------------------------------------------------------------------------------------- General and administrative expense 51,966 51,840 51,408 50,663 - ----------------------------------------------------------------------------------------------- Income before income tax expense 82,937 75,954 62,104 72,227 Income tax expense 26,540 25,065 20,503 24,268 - ----------------------------------------------------------------------------------------------- Net income $ 56,397 $ 50,889 $ 41,601 $ 47,959 =============================================================================================== Basic earnings per common share $ 0.69 $ 0.64 $ 0.53 $ 0.65 Diluted earnings per common share $ 0.69 $ 0.64 $ 0.53 $ 0.63
For the Year Ended December 31, 2002 ----------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------- Interest income $330,890 $326,275 $313,380 $295,717 Interest expense 215,963 203,906 197,256 184,713 - ----------------------------------------------------------------------------------------------- Net interest income 114,927 122,369 116,124 111,004 Provision for loan losses 1,004 1,002 301 -- - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 113,923 121,367 115,823 111,004 Non-interest income 26,960 24,328 25,212 30,907 - ----------------------------------------------------------------------------------------------- Total income 140,883 145,695 141,035 141,911 - ----------------------------------------------------------------------------------------------- General and administrative expense 48,129 50,275 48,582 48,841 Extinguishment of debt -- -- -- 2,202 - ----------------------------------------------------------------------------------------------- Income before income tax expense 92,754 95,420 92,453 90,868 Income tax expense 31,536 31,489 30,237 29,804 - ----------------------------------------------------------------------------------------------- Net income $ 61,218 $ 63,931 $ 62,216 $ 61,064 =============================================================================================== Basic earnings per common share $ 0.70 $ 0.74 $ 0.73 $ 0.73 Diluted earnings per common share $ 0.69 $ 0.73 $ 0.72 $ 0.73
113 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit - ----------- ------------------------- 2.1 Agreement and Plan of Merger dated as of the 2nd day of April 1998 by and between Astoria Financial Corporation and Long Island Bancorp, Inc., as amended. (1) 3.1 Certificate of Incorporation of Astoria Financial Corporation, as amended effective as of June 3, 1998. (2) 3.2 Bylaws of Astoria Financial Corporation. (3) 4.1 Astoria Financial Corporation Specimen Stock Certificate. (*) 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. (4) 4.4 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock. (5) 4.5 Amended Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock. (6) 4.6 Rights Agreement between Astoria Financial Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated as of July 17, 1996, as amended. (5) 4.7 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. (1) 4.8 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. (7) 4.9 Form of Rights Certificate. (5) 4.10 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. (9) 4.11 Form of Certificate of Junior Subordinated Debenture. (9) 4.12 Form of Certificate of Exchange Junior Subordinated Debenture. (9) 4.13 Amended and Restated Declaration of Trust of Astoria Capital Trust I, dated as of October 28, 1999. (9)
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Exhibit No. Identification of Exhibit - ----------- ------------------------- 4.14 Common Securities Guarantee Agreement of Astoria Financial Corporation, dated as of October 28, 1999. (9) 4.15 Form of Certificate Evidencing Common Securities of Astoria Capital Trust I. (9) 4.16 Form of Exchange Capital Security Certificate for Astoria Capital Trust I. (9) 4.17 Series A Capital Securities Guarantee Agreement of Astoria Financial Corporation, dated as of October 28, 1999. (9) 4.18 Form of Series B Capital Securities Guarantee Agreement of Astoria Financial Corporation. (9) 4.19 Form of Capital Security Certificate of Astoria Capital Trust I. (9) 4.20 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. (10) 4.21 Form of 5.75% Senior Note due 2012, Series B. (10) 4.22 Astoria Financial Corporation Automatic Dividend Reinvestment and Stock Purchase Plan. (11) 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)
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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 10.46 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 February 21, 1996. (*) 10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement Benefit Plan, as amended. (3) 10.10 Astoria Financial Corporation Death Benefit Plan for Outside Directors. (*) 10.11 Deferred Compensation Plan for Directors of Astoria Financial Corporation. (*) 10.12 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as amended. (8) 10.13 Astoria Financial Corporation 1993 Stock Option Plan For Outside Directors, as amended. (8) 10.14 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended. (8) 10.15 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended. (8) 10.16 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation. (12) 10.17 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation. (12) 10.18 Amendment to Section 4.5 of the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation. (4) 10.19 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation. (13) 10.20 Astoria Federal Savings and Loan Association Annual Incentive Plan for Select Executives. (3) 10.21 Astoria Financial Corporation Executive Officer Annual Incentive Plan. (12) 10.22 Astoria Financial Corporation Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (14)
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Exhibit No. Identification of Exhibit - ----------- ------------------------- 10.23 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (14) 10.24 Astoria Financial Corporation Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (14) 10.25 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (14) 10.26 Employment Termination and Release Agreement by and among John J. Conefry, Jr., Astoria Federal Savings and Loan Association and Astoria Financial Corporation. (4) 10.27 Astoria Financial Corporation Amended and Restated Employment Agreement with Arnold K. Greenberg dated as of January 1, 2000. (14) 10.28 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Arnold K. Greenberg, dated as of January 1, 2000. (14) 10.29 Astoria Financial Corporation Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (*) 10.30 Astoria Federal Savings and Loan Association Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (*) 10.31 Astoria Financial Corporation Amended and Restated Employment Agreement with Monte N. Redman dated as of January 1, 2000. (14) 10.32 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Monte N. Redman, dated as of January 1, 2000. (14) 10.33 Astoria Financial Corporation Amended and Restated Employment Agreement with Alan P. Eggleston dated as of January 1, 2000. (14) 10.34 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Alan P. Eggleston, dated as of January 1, 2000. (14) 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 Josie Callari. (14) 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 J. DeStefano. (14)
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Exhibit No. Identification of Exhibit - ----------- ------------------------- 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 Frank E. Fusco. (14) 10.38 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. (14) 10.39 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. (14) 10.40 Change of Control Severance Agreement, dated as of December 20, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Harold R. Leistmann. (4) 10.41 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) 10.42 Retirement Medical and Dental Benefit Policy for Senior Officers. (8) 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. (15) 10.44 Option Conversion Certificates of Robert J. Conway, Leo J. Waters and Donald D. Wenk. (3) 10.45 Trust Agreement, dated as of January 31, 1995 between Astoria Financial Corporation and State Street Bank and Trust Company. (*) 10.46 Option Conversion Agreement by and between Astoria Financial Corporation and Gerard C. Keegan. (8) 12.1 Statement regarding computation of ratios. (*) 21.1 Subsidiaries of Astoria Financial Corporation. (*) 23 Consent of Independent Auditors. (*) 31.1 Certifications of Chief Executive Officer. (*) 31.2 Certifications of Chief Financial Officer. (*) 32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*)
118
Exhibit No. Identification of Exhibit - ----------- ------------------------- 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 19, 2004, which will be filed with the SEC within 120 days from December 31, 2003, 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 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). (2) 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). (3) 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). (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 Registration Statement on Form 8-K/A dated July 17, 1996, filed with the Securities and Exchange Commission on July 23, 1996. (6) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission on March 26, 2002 (File Number 000-22228). (7) 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). 119 (8) 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). (9) Incorporated by reference to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on February 18, 2000. (10) Incorporated by reference to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on December 6, 2002. (11) Incorporated by reference to Form 424B3 Prospectus Supplement, filed with the Securities and Exchange Commission on February 1, 2000. (12) Incorporated by reference to Astoria Financial Corporation's Form 14-A Definitive Proxy Statement filed on April 8, 1999 (File Number 000-22228). (13) Incorporated by reference to Astoria Financial Corporation's Form 14-A Definitive Proxy Statement filed on April 8, 2003 (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, 1999, filed with the Securities and Exchange Commission on March 24, 2000 (File Number 000-22228). (15) 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. 120 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as................................ 'SS' EX-4 3 ex4-1.txt EXHIBIT 4.1 Exhibit 4.1 COMMON STOCK This certificate also evidences and entitles the holder hereof to certain rights as COMMON STOCK PAR VALUE $0.01 set forth in a Rights Agreement between Astoria Financial Corporation and PAR VALUE $0.01 ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated as of July 17, 1996, as the same may be amended from time to time, (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Astoria Financial Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Astoria Financial Corporation will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights Agreement, Rights owned by any Person who is or becomes an Acquiring Person (as defined in the Rights Agreement) and certain transfers thereof shall become null and void. SEE REVERSE FOR CERTAIN DEFINITIONS [Logo] Astoria Financial Corporation INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE This Certifies That is the owner of: FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF ASTORIA FINANCIAL CORPORATION The shares represented by this certificate are transferable only on the stock transfer books of the Corporation by the holder of record thereof, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation of the Corporation and any amendments thereto (copies of which are on file with the Transfer Agent), to all of which provisions the holder by acceptance hereof, assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. The shares represented by this Certificate are not insured by the Federal Deposit Insurance Corporation or any other government agency. In Witness Thereof, Astoria Financial Corporation has caused this certificate to be executed by the facsimile signature of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. Dated: COUNTERSIGNED AND REGISTERED: [SEAL] ChaseMellon Shareholder Services, L.L.C. Astoria Financial Corporation (New York, New York) Corporate By Transfer Agent and Registrar Seal President and Chief Executive Officer 1993 Delaware Authorized Signature Secretary
ASTORIA FINANCIAL CORPORATION The shares represented by this certificate are subject to a limitation contained in the Certificate of Incorporation to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the "Limit") be entitled or permitted to any vote in respect of shares held in excess of the Limit. The Board of Directors of the corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional, or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof. The shares represented by this certificate may not be cumulatively voted on any matter. The affirmative vote of the holders of at least 80% of the voting stock of the corporation, voting together as a single class, shall be required to approve certain provisions of the Certificate of Incorporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM- as tenants in common UNIF GIFT MIN ACT- __________ Custodian______________ TEN ENT- as tenants by the entireties (Cust) (Minor) JT TEN- as joint tenants with under Uniform Gift to Minors right of survivorship and Act ____________________________ not as tenants in common Additional abbreviations may also be used though not in the above list. For Value received, ____________________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________ ______________________ _______________________________________________________________________________________________________________________________ _______________________________________________________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE _______________________________________________________________________________________________________________________________ _______________________________________________________________________________________________________________________________ _______________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________ Shares of the common stock represented by the within certificate, and do hereby irrevocably constitute and appoint ___________________ ____________________________________________________________________________________________________________________Attorney to transfer the said Stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, ______________ X______________________________________________________________________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever. SIGNATURE GUARANTEED:_______________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION. (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 13Ad-15.
EX-10 4 ex10-8.txt EXHIBIT 10.8 Exhibit 10.8 ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION and ASTORIA FINANCIAL CORPORATION DIRECTORS' RETIREMENT PLAN Effective January 1, 1990, as amended and restated effective February 21, 1996 1. Directors eligible to participate ("Eligible Directors") in this Directors' Retirement Plan (the "Plan") shall only be those who retire from the latter of the Board of Directors of Astoria Federal Savings and Loan Association (the "Association") and Astoria Financial Corporation (the "Company") and are not or were not full-time employees of the Association or institutions merged with the Association prior to the formation of the Company, or of companies merged with or acquired by the Association or Company thereafter. 2. The mandatory retirement age for members of the Board of Directors of the Association shall be as set forth in the Bylaws of the Association, as amended from time to time, although early retirement is permitted. 3. The mandatory retirement age for members of the Board of Directors of the Company shall be as set forth in the Bylaws of the Company, as amended from time to time, although early retirement is permitted. 4. For purposes of determining benefits (the "Monthly Benefits") under Paragraph 5 hereof the following definitions shall apply: (a) Full Years of Service shall be the greater of years of service for the Board of Directors of the Association or the Company; (b) Monthly Fee shall mean the aggregate of the monthly fees received for service on the Board of Directors of the Association and the Board of Directors of the Company for participant's final month of service on each Board. 5. The Monthly Benefit to which an Eligible Director shall be entitled shall be based upon the following vesting schedule:
Full Years Monthly Benefit, calculated by multiplying of the percentage below by the Monthly Fee Service received for the final month of service. ------------ ------------------------------------------ Less than 10 0% 10 50% 11 55% 12 60%
1 13 65% 14 70% 15 75% 16 80% 17 85% 18 90% 19 95% 20 or more 100%
Except as provided below with respect to Monthly Benefits which become payable following a Change of Control (as defined below), the Monthly Benefit shall be paid as follows: (a) Normal retirement: Monthly Benefits shall be paid monthly commencing on the first day of the month following retirement upon reaching the later of the mandatory retirement ages set forth in the Bylaws of the Company and the Association. (b) Early Retirement: Monthly Benefits shall be paid monthly commencing on the later of the first day of the month following retirement or attainment of age 65. For purposes of the Plan and subject to Paragraph 11, Early Retirement shall include all manner and means by which an eligible Director ceases to serve as a director of the Company and the Association, excluding only mandatory retirement, removal for cause or death. 6. Except as provided below with respect to a Change of Control (as defined below), the Plan is intended to be an unfunded plan and the Monthly Benefits will be paid as due by the Association from its general assets. 7. In the event that an Eligible Director's service on the Boards of Directors of the Company and the Association ceases as a result of such Director's disability, the Monthly Benefit to which such Director would otherwise have been entitled pursuant to the Plan and the timing of such payment may at the discretion of the Board of Directors of the Association be increased to an amount up to 100% of the Monthly Fee received by the Director and the payment of which may be accelerated as determined by the Board of Directors of the Association. 8. All benefits payable to an Eligible Director pursuant to the Plan shall terminate on the death of the Director. 9. (a) A Change of Control of the Company or the Association ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the stockholders of the Company of a transaction that would result in the 2 reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company, or approval by the stockholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board of Directors of the Company do not belong to any of the following groups: (A) individuals who were members of the Board of Directors of the Company on February 21, 1996; or (B) individuals who first became members of the Board of Directors of the Company after February 21, 1996 either: (I) upon election to serve as a member of the Board of Directors of the Company by affirmative vote of three-quarters of the members of such Board of Directors, or of a nominating 3 committee thereof, in office at the time of such first election; or (II) upon election by the stockholders of the Company to serve as a member of the Board of Directors of the Company, but only if nominated for election by affirmative vote of three-quarters of the members of the Board of Directors of the Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Company; or (v) any event which would be described in Paragraph 9(a)(i), (ii), (iii) or (iv) if the term "Association" were substituted for the term "Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Association, or a subsidiary of either of them, by the Company, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Paragraph 9(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Association shall pay, based upon the election of each of the Eligible Directors filed with the Secretary of the Association by March 31, 1996 or the date the Eligible Director completes 10 full years of service, whichever is later, and if no such election shall have been so filed by an Eligible Director then as to that Director as provided in Paragraph 9(b)(ii) below, an amount determined and payable as follows: (i) To a trust fund to be established for the benefit of the Eligible Director at the time of the Change of Control, with a trustee selected by the Eligible Director, an amount actuarially determined to be sufficient to pay to the Eligible Director the Monthly Benefit provided pursuant to the Plan as such benefit would be payable to the Eligible Director under the terms of the Plan but for the Change of Control. (ii) To the Eligible Director, not later than thirty (30) days following the Change of Control or upon the Eligible Director's termination of service as a director 4 of the Company and the Association, whichever is later, a lump sum payment equal to the present value of the Monthly Benefits to which such Director is actually entitled under the Plan but for the Change of Control, where such present value is determined using the mortality tables prescribed under section 415(b)(2)(E)(v) of the Code and a discount rate, compounded monthly, equal to the annualized rate of interest prescribed by the Pension Benefit Guaranty Corporation for the valuation of immediate annuities payable under terminating single-employer defined benefit plans for the month in which the Director's termination of service as a director occurs. To the extent of any payment under Paragraph 9(b)(ii), the Association shall have no further liability with respect to the payment of benefits to the Eligible Director under the Plan. The Association shall continue to be liable for the payment of benefits under the Plan to the extent of any shortfall in the funds held in trust for the payment of benefits pursuant to Paragraph 9(b)(i). To the extent that upon the conclusion of the payment from the trust of all benefits due to a Director under the Plan there is an excess in the funds held in trust for the benefit of the Director, such excess shall be returned to the Association. (c) Actions taken pursuant to Paragraph 9(b)(ii) shall be taken in such manner as to avoid causing the Eligible Director to be in constructive receipt of income under the Plan prior to the actual payment of benefits. The Association shall pay all taxes, trustee's fees and other administrative charges or expenses associated with the establishment or continuance of such trust fund. (d) An Eligible Director may, at any time, by written notice to the Board of Directors of the Association, request a change in the election in effect for his benefits under Paragraph 9(b). The Board of Directors of the Association may honor or decline to honor such a request in its sole and absolute discretion; provided, however, that the Board of Directors of the Association shall decline to honor any such request that in the opinion of counsel to the Board of Directors of the Association could result in the constructive receipt of income by the requesting Eligible Director or any other person entitled to benefits pursuant to the Plan. If the Board of Directors of the Association determines to honor such a request, it shall be effective for all payments to be made on or after the effective date specified by the Board of Directors of the Association. 10. (a) The Secretary of the Association shall provide a copy of this Plan and together with a form on which the Director may notify the Secretary of his election, which election, if the Eligible Director so chooses, he may complete, sign and return to the Secretary. (b) Whenever appropriate in the Plan, words used in the singular may be read in the 5 plural, words in the plural may be read in the singular, and words importing the masculine gender shall be deemed equally to refer to the feminine or the neuter. Any reference to a Paragraph shall be to a Paragraph of the Plan, unless otherwise indicated. (c) The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall rights be liable for or subject to debts, contracts liabilities or torts. This Plan shall be binding upon the Association and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or other person or firm or corporation to which all or substantially all of the assets and business of the Association may be sold or otherwise transferred. (d) The Association shall indemnify, hold harmless and defend its Eligible Directors against their reasonable costs, including legal fees, incurred by them or arising out of any action, suit or proceeding in which they may be involved, as a result of their efforts, in good faith, to defend or enforce terms of the Plan. (e) A determination that any provision of the Plan is invalid or unenforceable shall not effect the validity or enforceability of any other provision hereof. (f) Failure to insist upon strict compliance with any terms, covenants or conditions of the Plan shall not be deemed a waiver of such term, covenant or condition. A waiver of any provision of the Plan must be in writing, designated as a waiver, and signed by the party against whom enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. (g) The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States. (h) The Association shall have the right to retain a sufficient portion of any payment made under the Plan to cover the amount required to be withheld pursuant to any applicable federal, state and local tax law. (i) Nothing in this Plan shall be held or construed to establish any deposit account for any Eligible Director or any deposit liability on the part of the Association. An Eligible Directors' rights hereunder shall be equivalent to those of a general unsecured creditor. 11. Notwithstanding anything herein contained to the contrary, any payments or benefits 6 provided to an Eligible Director pursuant to this Plan by the Association are subject to and conditioned upon compliance with Section 18K of the Federal Deposit Insurance Act, 12 U.S.C. 'SS' 1828(k), and any regulations promulgated thereunder. Dated: February 21, 1996 Astoria Federal Savings and Loan Association By: /s/ George L. Engelke, Jr. ------------------------------------- George L. Engelke, Jr. President and Chief Executive Officer Dated: February 21, 1996 Astoria Financial Corporation By: /s/ George L. Engelke, Jr. ------------------------------------- George L. Engelke, Jr. President and Chief Executive Officer 7 EX-10 5 ex10-10.txt EXHIBIT 10.10 Exhibit 10.10 Astoria Financial Corporation Death Benefit Plan for Outside Directors Adopted effective as of January 1, 1995 TABLE OF CONTENTS
Page ---- Article I Definitions Section 1.1 Administrator............................................. 1 Section 1.2 Association............................................... 1 Section 1.3 Board..................................................... 1 Section 1.4 Director.................................................. 1 Section 1.5 Fees...................................................... 1 Section 1.6 Holding Company........................................... 1 Section 1.7 Participant............................................... 1 Section 1.8 Participating Company..................................... 1 Section 1.9 Plan...................................................... 1 Article II Participation Section 2.1 Participation............................................. 1 Article III Vesting Section 3.1 Vesting................................................... 2 Article IV Benefit Section 4.1 Benefit................................................... 2 Article V Beneficiaries Section 5.1 Distributions to Beneficiaries............................ 2 Section 5.2 Beneficiary Designations.................................. 3 Article VI Miscellaneous Provisions Section 6.1 Construction and Language................................. 4
Section 6.2 Headings.................................................. 4 Section 6.3 Funding .................................................. 4 Section 6.4 Non-Alienation of Benefits................................ 4 Section 6.5 Indemnification........................................... 4 Section 6.6 Severability.............................................. 4 Section 6.7 Waiver.................................................... 4 Section 6.8 Governing Law............................................. 5 Section 6.9 Taxes..................................................... 5 Section 6.10 No Deposit Account........................................ 5
Astoria Financial Corporation Death Benefit Plan for Outside Directors Article I Definitions The following definitions shall apply for the purposes of this Plan unless a different meaning is clearly indicated by the context: Section 1.1 Administrator means the Compensation Committee of the Board. Section 1.2 Association means Astoria Federal Savings and Loan Association. Section 1.3 Board means the Board of Directors of the Holding Company. Section 1.4 Director means any member of the Board of Directors of any Participating Company who is not an employee of any Participating Company. Section 1.5 Fees means, with respect to any Director, cash compensation payable for services as a member of the Board of Directors of a Participating Company, including annual retainers, fees for attendance at meetings, and special compensation as a chairman and/or a member of a committee of Directors. Section 1.6 Holding Company means Astoria Financial Corporation. Section 1.7 Participant means a Director. Section 1.8 Participating Company means the Holding Company, the Association, and any other company which, with the prior approval of the Administrator, may adopt this Plan. Section 1.9 Plan means this Astoria Financial Corporation Death Benefit Plan for Outside Directors. The Plan may be referred to as the "Death Benefit Plan". Article II Participation Section 2.1 Participation Each Director shall be a Participant in the Plan. Such participation shall commence either on the effective date of this Plan, which shall be January 1, 1995, or, if the Participant first becomes a Director after such effective date, on the date the Participant first assumes office as a Director. A Participant's participation in the Plan shall continue until the date the Participant shall, 1 for reasons other than death, cease to be a Director. Upon a Participant ceasing participation in the Plan, all rights to any benefits under the Plan shall cease and be forfeited. Article III Vesting Section 3.1 Vesting. Benefits payable pursuant to this Plan shall vest according to the following schedule:
No. of Years of Service Completed as a Director of any Participating Company Vesting Percentage 1 33.33 2 66.66 3 100.00
For purposes of the Plan, Years of Service shall be calculated from the earliest date of the Participant's assumption of office as a Director and shall be based upon the completion of service as a Director through the specified anniversary date of such initial assumption of office. Any service as a Director which predates the effective date of this Plan shall be included in such calculation. Article IV Benefit Section 4.1 Benefit. Upon the death of a Participant while in service as a Director, the designated beneficiary or beneficiaries of the Participant or, if the Participant has made no such designation, the estate of the Participant, shall receive a lump sum payment from the Holding Company equal the annualized rate of Fees which were being paid to the Participant immediately preceding the date of his or her death, taking into consideration all directorships at any Participating Companies which the Participant held at such time, multiplied times the applicable vesting percentage based upon the Years of Service of the Director as provided herein. Article V Beneficiaries Section 5.1 Distributions to Beneficiaries. 2 (a) In the event that a Participant dies while in service as a Director, the benefit specified above shall be paid to such one or more beneficiaries and in such proportions as the Participant may designate on such form and in such manner as the Administrator may require. A beneficiary designation pursuant to this section 5.1 shall not be effective unless it is in writing and is received by the Administrator as provided below. (b) Payments to the Participant's beneficiary or beneficiaries pursuant to this section 5.1 shall be made in a single lump sum as soon as practicable after the Participant's death. Section 5.2 Beneficiary Designations. (a) The Administrator shall provide a copy of this Plan to each Director together with a form on which the Participant may notify the Administrator of his or her beneficiary designations, if any. The Participant may designate one or more primary beneficiaries. If more than one primary beneficiary is designated, the Director shall indicate the percentage of the benefits payable under the Plan which shall be payable to each beneficiary. In the absence of any designation of the percentage to be received, the benefits shall be paid to the beneficiaries on an equal pro rata basis. If the aggregate percentage designations by a Participant is less than 100% of the benefits to be paid, the beneficiaries shall receive their designated percentage of the benefits payable under the Plan and the excess shall be payable to the estate of the Participant. If the aggregate percentage designated by a Participant is more than 100% of the benefits to be paid, the beneficiaries shall receive their designated percentage of the benefits payable under the Plan reduced on a proportionate basis so that the aggregate designate percentage does not exceed 100%. If more than one primary beneficiary is designated, the Participant may designate whether, in the event that one of the primary beneficiaries predeceases the Participant, the portion of the benefits payable to the deceased beneficiary shall be paid to the surviving primary beneficiary. If (i) no primary beneficiary survives the Participant or (ii) at least one primary beneficiaries predeceases the Participant, in the absence of a right of survivorship designation among primary beneficiaries and only to the extent of the benefits that would have been payable to any primary beneficiary who predecease the Participant, than benefits payable under the Plan shall be paid according to the secondary beneficiary designation, if any, made by the Director in accordance with the provisions set forth herein applicable to primary beneficiaries. (b) If no beneficiary shall have been designated, if any such designation shall be ineffective, or in the event that no designated beneficiary survives the Participant, the benefits payable under this Plan shall be paid to the estate of the Participant in a lump sum as soon as practicable following his death. In the event that the Participant and one or more of his designated beneficiaries shall die under circumstances which cast doubt on which of them shall have been the first to die, the Participant shall be deemed to have survived the deceased beneficiary. (c) Beneficiary designations by a Participant may be made or amended by a Participant from time to time. Such designations shall only be effective upon the actual receipt o the designation by the Administrator and the execution of an acknowledgement of receipt by a designated officer of the Holding Company on behalf of the Administrator. 3 Article VI Miscellaneous Provisions Section 6.1 Construction and Language. Wherever appropriate in the Plan, words used in the singular may be read in the plural, words in the plural may be read in the singular, and words importing the masculine gender shall be deemed equally to refer to the feminine or the neuter. Any reference to an Article or Section shall be to an Article or Section of the Plan, unless otherwise indicated. Section 6.2 Headings. The headings of Articles and Sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Agreement, the text shall control. Section 6.3 Funding The Plan shall be an unfunded plan. Section 6.4 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall rights be liable for or subject to debts, contracts, liabilities or torts. Section 6.5 Indemnification. Each Participating Company shall indemnify, hold harmless and defend its Directors and Participants, and the beneficiaries of each, against their reasonable costs, including legal fees, incurred by them or arising out of any action, suit or proceeding in which they may be involved, as a result of their efforts, in good faith, to defend or enforce terms of the Plan. Section 6.6 Severability. A determination that any provision of the Plan is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 6.7 Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions of the Plan shall not be deemed a waiver of such term, covenant or condition. A waiver of any provision of the Plan must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power 4 hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 6.8 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States. Any payments made pursuant to this Plan are subject to and conditioned upon their compliance with 12 U.S.C. 'SS'1828(k) and any regulations promulgated thereunder. Section 6.9 Taxes. Each Participating Company shall have the right to retain a sufficient portion of any payment made under the Plan to cover the amount required to be withheld pursuant to any applicable federal, state and local tax law. Section 6.10 No Deposit Account. Nothing in this Plan shall be held or construed to establish any deposit account for any Participant or any deposit liability on the part of the Association or any other financial institution which is a Participating Company. Participants' rights hereunder shall be equivalent to those of a general unsecured creditor. 5 EX-10 6 ex10-11.txt EXHIBIT 10.11 Exhibit 10.11 DEFERRED COMPENSATION PLAN FOR DIRECTORS OF ASTORIA FINANCIAL CORPORATION Adopted on December 21, 1994 Effective as of January 1, 1995 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 Administrator ............................................ 1 Section 1.2 Association .............................................. 1 Section 1.3 Board .................................................... 1 Section 1.4 Change of Control ........................................ 1 Section 1.5 Code ..................................................... 1 Section 1.6 Director ................................................. 1 Section 1.7 Exchange Act ............................................. 1 Section 1.8 Fees ..................................................... 1 Section 1.9 Holding Company .......................................... 1 Section 1.10 Memorandum Account ....................................... 1 Section 1.11 Participant .............................................. 2 Section 1.12 Participating Company .................................... 2 Section 1.13 Plan ..................................................... 2 ARTICLE II PARTICIPATION Section 2.1 Election to Participate .................................. 2 Section 2.2 Changes in Participation ................................. 2 ARTICLE III DEFERRED AMOUNTS Section 3.1 In General ............................................... 3 Section 3.2 Interest Credited to the Memorandum Account .............. 3 Section 3.3 Vesting .................................................. 3 ARTICLE IV DISTRIBUTIONS Section 4.1 Distributions to Participants ............................ 4 Section 4.2 Change of Payment Schedule ............................... 5 Section 4.3 Distributions to Beneficiaries ........................... 6
(i)
Page ---- ARTICLE V CHANGE OF CONTROL Section 5.1 Change of Control Defined ................................ 6 Section 5.2 Participants' Options upon a Change of Control ........... 8 ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.1 Notice and Election ...................................... 9 Section 6.2 Construction and Language ................................ 9 Section 6.3 Headings ................................................. 9 Section 6.4 Non-Alienation of Benefits ............................... 9 Section 6.5 Indemnification .......................................... 10 Section 6.6 Severability ............................................. 10 Section 6.7 Waiver ................................................... 10 Section 6.8 Governing Law ............................................ 10 Section 6.9 Taxes .................................................... 10 Section 6.10 No Deposit Account ....................................... 10
(ii) DEFERRED COMPENSATION PLAN FOR DIRECTORS OF ASTORIA FINANCIAL CORPORATION ARTICLE I DEFINITIONS The following definitions shall apply for the purposes of this Plan unless a different meaning is clearly indicated by the context: Section 1.1 Administrator means the Compensation Committee of the Board. Section 1.2 Association means Astoria Federal Savings and Loan Association. Section 1.3 Board means the Board of Directors of the Holding Company. Section 1.4 Change of Control has the meaning set forth in section 5.1. Section 1.5 Code means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). Section 1.6 Director means any member of the Board of Directors of any Participating Company who is not an employee of any Participating Company. The term "Director" shall not include any individual to the extent that his service is as a director emeritus or a member of an advisory board. Section 1.7 Exchange Act means the Securities Exchange Act of 1934, as amended (including the corresponding provisions of any succeeding law). Section 1.8 Fees means, with respect to any Director, compensation payable for services as a member of the Board of Directors of a Participating Company, including annual retainers, fees for attendance at meetings, and special compensation as a chairman and/or a member of a committee of Directors. Section 1.9 Holding Company means Astoria Financial Corporation. Section 1.10 Memorandum Account means, with respect to a Participant, an account maintained by the Holding Company to which is credited the amount of the Participant's deferred Fees together with interest thereon pursuant to section 3.2, and against which are charged any distributions of amounts credited to the Memorandum Account. Section 1.11 Participant means a Director who has a Memorandum Account under the Plan. Section 1.12 Participating Company means the Holding Company, the Association, and any other company which, with the prior approval of the Administrator, may adopt this Plan. -2- Section 1.13 Plan means this Deferred Compensation Plan for Directors. The Plan may be referred to as the "Deferred Compensation Plan for Directors of Astoria Financial Corporation. ARTICLE II PARTICIPATION Section 2.1 Election to Participate. Any Director may elect to become a Participant in the Plan by submitting to the Administrator a written election to defer receipt of all or a specified part of his Fees. Such election shall be made on or before the last day of any calendar year and shall be effective for the calendar year following the calendar year in which such election is made; provided, however, that in the case of initial elections made during 1994 or during the thirty (30) days after a person is first elected or appointed to serve as a Director, such election may be effective for Fees earned on or after an earlier date designated by the Director that is after the last day of the calendar month in which such election is filed with the Administrator. Once an election is made, it shall continue in effect for all succeeding calendar years until changed or revoked pursuant to section 2.2. Section 2.2 Changes in Participation. An election by a Director pursuant to section 2.1 shall continue in effect until termination of service as a Director; provided, however, that the Director may, by written election filed with the Administrator, increase or decrease the portion of his Fees to be deferred or discontinue such deferral altogether. Such election shall be effective with respect to Fees earned after the calendar year in which such election is filed with the Administrator. In the event that a Participant ceases to be a Director or in the event that a Director ceases to defer receipt of his Fees, the balance in his Memorandum Account shall continue to be credited with interest in accordance with Article V. A Director who has filed a written election to cease deferring receipt of his Fees may thereafter again file an election to defer receipt of all or any portion of his Fees pursuant to section 2.1, effective for the calendar year subsequent to the calendar year in which he files the new election. ARTICLE III DEFERRED AMOUNTS Section 3.1 In General. The Administrator shall maintain a separate Memorandum Account for each Participant. The amount of a Participant's Fees deferred pursuant to section 2.1 shall be credited to his Memorandum Account as of the date on which such Fees would have been paid if an election to defer were not in effect. Neither the Association nor any Participating Company shall fund its liability for the balances credited to a Memorandum Account, but each shall reflect its liability for such balances on its books. The Holding Company may, on such terms and conditions as it may, in its discretion, establish and agree to assume the liability for the payment of deferred -3- Fees and interest thereon attributable to service for the Association or other Participating Companies. Section 3.2 Interest Credited to the Memorandum Account. A Participant's Memorandum Account shall be credited with interest as of the last day of each calendar quarter. Such interest credit shall be equal to the product of: (a) the average daily balance in the Memorandum Account during the quarter then ended; multiplied by (b) twenty-five percent (25%) of the lower of: (i) the average (on a consolidated basis) of (A) the Holding Company's yield (expressed as an annual percentage rate) on its average investments for the preceding quarter and (B) the Holding Company's cost of funds (expressed as an annual percentage rate) on its average interest-bearing liabilities for the quarter preceding the quarter then ended; and (ii) the Holding Company's yield on a consolidated basis (expressed as an annual percentage rate) on its average investments for the quarter preceding the quarter then ended. Each such interest credit shall be added to the balance of a Participant's Memorandum Account as of the first day of the succeeding quarter for purposes of determining future interest credits. Section 3.3 Vesting. All deferred fees and interest credited to the Memorandum Account shall be 100% vested at all times. ARTICLE IV DISTRIBUTIONS Section 4.1 Distributions to Participants. (a) The balance in a Participant's Memorandum Account shall be paid to the Participant according to the payment schedule determined under section 4.1(b) as of the earlier of: (i) the first business day of the calendar quarter following the calendar quarter in which the Participant ceases to be a Director of any and all Participating Companies for any reason, including death or retirement at mandatory retirement age; or (ii) the first business day of the calendar quarter following the calendar quarter in which the Participant becomes permanently and totally disabled within the meaning of section 22(e)(3) of the Code. Payment (or the first in a series of payments) shall be made as soon as practicable after the date determined under this section 4.1(a). -4- (b) Subject to section 4.1(c), payments made pursuant to section 4.1(a) shall be made according to whichever of the following payment schedules the Participant shall designate in his initial election to defer receipt of Fees (or in a subsequent election made and approved pursuant to section 4.2): (i) in a single lump sum, in which case the amount of the payment shall be equal to the entire balance credited to the Participant's Memorandum Account as of the last day of the calendar quarter before the quarter in which the payment is to be made; (ii) in such number of quarterly installment payments (not to exceed one-hundred (100) quarterly payments) as the Participant shall specify in his written election to defer receipt of Fees, in which case the amount of the quarterly installment payments to be made in each calendar year shall be equal to the lesser of the total balance in the Participant's Memorandum Account as of the date of payment and the amount determined under the following formula: AB QP = ---- N where: (A) "QP" is the amount of the quarterly payment; (B) "AB" is the balance credited to the Participant's Memorandum Account as of (I) for the first calendar year in which payments are made, the first day of the first calendar quarter for which a payment is made, and (II) for succeeding calendar years, January 1st of the year for which the payment is being made; (C) "N" is the number of payments remaining to be paid as of (I) in the case of the first calendar year in which payments are made, the first day of the first calendar quarter for which a payment is due, and (II) in the case of succeeding calendar years, January 1st of the year for which the payment is made. The amount of the quarterly installments payable shall be adjusted as of the first day of each calendar year until the entire Memorandum Account has been distributed. Notwithstanding anything in this section 4.1(b)(ii) to the contrary, the final scheduled quarterly installment shall include the entire remaining balance credited to the Memorandum Account. If the Participant fails to designate a payment schedule in his election to defer receipt of Fees, then payment shall be made in one hundred (100) quarterly installments determined in accordance with section 4.1(b)(ii). (c) If, after payments have begun pursuant to section 4.1(a), the balance credited to a Participant's Memorandum Account falls below $10,000, the Administrator may, in its discretion, pay out such remaining balance in a lump sum, regardless of the payment schedule selected by the Participant pursuant to section 4.1(b). -5- Section 4.2 Change of Payment Schedule. A Participant may, at any time, by written notice to the Administrator, request a change in the payment schedule in effect for his Memorandum Account under section 4.1(b). The Administrator may honor or decline to honor such a request in its sole and absolute discretion; provided, however, that the Administrator shall decline to honor any such request that could, in the judgment of the Administrator, result in the constructive receipt of income by the requesting Participant or any other person entitled to benefits pursuant to the Plan. If the Administrator determines to honor such a request, it shall be effective for all payments to be made on or after the effective date specified by the Administrator. Section 4.3 Distributions to Beneficiaries. (a) In the event that a Participant dies prior to the receipt of all amounts payable to him pursuant to the Plan, any remaining balance credited to his Memorandum Account shall be paid to such one or more beneficiaries and in such proportions as the Participant may designate on such form and in such manner as the Administrator may require. A beneficiary designation pursuant to this section 4.3 shall not be effective unless it is in writing and is received by the Administrator prior to the death of the Participant making the designation. (b) Payments to the Participant's beneficiary(ies) pursuant to this section 4.3 shall be payable in a single lump sum as soon as practicable after the Participant's death, unless the Participant directs that payment be made according to the payment schedule selected by the Participant pursuant to section 4.1(b). (c) If no beneficiary shall have been designated or if any such designation shall be ineffective, or in the event that no designated beneficiary survives the Participant, the balance credited to the Participant's Memorandum Account shall be paid to his estate in a lump sum as soon as practicable following his death. In the event that the Participant and one or more of his designated beneficiaries shall die under circumstances which cast doubt on which of them shall have been the first to die, the Participant shall be deemed to have survived the deceased beneficiary. ARTICLE V CHANGE OF CONTROL Section 5.1 Change of Control Defined. A Change of Control shall be deemed to have occurred upon the happening of any of the following events: (a) in the case of a Director of the Holding Company, approval by the stockholders of the Holding Company of a transaction that would result in the reorganization, merger or consolidation of the Holding Company with one or more other persons, other than a transaction following which: (i) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the -6- same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Holding Company; and (ii) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Holding Company; (b) in the case of a Director of the Holding Company, the acquisition of all or substantially all of the assets of the Holding Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of Holding Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Holding Company of any transaction which would result in such an acquisition; or (c) in the case of a Director of the Holding Company, a complete liquidation or dissolution of the Holding Company, or approval by the stockholders of the Holding Company of a plan for such liquidation or dissolution; or (d) in the case of a Director of the Holding Company, the occurrence of any event if, immediately following such event, at least 50% of the members of the board of directors of the Holding Company do not belong to any of the following groups: (i) individuals who were members of the board of directors of the Holding Company on the date on which such Director first became a Participant; or (ii) individuals who first became members of the board of Directors of the Holding Company after such date either: (A) upon election to serve as a member of the board of directors of the Holding Company by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (B) upon election by the stockholders of the Holding Company to serve as a member of the board of directors of the Holding Company, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Holding Company, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the -7- meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the board of directors of the Holding Company; (e) in the case of any Participant who is or was a Director of the Association or a Participating Company other than the Association or the Holding Company, an event that would be described in section 5.1(a), (b), (c) or (d) if the name of the Association or such other Participating Company were substituted for the words "Holding Company" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Holding Company, the Association or any Participating Company, or any subsidiary of any of them, by the Holding Company, the Association or any Participating Company, or any subsidiary of any of them, or by any employee benefit plan maintained by any of them. For purposes of this section 5.1 the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. Section 5.2 Participants' Options upon a Change of Control In the event of Change of Control, the Memorandum Account maintained for a Participant shall continue to be held by the Administrator and distributed in accordance with the terms of the Plan; provided, however, that the Participant may, no later than sixty (60) days after the occurrence of the Change of Control: (a) cause the Participating Companies or their respective successors to place in a trust fund with a trustee selected by the Participant an amount equal to the balance credited to his Memorandum Account, plus any additional Fees thereafter deferred, to be invested for the account of the Participant, in which case payments shall continue to be made at the time or times determined under the Plan and the balance credited to the Memorandum Account shall at all times thereafter be equal to the balance held in such trust fund; or (b) cause the Participating Companies or their respective successors to purchase and hold an annuity contract issued by an insurance company selected by the Participant, the terms of which provide the same or substantially similar benefits as he would have received under the Plan if the Participant had terminated service as a Director as of the date of purchase of such annuity contract; provided, however, that the premium cost of such annuity contract shall not exceed the balance in the Memorandum Account. Actions taken pursuant to this section 5.2 shall be taken in such manner as to avoid causing the Participant to be in constructive receipt of income under the Plan prior to the actual payment of benefits. The Participating Companies shall pay all taxes, trustees' fees and other administrative charges or expenses associated with the establishment or continuance of such a trust fund or purchase of such an annuity contract. -8- ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.1 Notice and Election. The Administrator shall provide a copy of this Plan and the resolutions of adoption to each Director together with a form on which the Director may notify the Administrator of his election whether to become a Participant, which letter, if he so elects, he may complete, sign and return to the Administrator. Section 6.2 Construction and Language. Wherever appropriate in the Plan, words used in the singular may be read in the plural, words in the plural may be read in the singular, and words importing the masculine gender shall be deemed equally to refer to the feminine or the neuter. Any reference to an Article or section shall be to an Article or section of the Plan, unless otherwise indicated. Section 6.3 Headings. The headings of Articles and sections are included solely for convenience of reference. If there is any conflict between such headings and the text of the Agreement, the text shall control. Section 6.4 Non-Alienation of Benefits. The right to receive a benefit under the Plan shall not be subject in any manner to anticipation, alienation or assignment, nor shall rights be liable for or subject to debts, contracts, liabilities or torts. Section 6.5 Indemnification. Each Participating Company shall indemnify, hold harmless and defend its Directors and Participants, and the beneficiaries of each, against their reasonable costs, including legal fees, incurred by them or arising out of any action, suit or proceeding in which they may be involved, as a result of their efforts, in good faith, to defend or enforce terms of the Plan. Section 6.6 Severability. A determination that any provision of the Plan is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 6.7 Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions of the Plan shall not be deemed a waiver of such term, covenant or condition. A waiver of any provision of the Plan must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. -9- Section 6.8 Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States. Any payments made pursuant to this Plan are subject to and conditioned upon their compliance with 12 U.S.C. 'SS' 1828(k) and any regulations promulgated thereunder. Section 6.9 Taxes. Each Participating Company shall have the right to retain a sufficient portion of any payment made under the Plan to cover the amount required to be withheld pursuant to any applicable federal, state and local tax law. Section 6.10 No Deposit Account. Nothing in this Plan shall be held or construed to establish any deposit account for any Participant or any deposit liability on the part of the Association or any other financial institution which is a Participating Company. Participants' rights hereunder shall be equivalent to those of a general unsecured creditor. EX-10 7 ex10-29.txt EXHIBIT 10.29 Exhibit 10.29 ASTORIA FINANCIAL CORPORATION EMPLOYMENT AGREEMENT WITH EXECUTIVE OFFICER This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of December 1, 2003 by and between ASTORIA FINANCIAL CORPORATION, a business corporation organized and operating under the laws of the State of Delaware and having an office at One Astoria Federal Plaza, Lake Success, New York 11042-1085 (the "Company"), and GARY T. MCCANN, an individual residing at 17 Shoreham Road, Massapequa, New York 11758 (the "Executive"). WITNESSETH: WHEREAS, the Executive currently serves the Company in the capacity of Executive Vice President and as Executive Vice President of its wholly owned subsidiary, ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION (the "Association"); and WHEREAS, the Executive currently has a Change of Control Severance Agreement with the Company dated January 1, 2000 which the Executive and the Company wish to terminate and replace with this Agreement; and WHEREAS, the Company desires to assure for itself the continued availability of the Executive's services and the ability of the Executive to perform such services with a minimum of personal distraction in the event of a pending or threatened Change of Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company and the Executive hereby terminate in its entirety the Change of Control Severance Agreement by and between the Company and the Executive dated as of January 1, 2000 and replace such Change of Control Severance Agreement in all respects and manner with this Agreement so as to provide as follows from and after the date hereof: Section 1. Employment. The Company agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. Section 2. Employment Period; Remaining Unexpired Employment Period. Page 1 of 31 (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this Section 2 (the "Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the day before the third anniversary date of this Agreement, plus such extensions, if any, as are provided by the Board of Directors of the Company (the "Board") pursuant to Section 2(b). (b) Beginning on the date of this Agreement, the Employment Period shall automatically be extended for one (1) additional day each day, unless either the Company or the Executive elects not to extend the Agreement further by giving written notice to the other party, in which case the Employment Period shall end on the day before the third anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on: (i) if a notice of non-extension has been given in accordance with this Section 2(b), the day before the third anniversary of the date on which such notice is given; and (ii) in all other cases, the day before the third anniversary of the date as of which the Remaining Unexpired Employment Period is being determined. Upon termination of the Executive's employment with the Company for any reason whatsoever, any daily extensions provided pursuant to this Section 2(b), if not previously discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company from terminating the Executive's employment at any time during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Company and the Executive in the event of any such termination shall be determined pursuant to this Agreement. Section 3. Duties. The Executive shall serve as Executive Vice President of the Company, having such power, authority and responsibility and performing such duties as are prescribed by or pursuant to the By-Laws of the Company and as are customarily associated with such position. The Executive shall devote his or her full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Company, its affiliates and subsidiaries and shall use his or her best efforts to advance the interests of the Company. Page 2 of 31 Section 4. Cash Compensation. In consideration for the services to be rendered by the Executive hereunder, the Company shall pay to him or her a salary at an initial annual rate of TWO HUNDRED TWELVE THOUSAND DOLLARS ($212,000), payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. At least annually during the Employment Period, the Board shall review the Executive's annual rate of salary and may, in its discretion, approve an increase therein. In no event shall the Executive's annual rate of salary under this Agreement in effect at a particular time be reduced without his or her prior written consent and any such reduction in the absence of such consent shall be a material breach of this Agreement. In addition to salary, the Executive may receive other cash compensation from the Company for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. Section 5. Employee Benefit Plans and Programs. During the Employment Period, the Executive shall be treated as an employee of the Company and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's customary practices. Section 6. Indemnification and Insurance. (a) During the Employment Period and for a period of six (6) years thereafter, the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or service in other capacities at the request of the Company. The coverage provided to the Executive pursuant to this Section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six (6) years thereafter, the Company shall indemnify the Executive against, and hold him or her harmless from, any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions Page 3 of 31 that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. Section 7. Other Activities. (a) The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he or she may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his or her duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his or her duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company and generally applicable to all similarly situated executives. (b) The Executive may also serve as an officer or director of the Association on such terms and conditions as the Company and the Association may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his or her duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Association, he or she shall (subject to the Company's powers of termination hereunder) continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Association in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. Section 8. Working Facilities and Expenses. The Executive's principal place of employment shall be at the Company's executive offices at the address first above written, or at such other location within Queens County or Nassau County, New York at which the Company shall maintain its principal executive offices, or at such other location as the Company and the Executive may mutually agree upon. The Company shall provide the Executive at his or her principal place of employment with a private office, secretarial services and other support services and facilities suitable to his or her position with the Company and necessary or appropriate in connection with the performance of his or her assigned duties under this Agreement. The Company shall provide to the Executive for his or her exclusive use an automobile owned or leased by the Company and appropriate to his or her position, to be used in the performance of his or her duties hereunder, including commuting to and from his or her personal residence. The Company shall reimburse the Executive for his or her ordinary and necessary business expenses, including, without limitation, all expenses associated with his or her business use of the aforementioned automobile, fees for memberships in such clubs and organizations as the Executive Page 4 of 31 and the Company shall mutually agree are necessary and appropriate for business purposes, and his or her travel and entertainment expenses incurred in connection with the performance of his or her duties under this Agreement, in each case upon presentation to the Company of an itemized account of such expenses in such form as the Company may reasonably require. Section 9. Termination of Employment with Severance Benefits. (a) The Executive shall be entitled to the severance benefits described herein in the event that his or her employment with the Company terminates during the Employment Period under any of the following circumstances: (i) the Executive's voluntary resignation from employment with the Company within six (6) months following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the office of Executive Vice President (or a more senior office) of the Company; (B) if the Executive is or becomes a member of the Board, the failure of the stockholders of the Company to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Company of its material failure, whether by amendment of the Company's Certificate of Incorporation or By-laws, action of the Board or the Company's stockholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in Section 3 of this Agreement as of the date hereof, unless, during such thirty (30) day period, the Company cures such failure in a manner determined by the Executive, in his or her discretion, to be satisfactory; (D) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Company of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his or her total compensation package), unless, during such thirty (30) day period, the Company Page 5 of 31 cures such failure in a manner determined by the Executive, in his or her discretion, to be satisfactory; or (E) the relocation of the Executive's principal place of employment, without his or her written consent, to a location outside of Nassau County and Queens County, New York; (ii) the termination of the Executive's employment with the Company for any other reason not described in Section 10(a). In such event, the Company shall provide the benefits and pay to the Executive the amounts described in Section 9(b). (b) Upon the termination of the Executive's employment with the Company under circumstances described in Section 9(a) of this Agreement, the Company shall pay and provide to the Executive (or, in the event of the Executive's death following the Executive's termination of employment, to his or her estate): (i) his or her earned but unpaid compensation (including, without limitation, all items which constitute wages under Section 190.1 of the New York Labor Law and the payment of which is not otherwise provided for under this Section 9(b)) as of the date of the termination of his or her employment with the Company, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in any event not later than thirty (30) days after termination of employment; (ii) the benefits, if any, to which he or she is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to Section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage (including any co-payments and deductibles, but excluding any premium sharing arrangements, it being the intention of the parties to this Agreement that the premiums for such insurance benefits shall be the sole cost and expense of the Company) equivalent to the coverage to which he or she would have been entitled under such plans (as in effect on the date of his or her termination of employment, or, if his or her termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he or she had continued Page 6 of 31 working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary or compensation, as applicable, achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; (iv) within thirty (30) days following the Executive's termination of employment with the Company, a lump sum payment in an amount representing an estimate of the salary that the Executive would have earned if he or she had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company (the "Salary Severance Payment"). The Salary Severance Payment shall be computed using the following formula: SSP = BS x NY where: "SSP" is the amount of the Salary Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). The Salary Severance Payment shall be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination. (v) within thirty (30) days following the Executive's termination of employment with the Company, a lump sum payment (the "DB Severance Payment") in an amount equal to the excess, if any, of: (A) the present value of the aggregate benefits to which he or she would be entitled under any and all qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company, if he or she were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Page 7 of 31 Employment Period, such benefits to be determined as of the date of termination of employment by adding to the service actually recognized under such plans an additional period equal to the Remaining Unexpired Employment Period and by adding to the compensation recognized under such plans for the most recent year recognized all amounts payable pursuant to Sections 9(b)(i), (iv), (vii), (viii) and (ix) of this Agreement; over (B) the present value of the benefits to which he or she is actually entitled under such defined benefit pension plans as of the date of his or her termination; The DB Severance Payment shall be computed using the following formula: DBSP = SEVLS - LS where: "DBSP" is the amount of the DB Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "SEVLS" is the sum of the present value of the defined benefit pension benefits that have been or would be accrued by the Executive under all qualified and non-qualified defined benefit pension plans of which the Company or any of its affiliates or subsidiaries are a sponsor and in which the Executive is or, but for the completion of any service requirement that would have been completed during the Remaining Unexpired Employment Period, would be a participant utilizing the following assumptions: (I) the executive is 100% vested in the plans regardless of actual service, (II) the benefit to be valued shall be a single life annuity with monthly payments due on the first day of each month and with a guaranteed payout of not less than 120 monthly payments, (III) the calculation shall be made utilizing the same mortality table and interest rate as would be utilized by the plan on the date of termination as if the calculation were being made pursuant to Section 417(e)(3)(A)(ii) of the Internal Revenue Code, as amended, (the "Code"); Page 8 of 31 (IV) for purpose of calculating the Executive's monthly or annual benefit under the defined benefit plans, additional service equal to the Remaining Unexpired Employment Period (rounded up to the next whole year if such period is not a whole number when expressed in years) shall be added to the Executive's actual service to calculate the amount of the benefit; and (V) for purpose of calculating the Executive's monthly or annual benefit under the defined benefit plans, the following sums shall be added to the Executive's compensation recognized under such plans for the most recent year recognized: (1) payments made pursuant to Section 9(b)(i); (2) the Salary Severance Payment; (3) the Bonus Severance Payment; (4) the Option Surrender Payment; and (5) the RRP Surrender Payment. "LS" is the sum of the present value of the defined benefit pension benefits that are vested benefits actually accrued by the Executive under all qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company or any of its affiliates or subsidiaries in which the Executive is or, but for the completion of any service requirement, would be a participant utilizing the following assumptions: (I) the benefit to be valued shall be a single life annuity with monthly payments due on the first day of each month and with a guaranteed payout of not less than 120 monthly payments, and (II) the calculation shall be made utilizing the same mortality table and interest rate as would be utilized by the plan on the date of termination as if the calculation were being made pursuant to Section 417(e)(3)(A)(ii) of the Code; (vi) within thirty (30) days following the Executive's termination of employment with the Company, a lump sum payment (the "Defined Contribution Severance Payment") equal to the sum of: (A) an estimate of the additional employer contributions to which he or she would have been entitled under any and all qualified and non-qualified defined contribution pension plans, excluding the employee Page 9 of 31 stock ownership plans, maintained by, or covering employees of, the Company or any of its affiliates or subsidiaries as if he or she were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period (the "401K Severance Payment"); and (B) an estimate of the value of the additional assets which would have been allocable to him or her through debt service or otherwise under any and all qualified and non-qualified employee stock ownership plans, maintained by, or covering employees of, the Company or any of its affiliates or subsidiaries as if he or she were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period, based on the fair market value of such assets at termination of employment (the "ESOP Severance Payment"). The Defined Contribution Severance Payment shall be calculated as follows: DCSP = 401KSP + ESOPSP where: "DCSP" is the amount of the Defined Contribution Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "401KSP" is the amount of the 401K Severance Payment, before the deduction of applicable federal, state and local withholding taxes; and "ESOPSP" is the amount of the ESOP Severance Payment, before the deduction of applicable federal, state and local withholding taxes. The 401KSP shall be calculated as follows: 401KSP = (401KC x NY) + UVB where "401KC" is the sum of the Company Contributions as defined in the Association's Incentive Savings Plan or, if made under another defined contribution pension plan other than an employee stock ownership plan, the comparable contribution made for the benefit of the Executive during the one year period which shall end on the date of his or her termination of his or her employment with the Company; Page 10 of 31 "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number); and "UVB" is the actual balance credited to the Executive's account under the applicable plan at the date of his or her termination of employment that is not vested and does not become vested as a consequence of such termination of employment. The ESOPSP shall be calculated as follows: ESOPSP = (((ALL x FMV) + C) x NY) + UVB where: "ALL" is the sum of the number of shares of the Company's common stock or, if applicable, phantom shares of such stock by whatever term it is described allocated to the Executive's accounts under all qualified and non-qualified employee stock ownership plans maintained by the Company or any of its affiliates or subsidiaries during or for the last complete plan year in which the Executive participated in such plans and received such an allocation whether the allocation occurred as a result of contributions made by the Company, the payment by the Company or any of its affiliates or subsidiaries of any loan payments under a leveraged employee stock ownership plan, the allocation of forfeitures under the terms of such plan or as a result of the use of cash or earnings allocated to the Executive's account during such plan year to make loan payments that result in share allocations, provided however, that excluded shall be any shares or phantom shares allocated to the Executive's account under any qualified and non-qualified employee stock ownership plans maintained by the Company or any of its affiliates or subsidiaries solely as a result of the termination of such plans, provided further, that if the shares allocated are not shares of the Association's common stock or phantom shares of such stock than shares of whatever securities are so allocated shall be utilized, and provided further, that in the event that there shall be any shares or phantom shares allocated during the then current plan year or the last complete plan year to the Executive's account under any qualified and non-qualified employee stock ownership plans maintained by the Association or any of its affiliates or subsidiaries solely as a result of the termination of such plans, the ALL shall be reduced (but not to an amount less than zero (0)) by an amount calculated by multiplying the number of shares or phantom shares allocated to the Executive's account solely as a result of the termination of such plans times the FMV utilized to calculate the ESOPSP; Page 11 of 31 "C" is the sum of all cash allocated to the Executive's accounts under all qualified and non-qualified employee stock ownership plans maintained by the Company during or for the last complete plan year in which the Executive participated in such plans whether the allocation occurred as a result of contributions made by the Company, the payment by the Company or the Association of any loan payments under a leveraged employee stock ownership plan or the allocation of forfeitures under the terms of such plan during such plan year; "FMV" is the closing price of the Company's common stock on the New York Stock Exchange or on whatever other stock exchange or market such stock is publicly traded on the date the Executive's employment terminates or, if such day is not a day on which such securities are traded, on the most recent preceding trading day on which a trade occurs, provided however that if the security allocated to the Executive's account during the last completed plan year is other than the Company's common stock the closing price of such other security on the date the Executive's employment terminates shall be utilized. "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number); and "UVB" is the actual balance credited to the Executive's account under the applicable plan at the date of his or her termination of employment that is not vested and does not become vested as a consequence of such termination of employment. (vii) within thirty (30) days following the Executive's termination of employment with the Company, the Company shall make a lump sum payment to the Executive in an amount equal to the estimated potential annual bonuses or incentive compensation that the Executive could have earned if the Executive had continued working for the Company during the Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company (the "Bonus Severance Payment"). The Bonus Severance Payment shall be computed using the following formula: BSP = ( BS x TIO x AP x NY) where: "BSP" is the amount of the Bonus Severance Payment, before the deduction Page 12 of 31 of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; "TIO" is the highest target incentive opportunity (expressed as a percentage of base salary) established by the Compensation Committee of the Board for the Executive pursuant to the Astoria Financial Corporation Executive Officer Annual Incentive Plan during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; "AP" is the highest award percentage available to the Executive with respect to the financial performance of the Company (expressed as a percentage of the TIO) established by the Compensation Committee of the Board for the Executive pursuant to the Astoria Financial Corporation Executive Officer Annual Incentive Plan during the period during that portion of the Employment Period which is prior to the Executive's termination of employment with the Company; and "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). (viii) at the election of the Company made within thirty (30) days following the Executive's termination of employment with the Company, upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company, a lump sum payment (the "Option Surrender Payment"). The Option Surrender Payment shall be calculated as follows: OSP = (FMV - EP) x N where: "OSP" is the amount of the Option Surrender Payment, before the deduction of applicable federal, state and local withholding taxes; "FMV" is the closing price of the Company's common stock on the New York Stock Exchange, or on whatever other stock exchange or market such stock is publicly traded, on the date the Executive's employment terminates Page 13 of 31 or, if such day is not a day on which such securities are traded, on the most recent preceding trading day on which a trade occurs, provided however that if the option or stock appreciation right is for a security other than the Company's common stock, the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment shall be utilized; "EP" is the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; and "N" is the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of determining the Option Severance Payment and for purposes of determining the Executive's right following his or her termination of employment with the Company to exercise any options or appreciation rights not surrendered pursuant hereto, the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company, even if he or she is not vested under such plan or program; (ix) at the election of the Company made within thirty (30) days following the Executive's termination of employment with the Company, upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Company, a lump sum payment (the "RRP Surrender Payment") The RRP Surrender Payment shall be calculated as follows: RSP = FMV x N where: "RSP" is the amount of the RRP Surrender Payment, before the deduction of applicable federal, state and local withholding taxes; "FMV" is the closing price of the Company's common stock on the New York Stock Exchange, or on whatever other stock exchange or market such stock is publicly traded, on the date the Executive's employment terminates or, if such day is not a day on which such securities are traded, on the preceding trading day on which a trade occurs, provided however that if the restricted stock is a security other than the Company's common stock, the fair market value of a share of stock of the same class as the stock granted under such plan, determined as of the date of termination of employment shall be Page 14 of 31 utilized; and "N" is the number of shares which are being surrendered. For purposes of determining the RRP Surrender Payment and for purposes of determining the Executive's right following his or her termination of employment with the Company to any stock not surrendered pursuant hereto, the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company, even if he or she is not vested under such plan. The Salary Severance Payment, the DB Severance Payment, the Defined Contribution Severance Payment, the Bonus Severance Payment, the Option Surrender Payment and the RRP Surrender Payment shall be computed at the expense of the Company by an attorney of the firm of Thacher Proffitt & Wood, Two World Financial Center, New York, New York 10281 or, if such firm is unavailable or unwilling to perform such calculation, by a firm of independent certified public accountants selected by the Executive and reasonably satisfactory to the Company (the "Computation Advisor"). The determination of the Computation Advisor as to the amount of such payments shall be final and binding in the absence of manifest error. The Company and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this Section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company and the Executive further agree that the Company may condition the payment of the Salary Severance Payment, the DB Severance Payment, the Defined Contribution Severance Payment, the Bonus Severance Payment, the Option Surrender Payment and the RRP Surrender Payment on the receipt of the Executive's resignation from any and all positions which he or she holds as an officer, director or committee member with respect to the Company, the Association or any subsidiary or affiliate of either of them. Section 10. Termination without Additional Company Liability. (a) In the event that the Executive's employment with the Company shall terminate during the Employment Period on account of: (i) the discharge of the Executive for Cause, which, for purposes of this Agreement shall mean: Page 15 of 31 (A) the Executive intentionally engages in dishonest conduct in connection with the Executive's performance of services for the Company resulting in the Executive's conviction of a felony; (B) the Executive is convicted of, or pleads guilty or nolo contendere to, a felony or any crime involving moral turpitude; (C) the Executive willfully fails or refuses to perform the Executive's duties under this Agreement and fails to cure such breach within sixty (60) days following written notice thereof from the Company; (D) the Executive breaches the Executive's fiduciary duties to the Company for personal profit; (E) the Executive's willful breach or violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease and desist order in connection with the Executive's performance of services for the Company; or (F) the Executive's material breach of any material provision of this Agreement which is not substantially cured within 60 days after written notice of such breach is received by the Executive from the Company. (ii) the Executive's voluntary resignation from employment with the Company for reasons other than those specified in Section 9(a) or 11(b); (iii) the Executive's death; (iv) a determination that the Executive is Disabled; (v) the Executive's termination of employment for any reason at or after attainment of mandatory retirement age under the Company's mandatory retirement policy for executive officers in effect as of the date of this Agreement; then the Company, except as otherwise specifically provided herein, shall have no further obligations under this Agreement, other than the payment to the Executive (or, in the event of his or her death, to his or her estate) of the amounts or benefits provided in Section 9(b)(i) and (ii) of this Agreement (the "Standard Termination Entitlements"). (b) For purposes of Section 10(a)(i), no act or failure to act, on the part of the Executive, Page 16 of 31 shall be considered "intentional" or "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Except as specifically provided below, the cessation of employment of the Executive shall not be deemed to be for Cause within the meaning of Section 10(a)(i) unless and until: (i) the Board, by the affirmative vote of 75% of its entire membership, determines that the Executive is guilty of the conduct described in Section 10(a)(i) above measured against standards generally prevailing at the relevant time in the savings and community banking industry; (ii) prior to the vote contemplated by Section 10(b)(i), the Board shall provide the Executive with notice of the Company's intent to discharge the Executive for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (iii) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by Section 10(b)(i), the Executive, together with the Executive's legal counsel, if the Executive so desires, are afforded a reasonable opportunity to make both written and oral presentations before the Board for the purpose of refuting the alleged grounds for Cause for the Executive's discharge; and (iv) after the vote contemplated by Section 10(b)(i), the Company has furnished to the Executive a notice of termination which shall specify the effective date of the Executive's termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board, certified by its corporate secretary, authorizing the termination of the Executive's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for the Executive's discharge (the "Final Discharge Notice"). If the Executive, during the 90 (ninety) day period commencing on the delivery by the Company to the Executive of the Notice of Intent to Discharge specified in Section 10(b)(ii), resigns his or her employment with the Company prior to the delivery to the Executive by the Company of the Final Discharge Notice specified in Section 10(b)(iv), then the cessation of employment of the Executive shall be deemed to be for Cause. Page 17 of 31 Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Executive's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Executive's participation in retirement, insurance and other employee benefit plans. If the Executive is not discharged or is discharged without Cause within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Executive is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Executive during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Executive's discharge with Cause shall be retained by the Executive and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Executive within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Executive with Cause shall require the giving of a new Notice of Intent to Discharge. If the Executive resigns pursuant to Section 10(b), the Executive shall forfeit his or her right to suspended amounts that have not been restored as of the date of the Executive's resignation or notice of resignation, whichever is earlier. (c) The Company may terminate the Executive's employment on the basis that the Executive is Disabled during the Employment Period upon a determination by the Board, by the affirmative vote of 75% of its entire membership, acting in reliance on the written advice of a medical professional acceptable to it, that the Executive is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Executive from performing the Executive's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Executive from performing the Executive's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (A) The Company shall pay and provide the Standard Termination Entitlements to the Executive; (B) In addition to the Standard Termination Entitlements, the Company shall continue to pay to the Executive the Executive's base salary, at the annual rate in effect for the Executive immediately prior to the Page 18 of 31 termination of the Executive's employment, during a period ending on the earliest of: (I) the expiration of one hundred and eighty (180) days after the date of termination of the Executive's employment; (II) the date on which long-term disability insurance benefits are first payable to the Executive under any long-term disability insurance plan covering the Executive; or (III) the date of the Executive's death. A termination of employment due to Disability under this Section shall be effected by a notice of termination given to the Executive by the Company and shall take effect on the later of the effective date of termination specified in such notice or, if no such date is specified, the date on which the notice of termination is deemed given to the Executive. Section 11. Termination Upon or Following a Change of Control. (a) A Change of Control of the Company ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the stockholders of the Company of a transaction that would result in the reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated Page 19 of 31 under the Exchange Act) at least 51 % of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company, or approval by the stockholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (I) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (II) upon election by the stockholders of the Company to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board; or (v) any event which would be described in Section 11(a)(i), (ii), (iii) or (iv) if the Page 20 of 31 term "Association" were substituted for the term "Company" therein or the term "Board of Directors of the Association" were substituted for the term "Board". In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Association, or an affiliate or subsidiary of either of them, by the Company, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 11 (a), the term "person" shall have the meaning assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Executive shall be entitled to the payments and benefits contemplated by Section 9(b) in the event of his or her termination of employment with the Company under any of the circumstances described in Section 9(a) of this Agreement or under any of the following circumstances: (i) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following his or her demotion, loss of title, office or significant authority or responsibility or following any reduction in any element of his or her package of compensation and benefits; (ii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following any relocation of his or her principal place of employment or any change in working conditions at such principal place of employment which the Executive, in his or her reasonable discretion, determines to be embarrassing, derogatory or otherwise adverse; (iii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following the failure of any successor to the Company in the Change of Control to include the Executive in any compensation or benefit program maintained by it or covering any of its executive officers, unless the Executive is already covered by a substantially similar plan of the Company which is at least as favorable to him or her; or (iv) resignation, voluntary or otherwise, for any reason whatsoever during the Employment Period within six months following the effective date of the Change of Control. Section 12. Tax Indemnification. (a) This Section 12 shall apply if the Executive's employment is terminated upon or Page 21 of 31 following: (i) a Change of Control (as defined in Section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Association or "in the ownership of a substantial portion of the assets" of the Company or the Association within the meaning of Section 28OG of the Code. If this Section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under Section 4999 of the Code with respect to any payment in the nature of compensation made by the Company, the Association or any direct or indirect subsidiary or affiliate of the Company or the Association to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount intended to indemnify the Executive against the financial effects of the excise tax imposed on excess parachute payments under Section 28OG of the Code (the "Tax Indemnity Payment"). The Tax Indemnity Payment shall be determined under the following formula: E x P TIP = ---------------------------------------- 1 - (( FI x ( 1 - SLI )) + SLI + E + M ) where: "TIP" is the Tax Indemnity Payment, before the deduction of applicable federal, state and local withholding taxes; "E" is the percentage rate at which an excise tax is assessed under Section 4999 of the Code; "P" is the amount with respect to which such excise tax is assessed, determined without regard to any amount payable pursuant to this Section 12; "FI" is the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; "SLI" is the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and "M" is the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. Page 22 of 31 (b) The computation of the Tax Indemnity Payment shall be made at the expense of the Company by the Computation Advisor and shall be based on the following assumptions: (i) that a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of the assets of the Association or the Company has occurred within the meaning of Section 28OG of the Code (a "28OG Change of Control"); (ii) that all direct or indirect payments made to or benefits conferred upon the Executive on account of the Executive's termination of employment are "parachute payments" within the meaning of Section 28OG of the Code; and (iii) that no portion of such payments is reasonable compensation for services rendered prior to the Executive's termination of employment. (c) With respect to any payment that is presumed to be a parachute payment for purposes of Section 28OG of the Code, the Tax Indemnity Payment shall be made to the Executive on the earlier of the date the Company, the Association or any direct or indirect subsidiary or affiliate of the Company or the Association is required to withhold such tax or the date the tax is required to be paid by the Executive, unless, prior to such date, the Company delivers to the Executive the written opinion (the "Opinion Letter"), in form and substance reasonably satisfactory to the Executive, of the Computation Advisor or, if the Computation Advisor is unable to provide such opinion, of an attorney or firm of independent certified public accountants selected by the Company and reasonably satisfactory to the Executive, to the effect that the Executive has a reasonable basis on which to conclude that: (i) no 28OG Change in Control has occurred, or (ii) all or part of the payment or benefit in question is not a parachute payment for purposes of Section 28OG of the Code, or (iii) all or a part of such payment or benefit constitutes reasonable compensation for services rendered prior to the 28OG Change of Control, or (iv) for some other reason which shall be set forth in detail in such letter, no excise tax is due under Section 4999 of the Code with respect to such payment or benefit. If the Company delivers an Opinion Letter, the Computation Advisor shall re-compute, and the Company shall make, the Tax Indemnity Payment, if any, in reliance on the information contained in the Opinion Letter. Page 23 of 31 (d) In the event that the Executive's liability for the excise tax under Section 4999 of the Code for a taxable year is subsequently determined to be different than the amount with respect to which the Tax Indemnity Payment is made, the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made pursuant to Sections 12(a) and 12(c), when increased by the amount of the payment made to the Executive pursuant to this Section 12(d), or when reduced by the amount of the payment made to the Company pursuant to this Section 12(d), equals the amount that should have properly been paid to the Executive under Sections 12(a) and 12(c). The interest paid to the Company under this Section 12(d) shall be determined at the rate provided under Section 1274(b)(2)(B) of the Code. The payment made to the Executive shall include such amount of interest as is necessary to satisfy any interest assessment made by the Internal Revenue Service and an additional amount equal to any monetary penalties assessed by the Internal Revenue Service on account of an underpayment of the excise tax. To confirm that the proper amount, if any, was paid to the Executive under this Section 12, the Executive shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. Nothing in this Agreement shall give the Company any right to control or otherwise participate in any action, suit or proceeding to which the Executive is a party as a result of positions taken on the Executive's federal income tax return with respect to the Executive's liability for excise taxes under Section 4999 of the Code. (e) The provisions of this Section 12 are designed to reflect the provisions of applicable federal, state and local tax laws in effect on the date of this Agreement. If, after the date hereof, there shall be any change in any such laws, this Section 12 shall be modified in such manner as the Executive and the Company may mutually agree upon if and to the extent necessary to assure that the Executive is fully indemnified against the economic effects of the tax imposed under Section 4999 of the Code or any similar federal, state or local tax. Section 13. Covenant Not To Compete. The Executive hereby covenants and agrees that, in the event of his or her termination of employment with the Company prior to the expiration of the Employment Period, for a period of one (1) year following the date of his or her termination of employment with the Company (or, if less, for the Remaining Unexpired Employment Period), the Executive shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of the Page 24 of 31 Executive's termination of employment; provided, however, that this Section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in Section 9(a); and provided, further, that if the Executive's employment shall be terminated on account of Disability as provided in Section 10(c) of this Agreement, this Section 13 shall not prevent the Executive from accepting any position or performing any services if: (a) he or she first offers, by written notice, to accept a similar position with or perform similar services for the Company on substantially the same terms and conditions and (b) the Company declines to accept such offer within ten (10) days after such notice is given. Section 14. Confidentiality. Unless the Executive obtains the prior written consent of the Company, the Executive shall keep confidential and shall refrain from using for the benefit of the Executive or any person or entity other than the Company, any entity which is a subsidiary of the Company or any entity which the Company is a subsidiary of, any material document or information obtained from the Company, or from its affiliates or subsidiaries, in the course of the Executive's employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his or her own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 14 shall prevent the Executive, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Section 15. Solicitation. The Executive hereby covenants and agrees that, for a period of one (1) year following the Executive's termination of employment with the Company, he or she shall not, without the written consent of the Company, either directly or indirectly: (a) solicit, offer employment to or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association or any affiliate or subsidiary of ether of them, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office; Page 25 of 31 (b) provide any information, advice or recommendation with respect to any such officer or employee to any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association, or any affiliate or subsidiary of either of them, to terminate his or her employment and accept employment, become affiliated with or provide services for compensation in any capacity whatsoever to any such savings bank, savings and loan association, bank, bank holding company, savings and loan holding company or other institution engaged in the business of accepting deposits and making loans; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company, the Association, or any affiliate or subsidiary of either of them to terminate an existing business or commercial relationship with the Company, the Association, or any affiliate or subsidiary of either of them. Section 16. No Effect on Employee Benefit Plans or Programs. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company from time to time. Section 17. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Executive, his or her legal representatives and testate or intestate distributees, and the Company and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's obligations under this Agreement at least sixty (60) days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. Page 26 of 31 Section 18. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Gary T. McCann 17 Shoreham Road Massapequa, New York 11758 If to the Company: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: General Counsel with a copy to: Thacher Proffitt & Wood Two World Financial Center New York, New York 10281 Attention: W. Edward Bright, Esq. Section 19. Indemnification for Attorneys' Fees. The Company shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees, incurred by him or her in connection with or arising out of any action, suit or proceeding in which he or she may be involved, as a result of his or her efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that in the case of any action, suit or proceeding instituted prior to a Change of Control, the Executive shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's obligations hereunder shall be conclusive evidence of the Executive's entitlement to Page 27 of 31 indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. Section 20. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 21. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 22. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 23. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. Section 24. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 25. Entire Agreement: Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Page 28 of 31 Section 26. Guarantee. The Company hereby agrees to guarantee the payment by the Association of any benefits and compensation to which the Executive is or may be entitled to under the terms and conditions of the Employment Agreement dated as of the lst day of December, 2003 between the Association and the Executive. Section 27. Non-duplication. In the event that the Executive shall perform services for the Association or any other affiliate or subsidiary of the Company, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company and all of its affiliates and subsidiaries. Section 28. Survival. The provisions of any sections of this Agreement which by its terms contemplates performance after the expiration or termination of this Agreement (including, but not limited to, Sections 6, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 21, 26, 27, 29, 30 and 31) shall survive the expiration of the Employment Period or termination of this Agreement. Section 29. Equitable Remedies. The Company and the Executive hereby stipulate that money damages are an inadequate remedy for violations of Sections 6(a), 13, 14 or 15 of this Agreement and agree that equitable remedies, including, without limitations, the remedies of specific performance and injunctive relief, shall be available with respect to the enforcement of such provisions. Section 30. Required Regulatory Provisions. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. Section 31. No Offset or Recoupment; No Attachment. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations under this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its affiliates or subsidiaries may have against the Executive. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Page 29 of 31 the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Executive has hereunto set his or her hand, all as of the day and year first above written. ATTEST: ASTORIA FINANCIAL CORPORATION /s/ Alan P. Eggleston By: /s/ George L. Engelke, Jr. - -------------------------------------- ----------------------------------- Alan P. Eggleston Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer [Seal] /s/ Gary T. McCann --------------------------------------- GARY T. MCCANN Page 30 of 31 STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On this 1st day of December, 2003, before me, the undersigned, personally appeared Gary T. McCann, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ Anna Knice --------------------------------------- Notary Public Anna Knice Notary Public, State of New York NOP. 4980431 Qualified in Suffolk County Commission Expires April 22, 2007 STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On this 1st day of December, 2003, before me, the undersigned, personally appeared George L. Engelke, Jr., personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ Anna Knice ------------------------------------- Notary Public Anna Knice Notary Public, State of New York NOP. 4980431 Qualified in Suffolk County Commission Expires April 22, 2007 Page 31 of 31 EX-10 8 ex10-30.txt EXHIBIT 10.30 Exhibit 10.30 ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION EMPLOYMENT AGREEMENT WITH EXECUTIVE OFFICER This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of December 1, 2003 by and between ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION, a savings association organized and operating under the federal laws of the United States and having an office at One Astoria Federal Plaza, Lake Success, New York 11042-1085 (the "Association") and, GARY T. MCCANN, an individual residing at 17 Shoreham Road, Massapequa, New York 11758 (the "Executive"). WITNESSETH: WHEREAS, the Executive currently serves the Association in the capacity of Executive Vice President and as Executive Vice President of the Association's savings and loan holding company, ASTORIA FINANCIAL CORPORATION, a publicly held business corporation organized and operating pursuant to the laws of the State of Delaware (the "Company"); and WHEREAS, the Executive currently has a Change of Control Severance Agreement with the Association dated January 1, 2000 which the Executive and the Association wish to terminate and replace with this Agreement; and WHEREAS, the Association desires to assure for itself the continued availability of the Executive's services and the ability of the Executive to perform such services with a minimum of personal distraction in the event of a pending or threatened Change of Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Association on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Association and the Executive hereby terminate in its entirety the Change of Control Severance Agreement by and between the Association and the Executive dated as of January 1, 2000 and replace such Change of Control Severance Agreement in all respects and manner with this Agreement so as to provide as follows from and after the date hereof: Section 1. Employment. The Association agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. Page 1 of 28 Section 2. Employment Period; Remaining Unexpired Employment Period. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this Section 2 (the "Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the day before the third anniversary date of this Agreement. Prior to the first anniversary of the date of this Agreement and on each anniversary date thereafter (each an "Anniversary Date) the Board of Directors of the Association (the "Board") shall review the terms of this Agreement and the Executive's performance of services hereunder and may, in the absence of objection from the Executive, approve an extension of the Employment Period. In such event, the Employment Period shall be extended to the day before the third anniversary of the relevant Anniversary Date. (b) For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the day before the Anniversary Date on which the Employment Period (as extended pursuant to Section 2(a) of this Agreement) is then scheduled to expire. (c) Nothing in this Agreement shall be deemed to prohibit the Association from terminating the Executive's employment at any time during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Association and the Executive in the event of any such termination shall be determined pursuant to this Agreement. Section 3. Duties. The Executive shall serve as Executive Vice President of the Association, having such power, authority and responsibility and performing such duties as are prescribed by or pursuant to the By-Laws of the Association and as are customarily associated with such position. The Executive shall devote his or her full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Association and shall use his or her best efforts to advance the interests of the Association. Section 4. Cash Compensation. In consideration for the services to be rendered by the Executive hereunder, the Association shall pay to him or her a salary at an initial annual rate of TWO HUNDRED TWELVE THOUSAND DOLLARS ($212,000), payable in approximately equal installments in accordance with the Association's customary payroll practices for senior officers. Prior to each Anniversary Date occurring during the Employment Period, the Board shall review the Executive's annual rate of salary and may, in its discretion, approve an increase therein. In addition to salary, the Executive may Page 2 of 28 receive other cash compensation from the Association for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. Section 5. Employee Benefit Plans and Programs. During the Employment Period, the Executive shall be treated as an employee of the Association and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Association, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Association's customary practices. Section 6. Indemnification and Insurance. (a) During the Employment Period and for a period of six (6) years thereafter, the Association shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Association or service in other capacities at the request of the Association. The coverage provided to the Executive pursuant to this Section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Association. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six (6) years thereafter, the Association shall indemnify the Executive against, and hold him or her harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Association or any subsidiary or affiliate thereof. This Section 6(b) shall not be applicable where Section 18 is applicable. Section 7. Other Activities. (a) The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he or she may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his or her duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially Page 3 of 28 interfere with the performance of his or her duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Association and generally applicable to all similarly situated executives. (b) The Executive may also serve as an officer or director of the Company on such terms and conditions as the Association and the Company may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his or her duties hereunder or otherwise result in a material breach of this Agreement. Section 8. Working Facilities and Expenses. The Executive's principal place of employment shall be at the Association's executive offices at the address first above written, or at such other location within Queens County or Nassau County, New York at which the Association shall maintain its principal executive offices, or at such other location as the Association and the Executive may mutually agree upon. The Association shall provide the Executive at his or her principal place of employment with a private office, secretarial services and other support services and facilities suitable to his or her position with the Association and necessary or appropriate in connection with the performance of his or her assigned duties under this Agreement. The Association shall provide to the Executive for his or her exclusive use an automobile owned or leased by the Association and appropriate to his or her position, to be used in the performance of his or her duties hereunder, including commuting to and from his or her personal residence. The Association shall reimburse the Executive for his or her ordinary and necessary business expenses, including, without limitation, all expenses associated with his or her business use of the aforementioned automobile, fees for memberships in such clubs and organizations as the Executive and the Association shall mutually agree are necessary and appropriate for business purposes, and his or her travel and entertainment expenses incurred in connection with the performance of his or her duties under this Agreement, in each case upon presentation to the Association of an itemized account of such expenses in such form as the Association may reasonably require. Section 9. Termination of Employment with Severance Benefits. (a) The Executive shall be entitled to the severance benefits described herein in the event that his or her employment with the Association terminates during the Employment Period under any of the following circumstances: (i) the Executive's voluntary resignation from employment with the Association within six (6) months following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the office of Executive Vice President (or a more senior Page 4 of 28 office) of the Association; (B) if the Executive is or becomes a member of the Board, the failure of the stockholders of the Association to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Association of its material failure, whether by amendment of the Association's Organization Certificate or By-laws, action of the Board or the Association's stockholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in Section 3 of this Agreement as of the date hereof, unless, during such thirty (30) day period, the Association cures such failure; (D) the expiration of a thirty (30) day period following the date on which the Executive gives written notice to the Association of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his or her total compensation package), unless, during such thirty (30) day period, the Association cures such failure; or (E) the relocation of the Executive's principal place of employment, without his or her written consent, to a location outside of Nassau County and Queens County, New York; (ii) the termination of the Executive's employment with the Association for any other reason not described in Section 10(a). In such event and subject to Section 27 of this Agreement, the Association shall provide the benefits and pay to the Executive the amounts described in Section 9(b). (b) Upon the termination of the Executive's employment with the Association under circumstances described in Section 9(a) of this Agreement, the Association shall pay and provide to the Executive (or, in the event of the Executive's death following the Executive's termination of employment, to his or her estate): Page 5 of 28 (i) his or her earned but unpaid compensation (including, without limitation, all items which constitute wages under Section 190.1 of the New York Labor Law and the payment of which is not otherwise provided for under this Section 9(b)) as of the date of the termination of his or her employment with the Association, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in any event not later than thirty (30) days after termination of employment; (ii) the benefits, if any, to which he or she is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Association's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to Section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage (including any co-payments and deductibles, but excluding any premium sharing arrangements, it being the intention of the parties to this Agreement that the premiums for such insurance benefits shall be the sole cost and expense of the Association) equivalent to the coverage to which he or she would have been entitled under such plans (as in effect on the date of his or her termination of employment, or, if his or her termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he or she had continued working for the Association during the Remaining Unexpired Employment Period at the highest annual rate of salary or compensation, as applicable, achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association; (iv) within thirty (30) days following the Executive's termination of employment with the Association, a lump sum payment in an amount representing an estimate of the salary that the Executive would have earned if he or she had continued working for the Association during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association (the "Salary Severance Payment"). The Salary Severance Payment shall be computed using the following formula: SSP = BS x NY where: Page 6 of 28 "SSP" is the amount of the Salary Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association; "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). The Salary Severance Payment shall be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination. (v) within thirty (30) days following the Executive's termination of employment with the Association, a lump sum payment (the "DB Severance Payment") in an amount equal to the excess, if any, of: (A) the present value of the aggregate benefits to which he or she would be entitled under any and all qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Association, if he or she were 100% vested thereunder and had continued working for the Association during the Remaining Unexpired Employment Period, such benefits to be determined as of the date of termination of employment by adding to the service actually recognized under such plans an additional period equal to the Remaining Unexpired Employment Period and by adding to the compensation recognized under such plans for the most recent year recognized all amounts payable pursuant to Sections 9(b)(i), (iv), (vii), (viii) and (ix) of this Agreement; over (B) the present value of the benefits to which he or she is actually entitled under such defined benefit pension plans as of the date of his or her termination; The DB Severance Payment shall be computed using the following formula: DBSP = SEVLS - LS where: "DBSP" is the amount of the DB Severance Payment, before the deduction Page 7 of 28 of applicable federal, state and local withholding taxes; "SEVLS" is the sum of the present value of the defined benefit pension benefits that have been or would be accrued by the Executive under all qualified and non-qualified defined benefit pension plans of which the Association or any of its affiliates or subsidiaries are a sponsor and in which the Executive is or, but for the completion of any service requirement that would have been completed during the Remaining Unexpired Employment Period, would be a participant utilizing the following assumptions: (I) the executive is 100% vested in the plans regardless of actual service, (II) the benefit to be valued shall be a single life annuity with monthly payments due on the first day of each month and with a guaranteed payout of not less than 120 monthly payments, (III) the calculation shall be made utilizing the same mortality table and interest rate as would be utilized by the plan on the date of termination as if the calculation were being made pursuant to Section 417(e)(3)(A)(ii) of the Internal Revenue Code, as amended, (the "Code"); (IV) for purpose of calculating the Executive's monthly or annual benefit under the defined benefit plans, additional service equal to the Remaining Unexpired Employment Period (rounded up to the next whole year if such period is not a whole number when expressed in years) shall be added to the Executive's actual service to calculate the amount of the benefit; and (V) for purpose of calculating the Executive's monthly or annual benefit under the defined benefit plans, the following sums shall be added to the Executive's compensation recognized under such plans for the most recent year recognized: (1) payments made pursuant to Section 9(b)(i); (2) the Salary Severance Payment; (3) the Bonus Severance Payment; (4) the Option Surrender Payment; and (5) the RRP Surrender Payment. Page 8 of 28 "LS" is the sum of the present value of the defined benefit pension benefits that are vested benefits actually accrued by the Executive under all qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company or any of its affiliates or subsidiaries in which the Executive is or, but for the completion of any service requirement, would be a participant utilizing the following assumptions: (I) the benefit to be valued shall be a single life annuity with monthly payments due on the first day of each month and with a guaranteed payout of not less than 120 monthly payments, and (II) the calculation shall be made utilizing the same mortality table and interest rate as would be utilized by the plan on the date of termination as if the calculation were being made pursuant to Section 417(e)(3)(A)(ii) of the Code; (vi) within thirty (30) days following the Executive's termination of employment with the Association, a lump sum payment (the "Defined Contribution Severance Payment") equal to the sum of: (A) an estimate of the additional employer contributions to which he or she would have been entitled under any and all qualified and non-qualified defined contribution pension plans, excluding the employee stock ownership plans, maintained by, or covering employees of, the Association or any of its affiliates or subsidiaries as if he or she were 100% vested thereunder and had continued working for the Association during the Remaining Unexpired Employment Period (the "401K Severance Payment"); and (B) an estimate of the value of the additional assets which would have been allocable to him or her through debt service or otherwise under any and all qualified and non-qualified employee stock ownership plans, maintained by, or covering employees of the Association or any of its affiliates or subsidiaries as if he or she were 100% vested thereunder and had continued working for the Association during the Remaining Unexpired Employment Period, based on the fair market value of such assets at termination of employment (the "ESOP Severance Payment"). The Defined Contribution Severance Payment shall be calculated as follows: DCSP = 401KSP + ESOPSP Page 9 of 28 where: "DCSP" is the amount of the Defined Contribution Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "401KSP" is the amount of the 401K Severance Payment, before the deduction of applicable federal, state and local withholding taxes; and "ESOPSP" is the amount of the ESOP Severance Payment, before the deduction of applicable federal, state and local withholding taxes. The 401KSP shall be calculated as follows: 401SP = (401KC x NY) + UVB where "401KC" is the sum of the Association Contributions as defined in the Association's Incentive Savings Plan or, if made under another defined contribution pension plan other than an employee stock ownership plan, the comparable contribution made for the benefit of the Executive during the one year period which shall end on the date of his or her termination of his or her employment with the Association; "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number); and "UVB" is the actual balance credited to the Executive's account under the applicable plan at the date of his or her termination of employment that is not vested and does not become vested as a consequence of such termination of employment. The ESOPSP shall be calculated as follows: ESOPSP = (((ALL x FMV) + C) x NY) + UVB where: "ALL" is the sum of the number of shares of the Association's common stock or, if applicable, phantom shares of such stock by whatever term it is described allocated to the Executive's accounts under all qualified and non- Page 10 of 28 qualified employee stock ownership plans maintained by the Association or any of its affiliates or subsidiaries during or for the last complete plan year in which the Executive participated in such plans and received such an allocation whether the allocation occurred as a result of contributions made by the Association, the payment by the Association or any of its affiliates or subsidiaries of any loan payments under a leveraged employee stock ownership plan, the allocation of forfeitures under the terms of such plan or as a result of the use of cash or earnings allocated to the Executives account during such plan year to make loan payments that result in share allocations, provided however, that excluded shall be any shares or phantom shares allocated to the Executive's account under any qualified and non-qualified employee stock ownership plans maintained by the Association or any of its affiliates or subsidiaries solely as a result of the termination of such plans, provided further, that if the shares allocated are not shares of the Association's common stock or phantom shares of such stock than shares of whatever securities are so allocated shall be utilized, and provided further, that in the event that there shall be any shares or phantom shares allocated during the then current plan year or the last complete plan year to the Executive's account under any qualified and non-qualified employee stock ownership plans maintained by the Association or any of its affiliates or subsidiaries solely as a result of the termination of such plans, the ALL shall be reduced (but not to an amount less than zero (0)) by an amount calculated by multiplying the number of shares or phantom shares allocated to the Executive's account solely as a result of the termination of such plans times the FMV utilized to calculate the ESOPSP; "C" is the sum of all cash allocated to the Executive's accounts under all qualified and non-qualified employee stock ownership plans maintained by the Association during or for the last complete plan year in which the Executive participated in such plans whether the allocation occurred as a result of contributions made by the Association, the payment by the Association or the Association of any loan payments under a leveraged employee stock ownership plan or the allocation of forfeitures under the terms of such plan during such plan year; "FMV" is the closing price of the Association's common stock on the New York Stock Exchange or on whatever other stock exchange or market such stock is publicly traded on the date the Executive's employment terminates or, if such day is not a day on which such securities are traded, on the most recent preceding trading day on which a trade occurs, provided however that if the security allocated to the Executive's account during the last completed plan year is other than the Association's common stock the closing price of such security on the date the Executive's employment terminates shall be Page 11 of 28 utilized; "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number); and "UVB" is the actual balance credited to the Executive's account under the applicable plan at the date of his or her termination of employment that is not vested and does not become vested as a consequence of such termination of employment. (vii) within thirty (30) days following the Executive's termination of employment with the Association, the Association shall make a lump sum payment to the Executive in an amount equal to the estimated potential annual bonuses or incentive compensation that the Executive could have earned if the Executive had continued working for the Association during the Unexpired Employment Period at the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association (the "Bonus Severance Payment"). The Bonus Severance Payment shall be computed using the following formula: BSP = (BS x TIO x AP x NY) where: "BSP" is the amount of the Bonus Severance Payment, before the deduction of applicable federal, state and local withholding taxes; "BS" is the highest annual rate of salary achieved during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association; "TIO" is the highest target incentive opportunity (expressed as a percentage of base salary) established by the Compensation Committee of the Board for the Executive pursuant to the Astoria Financial Corporation Executive Officer Annual Incentive Plan during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association; "AP" is the highest award percentage available to the Executive with respect to the financial performance of the Company (expressed as a percentage of the TIO) established by the Compensation Committee of the Board for the Page 12 of 28 Executive pursuant to the Astoria Financial Corporation Executive Officer Annual Incentive Plan during the period during that portion of the Employment Period which is prior to the Executive's termination of employment with the Association; and "NY" is the Remaining Unexpired Employment Period expressed as a number of years (rounded, if such period is not a whole number, to the next highest whole number). (viii) at the election of the Association made within thirty (30) days following the Executive's termination of employment with the Association, upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Association, a lump sum payment (the "Option Surrender Payment"). The Option Surrender Payment shall be calculated as follows: OSP = (FMV - EP) x N where: "OSP" is the amount of the Option Surrender Payment, before the deduction of applicable federal, state and local withholding taxes; "FMV" is the closing price of the Association's common stock on the New York Stock Exchange, or on whatever other stock exchange or market such stock is publicly traded, on the date the Executive's employment terminates or, if such day is not a day on which such securities are traded, on the most recent preceding trading day on which a trade occurs, provided however that if the option or stock appreciation right is for a security other than the Association's common stock, the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment shall be utilized; "EP" is the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; and "N" is the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of determining the Option Severance Payment and for purposes of determining the Executive's right following his or her termination of employment with the Association to exercise any options or appreciation Page 13 of 28 rights not surrendered pursuant hereto, the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Association, even if he or she is not vested under such plan or program; (ix) at the election of the Association made within thirty (30) days following the Executive's termination of employment with the Association, upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Association, a lump sum payment (the "RRP Surrender Payment") The RRP Surrender Payment shall be calculated as follows: RSP = FMV x N where: "RSP" is the amount of the RRP Surrender Payment, before the deduction of applicable federal, state and local withholding taxes; "FMV" is the closing price of the Association's common stock on the New York Stock Exchange, or on whatever other stock exchange or market such stock is publicly traded, on the date the Executive's employment terminates or, if such day is not a day on which such securities are traded, on the most recent preceding trading day on which a trade occurs, provided however that if the restricted stock is a security other than the Association's common stock, the fair market value of a share of stock of the same class as the stock granted under such plan, determined as of the date of termination of employment shall be utilized; and "N" is the number of shares which are being surrendered. For purposes of determining the RRP Surrender Payment and for purposes of determining the Executive's right following his or her termination of employment with the Association to any stock not surrendered pursuant hereto, the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Association, even if he or she is not vested under such plan. The Salary Severance Payment, the DB Severance Payment, the Defined Contribution Severance Payment, the Bonus Severance Payment, the Option Surrender Payment and the RRP Surrender Payment shall be computed at the expense of the Association by an attorney of the firm of Thacher Proffitt & Wood, Two World Financial Center, New York, New York 10281 or, if such firm is Page 14 of 28 unavailable or unwilling to perform such calculation, by a firm of independent certified public accountants selected by the Executive and reasonably satisfactory to the Association (the "Computation Advisor"). The determination of the Computation Advisor as to the amount of such payments shall be final and binding in the absence of manifest error. The Association and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this Section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Association and the Executive further agree that the Association may condition the payment of the Salary Severance Payment, the DB Severance Payment, the Defined Contribution Severance Payment, the Bonus Severance Payment, the Option Surrender Payment and the RRP Surrender Payment on the receipt of the Executive's resignation from any and all positions which he or she holds as an officer, director or committee member with respect to the Association, the Association or any subsidiary or affiliate of either of them. Section 10. Termination without Additional Association Liability. (a) In the event that the Executive's employment with the Association shall terminate during the Employment Period on account of: (i) the discharge of the Executive for Cause, which, for purposes of this Agreement shall mean personal dishonesty, incompetence, wilful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, wilful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement, in each case measured against standards generally prevailing at the relevant time in the savings and community banking industry; (ii) the Executive's voluntary resignation from employment with the Association for reasons other than those specified in Section 9(a) or 11(b); (iii) the Executive's death; (iv) a determination that the Executive is Disabled; (v) the Executive's termination of employment for any reason at or after attainment of mandatory retirement age under the Association's mandatory Page 15 of 28 retirement policy for executive officers in effect as of the date of this Agreement; then the Association, except as otherwise specifically provided herein, shall have no further obligations under this Agreement, other than the payment to the Executive (or, in the event of his or her death, to his or her estate) of the amounts or benefits provided in Section 9(b)(i) and (ii) of this Agreement (the "Standard Termination Entitlements"). (b) The cessation of employment of the Executive shall not be deemed to be for Cause within the meaning of Section 10(a)(i) unless and until: (i) the Board, by the affirmative vote of 75% of its entire membership, determines that the Executive is guilty of the conduct described in Section 10(a)(i) above measured against standards generally prevailing at the relevant time in the savings and community banking industry; (ii) prior to the vote contemplated by Section 10(b)(i), the Board shall provide the Executive with notice of the Association's intent to discharge the Executive for Cause, detailing with particularity the facts and circumstances which are alleged to constitute Cause (the "Notice of Intent to Discharge"); and (iii) after the giving of the Notice of Intent to Discharge and before the taking of the vote contemplated by Section 10(b)(i), the Executive, together with the Executive's legal counsel, if the Executive so desires, are afforded a reasonable opportunity to make both written and oral presentations before the Board for the purpose of refuting the alleged grounds for Cause for the Executive's discharge; and (iv) after the vote contemplated by Section 10(b)(i), the Association has furnished to the Executive a notice of termination which shall specify the effective date of the Executive's termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board, certified by its corporate secretary, authorizing the termination of the Executive's employment with Cause and stating with particularity the facts and circumstances found to constitute Cause for the Executive's discharge (the "Final Discharge Notice"). If the Executive, during the ninety (90) day period commencing on the delivery by the Association to the Executive of the Notice of Intent to Discharge specified in Section 10(b)(ii), resigns his or her employment with the Association prior to the delivery to the Executive by the Association of the Final Discharge Notice specified Page 16 of 28 in Section 10(b)(iv), then the cessation of employment of the Executive shall be deemed to be for Cause. Following the giving of a Notice of Intent to Discharge, the Bank may temporarily suspend the Executive's duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Executive's participation in retirement, insurance and other employee benefit plans. If the Executive is not discharged or is discharged without Cause within forty-five (45) days after the giving of a Notice of Intent to Discharge, payments of salary and cash compensation shall resume, and all payments withheld during the period of suspension shall be promptly restored. If the Executive is discharged with Cause not later than forty-five (45) days after the giving of the Notice of Intent to Discharge, all payments withheld during the period of suspension shall be deemed forfeited and shall not be included in the Standard Termination Entitlements. If a Final Discharge Notice is given later than forty-five (45) days, but sooner than ninety (90) days, after the giving of the Notice of Intent to Discharge, all payments made to the Executive during the period beginning with the giving of the Notice of Intent to Discharge and ending with the Executive's discharge with Cause shall be retained by the Executive and shall not be applied to offset the Standard Termination Entitlements. If the Bank does not give a Final Discharge Notice to the Executive within ninety (90) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Executive with Cause shall require the giving of a new Notice of Intent to Discharge. If the Executive resigns pursuant to Section 10(b), the Executive shall forfeit his or her right to suspended amounts that have not been restored as of the date of the Executive's resignation or notice of resignation, whichever is earlier. (c) The Association may terminate the Executive's employment on the basis that the Executive is Disabled during the Employment Period upon a determination by the Board, by the affirmative vote of 75% of its entire membership, acting in reliance on the written advice of a medical professional acceptable to it, that the Executive is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Executive from performing the Executive's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year ending with the date of the determination or is likely to result in death or prevent the Executive from performing the Executive's assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination. In such event: (A) The Association shall pay and provide the Standard Termination Entitlements to the Executive; Page 17 of 28 (B) In addition to the Standard Termination Entitlements, the Association shall continue to pay to the Executive the Executive's base salary, at the annual rate in effect for the Executive immediately prior to the termination of the Executive's employment, during a period ending on the earliest of: (I) the expiration of one hundred and eighty (180) days after the date of termination of the Executive's employment; (II) the date on which long-term disability insurance benefits are first payable to the Executive under any long-term disability insurance plan covering the Executive; or (III) the date of the Executive's death. A termination of employment due to Disability under this Section shall be effected by a notice of termination given to the Executive by the Association and shall take effect on the later of the effective date of termination specified in such notice or, if no such date is specified, the date on which the notice of termination is deemed given to the Executive. Section 11. Termination Upon or Following a Change of Control. (a) A Change of Control of the Association ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the stockholders of the Association of a transaction that would result in the reorganization, merger or consolidation of the Association with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Association; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative Page 18 of 28 proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51 % of the securities entitled to vote generally in the election of directors of the Association; (ii) the acquisition of all or substantially all of the assets of the Association or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the outstanding securities of the Association entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the stockholders of the Association of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Association, or approval by the stockholders of the Association of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (I) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such Board, or of a nominating committee thereof, in office at the time of such first election; or (II) upon election by the stockholders of the Association to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of Page 19 of 28 the Board; or (v) any event which would be described in Section 11(a)(i), (ii), (iii) or (iv) if the term "Company" were substituted for the term "Association" therein or the term "Board of Directors of the Company" were substituted for the term "Board". In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Association, the Association, or an affiliate or subsidiary of either of them, by the Association, the Association, or a subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this Section 11 (a), the term "person" shall have the meaning assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Executive shall be entitled to the payments and benefits contemplated by Section 9(b) in the event of his or her termination of employment with the Association under any of the circumstances described in Section 9(a) of this Agreement or under any of the following circumstances: (i) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following his or her demotion, loss of title, office or significant authority or responsibility or following any reduction in any element of his or her package of compensation and benefits; (ii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following any relocation of his or her principal place of employment or any change in working conditions at such principal place of employment which the Executive, in his or her reasonable discretion, determines to be embarrassing, derogatory or otherwise adverse; (iii) resignation, voluntary or otherwise, by the Executive at any time during the Employment Period within six (6) months following the failure of any successor to the Association in the Change of Control to include the Executive in any compensation or benefit program maintained by it or covering any of its executive officers, unless the Executive is already covered by a substantially similar plan of the Association which is at least as favorable to him or her; or (iv) resignation, voluntary or otherwise, for any reason whatsoever during the Employment Period within six months following the expiration of a transition period of thirty (30) days beginning on the effective date of the Change of Control (or for such longer period, not to exceed ninety (90) days beginning Page 20 of 28 on the effective date of the Change of Control, as the Association or its successor may reasonably request) to facilitate a transfer of management responsibilities. Section 12. Covenant Not To Compete. The Executive hereby covenants and agrees that, in the event of his or her termination of employment with the Association prior to the expiration of the Employment Period, for a period of one (1) year following the date of his or her termination of employment with the Association (or, if less, for the Remaining Unexpired Employment Period), the Executive shall not, without the written consent of the Association, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding Association, bank or bank holding Association, or any direct or indirect subsidiary or affiliate of any such entity, that entails working in any city, town or county in which the Association or the Association has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of the Executive's termination of employment; provided, however, that this Section 12 shall not apply if the Executive's employment is terminated for the reasons set forth in Section 9(a); and provided, further, that if the Executive's employment shall be terminated on account of Disability as provided in Section 10(c) of this Agreement, this Section 12 shall not prevent the Executive from accepting any position or performing any services if: (a) he or she first offers, by written notice, to accept a similar position with or perform similar services for the Association on substantially the same terms and conditions and (b) the Association declines to accept such offer within ten (10) days after such notice is given. Section 13. Confidentiality. Unless the Executive obtains the prior written consent of the Association, the Executive shall keep confidential and shall refrain from using for the benefit of the Executive or any person or entity other than the Association, any entity which is a subsidiary of the Association or any entity which the Association is a subsidiary of, any material document or information obtained from the Association, or from its affiliates or subsidiaries, in the course of the Executive's employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his or her own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 13 shall prevent the Executive, with or without the Association's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. Page 21 of 28 Section 14. Solicitation. The Executive hereby covenants and agrees that, for a period of one (1) year following the Executive's termination of employment with the Association, he or she shall not, without the written consent of the Association, either directly or indirectly: (a) solicit, offer employment to or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association or any affiliate or subsidiary of ether of them, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding Association, savings and loan holding Association, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office; (b) provide any information, advice or recommendation with respect to any such officer or employee to any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business in any city, town or county in which the Association or the Company has an office or has filed an application for regulatory approval to establish an office that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Association, or any affiliate or subsidiary of either of them, to terminate his or her employment and accept employment, become affiliated with or provide services for compensation in any capacity whatsoever to any such savings bank, savings and loan association, bank, bank holding company, savings and loan holding company or other institution engaged in the business of accepting deposits and making loans; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company, the Association, or any affiliate or subsidiary of either of them to terminate an existing business or commercial relationship with the Company, the Association, or any affiliate or subsidiary of either of them. Section 15. No Effect on Employee Benefit Plans or Programs. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Association or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Association's qualified or non-qualified retirement, Page 22 of 28 pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Association from time to time. Section 16. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Executive, his or her legal representatives and testate or intestate distributees, and the Association and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Association may be sold or otherwise transferred. Failure of the Association to obtain from any successor its express written assumption of the Association's obligations under this Agreement at least sixty (60) days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. Section 17. Notices. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Gary T. McCann 17 Shoreham Road Massapequa, New York 11758 If to the Association: Astoria Federal Savings and Loan Association One Astoria Federal Plaza Lake Success, New York 11042-1085 Attention: General Counsel with a copy to: Thacher Proffitt & Wood Two World Financial Center Page 23 of 28 New York, New York 10281 Attention: W. Edward Bright, Esq. Section 18. Indemnification for Attorneys' Fees. The Association shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees, incurred by him or her in connection with or arising out of any action, suit or proceeding in which he or she may be involved, as a result of his or her efforts, in good faith, to defend or enforce the terms of this Agreement; provided, however, that in the case of any action, suit or proceeding instituted prior to a Change of Control, the Executive shall have substantially prevailed on the merits pursuant to a judgment, decree or order of a court of competent jurisdiction or of an arbitrator in an arbitration proceeding, or in a settlement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Association's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. Section 19. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 20. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. Section 21. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. Section 22. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed Page 24 of 28 entirely within the State of New York. Section 23. Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 24. Entire Agreement: Modifications. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 25. Survival. The provisions of any sections of this Agreement which by its terms contemplates performance after the expiration or termination of this Agreement (including, but not limited to, Sections 6, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 20, 26, 27 and 28) shall survive the expiration of the Employment Period or termination of this Agreement. Section 26. Equitable Remedies. The Association and the Executive hereby stipulate that money damages are an inadequate remedy for violations of Sections 6(a), 12, 13 or 14 of this Agreement and agree that equitable remedies, including, without limitations, the remedies of specific performance and injunctive relief, shall be available with respect to the enforcement of such provisions. Section 27. Required Regulatory Provisions. The following provisions are included for the purposes of complying with various laws, rules and regulations applicable to the Association: (a) Notwithstanding anything herein contained to the contrary, in no event shall the aggregate amount of compensation payable to the Executive pursuant to Section 9(b) of this Agreement (exclusive of amounts described in Section 9(b)(i), (ii), (viii) or (ix)) exceed three times the Executive's average annual total compensation for the last five consecutive calendar years to end prior to the Executive's termination of employment with the Association (or for the Executive's entire period of employment with the Association if less than five calendar years). (b) Notwithstanding anything herein contained to the contrary, any payments to the Page 25 of 28 Executive by the Association, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. 'SS' 1828(k), and any regulations promulgated thereunder. (c) Notwithstanding anything herein contained to the contrary, if the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the affairs of the Association pursuant to a notice served under Section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C. 'SS' 1818(e)(3) or 1818(g)(1), the Association's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in such notice are dismissed, the Association, in its discretion, may (i) pay to the Executive all or part of the compensation withheld while the Association's obligations hereunder were suspended and (ii) reinstate, in whole or in part, any of the obligations which were suspended. (d) Notwithstanding anything herein contained to the contrary, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. 'SS' 1818(e)(4) or (g)(1), all prospective obligations of the Association under this Agreement shall terminate as of the effective date of the order, but vested rights and obligations of the Association and the Executive shall not be affected. (e) Notwithstanding anything herein contained to the contrary, if the Association is in default (within the meaning of Section 3(x)(1) of the FDI Act, 12 U.S.C. 'SS' 1813(x)(1), all prospective obligations of the Association under this Agreement shall terminate as of the date of default, but vested rights and obligations of the Association and the Executive shall not be affected. (f) Notwithstanding anything herein contained to the contrary, all prospective obligations of the Association hereunder shall be terminated, except to the extent that a continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("OTS") or his or her designee or the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) of the FDI Act, 12 U.S.C. 'SS' 1823(c); (ii) by the Director of the OTS or his or her designee at the time such Director or designee approves a supervisory merger to resolve problems related to the operation of the Association or when the Association is determined by such Director to be in an unsafe or unsound condition. The vested rights and obligations of the parties shall not be affected. If and to the extent that any of the foregoing provisions shall cease to be required or by applicable Page 26 of 28 law, rule or regulation, the same shall become inoperative as though eliminated by formal amendment of this Agreement. Section 28. No Offset or Recoupment; No Attachment. The Association's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations under this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Association or any of its affiliates or subsidiaries may have against the Executive. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. IN WITNESS WHEREOF, the Association has caused this Agreement to be executed and the Executive has hereunto set his or her hand, all as of the day and year first above written. ATTEST: ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION /s/ Alan P. Eggleston By: /s/ George L. Engelke, Jr. - ----------------------------------- -------------------------------- Alan P. Eggleston Name: George L. Engelke, Jr. Title: Chairman, President and Chief Executive Officer [Seal] /s/ Gary T. McCann ------------------------------------ GARY T. MCCANN STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On this 1st day of December, 2003, before me, the undersigned, personally appeared Gary T. McCann, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me Page 27 of 28 that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ Anna Knice ------------------------------------ Notary Public Anna Knice Notary Public, State of New York NOP. 4980431 Qualified in Suffolk County Commission Expires April 22, 2007 STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On this 1st day of December, 2003, before me, the undersigned, personally appearedGeorge L. Engelke, Jr., personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ Anna Knice ------------------------------------ Notary Public Anna Knice Notary Public, State of New York NOP. 4980431 Qualified in Suffolk County Commission Expires April 22, 2007 Page 28 of 28 EX-10 9 ex10-45.txt EXHIBIT 10.45 Exhibit 10.45 TRUST AGREEMENT Dated as of January 31, 1995 between ASTORIA FINANCIAL CORPORATION and STATE STREET BANK AND TRUST COMPANY as Trustee, for the benefit of Participating Employees to Provide for the Payment of Certain Retirement Benefits Described Herein TRUST AGREEMENT made and entered into as of January 31, 1995 by and between Astoria Financial Corporation, a Delaware corporation (the "Company"), and State Street Bank and Trust Company, a bank and trust company organized under the laws of the Commonwealth of Massachusetts (the "Trustee"). WHEREAS, the Company is a party to an Agreement and Plan of Merger among the Company, Astoria Federal Savings and Loan Association (the "Association") and Fidelity New York F.S.B. (the "Bank"), dated as of July 12, 1994, as amended (the "Merger Agreement"), a copy of which has been provided to the Trustee; WHEREAS, Section 4.03(b)(i) of the Merger Agreement provides that the Company shall, or shall cause the Association to, assume and perform the obligations of the Bank under certain Employment Agreements between the Bank and Thomas V. Powderly, William A. Wesp and Frederick J. Meyer (the "Employment Agreements" and the "Executives," respectively) and that the Company shall guarantee the performance by the Association under such Employment Agreements; WHEREAS, Section 5(g) of the Employment Agreements provides for certain supplemental pension benefits to be paid to the Executives (the "SERP Benefits"); WHEREAS, Section 5(e) of the Employment Agreements provides for certain continued health (including dental), life and long-term disability insurance coverage to be provided to the Executives (the "Welfare Benefits"); WHEREAS, the Bank's Excess Benefit Plan (within the meaning of section 3(36) of ERISA) provide for certain other benefits to the Executives (the "Excess Benefits"); WHEREAS, the Company desires to amend the SERP Benefits and the Welfare Benefits in the manner set forth herein and the Executives each shall agree, effective upon the establishment of the trust established hereby, to have such benefits so amended; WHEREAS, the Merger Agreement provides that the Company shall make certain payments in full settlement of the Executives' entitlements to Excess Benefits. WHEREAS, the Company wishes to establish a trust (the "Trust") to aid the Company in meeting its obligations to pay the Benefits (as defined in Section 1.5 hereof); WHEREAS, the Company intends to make contributions to the Trust at the times and in the amounts set forth herein and further intends that such contributions shall be held by the Trustee in trust and invested and reinvested in accordance with the provisions of this Trust Agreement; WHEREAS, the Trust is intended to be a "grantor trust" within the meaning of Section 671 of the Internal Revenue Code of 1986; and WHEREAS, the Company intends that the assets of the Trust at all times shall be subject to the claims of bankruptcy creditors of the Company as provided in Section 16 of this Trust Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee declare and agree as follows: SECTION 1 Amendment of Benefits. 1.1 Amount of Benefit. 1.1.1 In General. In lieu of the amounts to which each Executive is entitled under (i) Sections 5(e) and (g) of the Employment Agreement to which such Executive is a party and (ii) the Bank's Excess Benefit Plan, the Executive shall instead be entitled to any and all amounts credited to his Account under the provisions hereof from time to time. 1.1.2 Insolvency. For purposes of determining the amount of each Executive's Benefit under Section 1.1.1, any reduction in the amount credited to the Account of the Executive pursuant to Section 16.1 shall be ignored. In addition, in the event of any such reduction, the amount credited to the Executive's Account thereafter shall be deemed to be increased by hypothetical interest credited on the amount of any such reduction at a rate for each calendar year equal to the corporate bond rate for seasoned issues, all industries, as of January 1 of such year, compounded annually. In the event of any reimbursement to an Executive's Account pursuant to Section 16.3 hereof, the amount of such reimbursement shall not be deemed to increase the amount credited to the Account of such Executive for purposes of determining the amount of such Executive's Benefit under Section 1.1.1. In addition, effective upon the receipt of any such reimbursement, hypothetical interest shall cease to be credited to such Participant's Account with respect to the reimbursed amount. 1.2 Timing of Payment of Benefit. The amount described in Section 1.1 with respect to each Executive shall be paid by the Trust to such Executive in five approximately equal annual installments to be paid on the first business day of each calendar year from 2000 through 2004. 1.3 Death of Executive. Notwithstanding Section 1.2 hereof, as soon as practical following the death of an Executive, the entire amount credited to the Account of the Executive shall be paid by the Trust to the beneficiary or beneficiaries designated by the Executive to the Company. Upon the death of the Executive, all rights of the Executive with respect to this Trust shall inure to the beneficiaries so designated. In the event that more than one beneficiary is so designated, such beneficiaries shall act with respect to such rights at the discretion of a majority thereof. 1.4 Certain Transactions. Notwithstanding Section 1.2 hereof, if, in connection with any consolidation of the Company with, or merger of the Company with or into, any corporation or corporations, or any sale or conveyance of all or substantially all of the assets of the Company, 2 the corporation formed by such consolidation, or with or into which the Company is merged, or the person that acquires the assets of the Company, does not assume, by contract or by operation of law, in a form reasonably satisfactory to the Trustee, the duties and obligations of the Company under this Trust Agreement, the entire amount credited to the Account of the Executive shall be paid to the Executive on the date of such event. 1.5 Definition. The term "Benefits" as used herein shall, in the case of each Executive, refer to the amount determined under Section 6.2, as adjusted from time to time under Section 6.3. SECTION 2 Establishment of the Trust. 2.1 Trust Fund. The Company hereby establishes the Trust. The Trust shall consist of such money and other property acceptable to the Trustee as is from time to time paid or delivered to the Trustee. All such money and other property, all investments and reinvestments made therewith or proceeds thereof and all earnings and profits thereon, less all payments and charges as authorized herein, shall constitute the "Trust Fund." The Trust Fund shall be held by the Trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. 2.2 Irrevocability. Except as provided in Section 16 hereof, the Trust shall be for the exclusive purpose of aiding the Company in providing the Benefits in accordance with the provisions of this Trust Agreement. No part of the income or corpus of the Trust Fund shall be recoverable by the Company except as otherwise may be provided in Section 16 hereof. 2.3 Claims of Bankruptcy Creditors. Notwithstanding anything in this Trust Agreement to the contrary, the Trust Fund shall at all times be subject to the claims of bankruptcy creditors of the Company, as provided in Section 16 hereof. The Executives shall have no greater claim against the Trust Fund than a general unsecured creditor of the Company. SECTION 3 Acceptance by the Trustee. 3.1 Acceptance by Trustee. The Trustee accepts the Trust established under this Trust Agreement on the terms and subject to the provisions set forth herein. The Trustee agrees to discharge and perform fully and faithfully all of the duties and obligations imposed upon it under this Trust Agreement. SECTION 4 Investment of the Trust. 4.1 General Duty of Trustee. The Trustee shall invest and reinvest the Trust Fund in accordance with the Investment Guidelines set forth on Appendix A attached hereto. 4.2 Additional Powers of Trustee. Subject to the provisions of Section 4.1, the Trustee shall have the following additional powers and authority with respect to all property 3 constituting a part of the Trust Fund: 4.2.1 To purchase securities (including shares of common stock in any registered investment company) or any other kind of property and to retain such securities or other property, regardless of diversification and without being limited to investments authorized by law for the investment of trust funds. 4.2.2 To sell, exchange or transfer any such property at public or private sale for cash or on credit and grant options for the purchase or exchange thereof. 4.2.3 To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any such property, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any corporation or other entity any of the securities of which may at any time be held in the Trust Fund, and to do any act with reference thereto. 4.2.4 To deposit any such property with any protective, reorganization or similar committee; to delegate discretionary power to any such committee; and to pay part of the expenses and compensation of any such committee and any assessments levied with respect to any property so deposited. 4.2.5 To exercise any conversion privilege or subscription right available in connection with any such property, and to do any act with reference thereto, including the exercise of options, the making of agreements or subscriptions and the payment of expenses, assessments or subscriptions, which may be deemed necessary or advisable in connection therewith, and to hold and retain any securities or other property which it may so acquire. 4.2.6 To commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration any claims, debts or damages, due or owing to or from the Trust. 4.2.7 To exercise, personally or by general or limited power of attorney, any right, including the right to vote, appurtenant to any securities or other such property. 4.2.8 To hold cash awaiting investment uninvested, and to maintain such additional cash balances as it shall deem reasonable or necessary to meet anticipated cash distributions from the Trust Fund. 4.2.9 To invest at the Trustee, or any affiliated bank, in any type of interest-bearing investment, including, without limitation, deposit accounts, certificates of deposit and repurchase agreements. 4.2.10 To invest and reinvest all or any specified portion of the Trust Fund through 4 the medium of any common trust fund which has been or may hereafter be established and maintained by the Trustee. 4.2.11 To form corporations or partnerships and to create trusts to hold title to any property constituting the Trust Fund, upon such terms and conditions as may be deemed advisable. 4.2.12 To acquire, renew or extend or participate in the renewal or extension of any mortgage, and to agree to a reduction in the rate of interest on any indebtedness or mortgage or to any other modification or change in the terms of any indebtedness or mortgage or of any guarantee pertaining thereto, in any manner and to any extent that may be deemed advisable for the protection of the Trust or the preservation of any covenant or condition of any indebtedness or mortgage or in the performance of any guarantee, or to enforce any default in such manner and to such extent as may be deemed advisable; and to exercise and enforce any and all rights of foreclosure, to bid on any property on foreclosure, to take a deed in lieu of foreclosures with or without paying a consideration therefor and in connection therewith to release the obligation on the bond secured by such mortgage, and to exercise and enforce in any action, suit or proceeding at law or in equity any rights or remedies in respect of any such indebtedness or mortgage or guarantee. 4.2.13 To engage legal counsel, including counsel to the Company, or any other suitable agents, to consult with such counsel or agents with respect to the construction of this Trust Agreement, the duties of the Trustee hereunder, the transactions contemplated by this Trust Agreement or any act which the Trustee proposes to take or omit, to rely upon the advice of such counsel or agents and be protected in relying upon such advice, and to pay any such counsel's or agent's reasonable fees, expenses and compensation. 4.2.14 To register or hold any securities or other property held by it in its own name or in the name of any custodian of such property or of its nominee, including the nominee of any system for the central handling of securities, with or without the addition of words indicating that such securities are held in a fiduciary capacity, to deposit or arrange for the deposit of any such securities with such a system and to hold any securities in bearer form. 4.2.15 To make, execute and deliver, as Trustee, any and all deeds, leases, notes, bonds, guarantees, mortgages, conveyances, contracts, waivers, releases or other instruments in writing that are necessary or proper for the accomplishment of any of the foregoing powers. 4.2.16 Generally, to exercise any of the powers of an owner with respect to property held in the Trust Fund. SECTION 5 Establishment and Maintenance of Benefit Schedule. 5.1 Copies of Certain Documents. The Company has provided the Trustee with a copy of each Employment Agreement, the Merger Agreement and the Bank's Excess Benefit Plan, each as in effect on the date of delivery thereof and shall provide the Trustee with a certified copy 5 of any amendment to any such document within 90 days after its adoption. 5.2 Form of Benefit Schedule. The Company has provided to the Trustee a schedule that sets forth (a) the name of each Executive and the address to which any notice to such Executive that may be required hereunder may be sent and (b) the names of the beneficiary or beneficiaries of each Executive to whom payments required to be made to hereunder after the Executive's death shall be made. Such Schedule (or any amendment or substitution thereof) is hereinafter referred to as the "Benefit Schedule." 5.3 Maintaining the Benefit Schedule. Each Executive shall be entitled to update the portions of the Benefit Schedule applicable to him from time to time by delivering a notice to the Trustee setting forth the updated information. The Trustee shall be entitled to rely upon the Benefit Schedule, updated as provided herein, without a duty of further inquiry. 5.4 Executive Requests. At the request of any Executive (or, in the event of the death of an Executive, one or more of his designated beneficiaries), the Trustee shall deliver to such Executive (or beneficiaries) a copy of the information contained in the Benefit Schedule that pertains to such Executive (or to such beneficiaries). SECTION 6 Maintenance of Trust and Accounts. 6.1 Accounts. The Trustee shall maintain within the Trust an account with respect to each Executive (each an "Account" or an "Executive Account"). 6.2 Contribution to the Trust and Allocation to Accounts. 6.2.1 The Company shall make a cash contribution to the Trust on January 31, 1995 in an amount equal to Two Million Two Hundred Forty-nine Thousand Two Hundred Forty-three Dollars ($2,249,243). The Trustee shall allocate on its books and records a portion of the contribution to the Trust to each Executive's Account equal to: Mr. Powderly: $1,072,204 Mr. Wesp: 471,782 Mr. Meyer: 705,257 Total: $2,249,243
6.2.2 The Trustee shall hold and invest all contributions to the Trust, and all earnings on and reinvestments thereof, as a single commingled fund. 6.3 Allocation of Investment Earnings. All investment earnings, gains and losses with respect to the portion of the assets of the Trust Fund allocated to the Account of each Executive on the books and records of the Trustee shall be allocated to the Account of such Executive. 6 6.4 Valuation of Accounts. The Trustee shall revalue the Trust Fund and each Executive's Account as of the last business day of each calendar quarter and report such valuation to the Company and, with respect to the Account of each Executive, such Executive as soon as practical thereafter. SECTION 7 Distributions from the Trust. 7.1 Distributions from the Trust. The Trustee shall distribute from the Trust to each Executive the amounts to which the Executive is entitled at the times provided by Section 1 hereof. The Trustee shall reduce the amount allocated to an Executive's Account to reflect any distributions of Benefits to the Executive and shall not distribute to any Executive an amount that exceeds the amount credited to that Executive's Account. Subject to the provisions of Section 16.1, the Trustee shall make the distributions described in this Section 7.1 notwithstanding any contrary instruction, claim or threat of litigation by the Company or any other person, unless the Trustee shall have been ordered by a court of competent jurisdiction not to make such distributions. 7.2 Protection of Trustee. The Trustee shall, to the maximum extent permitted by applicable law, be fully indemnified by the Company in acting upon the Benefit Schedule and any written statement, affidavit or certification referred to in this Trust Agreement, including any notification or failure to notify the Trustee under Section 7.6. The Trustee shall at all times, to the maximum extent permitted by applicable law, be fully indemnified by the Company in making distributions pursuant to Sections 7 and 16 hereof. 7.3 The Company's Obligations. Except as provided in Section 16.3, by payment to the Trust of the amount specified in Section 6.2 the Company shall satisfy all of its obligations to each Executive hereunder. The Company shall have no obligation to make payments hereunder other than as provided in the preceding sentence and in Section 8. 7.4 Trustee as Holder of Legal Title to Trust Assets. Subject to Section 16 hereof, the Trustee shall hold legal title to all assets in the Trust for benefit of the Executives. 7.5 Federal Income Tax Consequences of the Trust. The Trust Fund may be applied in the discharge of legal obligations of the Company as provided herein. Accordingly, the Company shall take into account in computing its tax liability those items of income, deductions and credits against tax attributable to assets held in the Trust to which the Company would have been entitled had the Trust not been in existence. The Trustee shall notify the Company promptly after it becomes aware of any tax liability assessed against, or imposed upon, the Trust or the Trustee in its capacity as Trustee of the Trust. The Company shall be responsible for all matters in respect of such assessment or imposition, and shall have sole responsibility for any defense in connection therewith. Payments in respect of any such tax liability, including, without limitation, interest and penalties, shall be made by the Company and not from the Trust Fund. 7.6 Withholding Tax. Upon receipt of written withholding instructions from the 7 Company, the Trustee shall reduce the amount of any distribution to an Executive by an amount which the Company notifies the Trustee is sufficient to satisfy the minimum federal, state, local and other withholding tax requirements applicable to such distribution. The Trustee shall be under no obligation to withhold any amounts in the absence of such instructions. SECTION 8 Expenses, Compensation and Indemnification. 8.1 Expenses. The Trustee shall be reimbursed by the Company for its reasonable expenses of management and administration of the Trust in accordance with the provisions (including Section 6) hereof, including the reasonable compensation of attorneys or other agents engaged by the Trustee to assist it in such management and administration, but not including commission or other transaction or investment costs, which shall be paid out of the Trust Fund. 8.2 Compensation. The Company shall pay the Trustee compensation in accordance with the compensation schedule attached hereto as Appendix B, unless the Company and the Trustee otherwise agree in writing after the Closing Date. 8.3 Indemnification. The Company hereby agrees to indemnify and hold harmless the Trustee from and against any losses, costs, damages, claims or expenses, including without limitation reasonable attorneys' fees, which the Trustee may incur or pay out in connection with, or otherwise arising out of: 8.3.1 the performance by the Trustee of its duties hereunder, unless any such loss, cost, damage, claim or expense is a result of negligence or willful misconduct by the Trustee or the breach by the Trustee of its fiduciary duties hereunder; or 8.3.2 any action taken by the Trustee in good faith pursuant to the written direction of the Company. In the event that any action or regulatory proceeding shall be commenced or claim asserted which may entitle the Trustee to be indemnified hereunder, the Trustee shall give the Company written notice of such action or claim promptly after becoming aware of such commencement or assertion. The Company shall be entitled to participate in and, upon notice to the Trustee, assume the defense of any such action or claim using counsel reasonably acceptable to the Trustee. The Trustee shall cooperate with the Company in connection with the defense of any such action or claim unless, in the opinion of counsel to the Trustee, there exists a material conflict of interest between the Trustee and the Company or unless the Company has not appointed counsel reasonably acceptable to the Trustee. 8.4 Exclusive Rights. The Trustee shall have no claim on the assets of the Trust Fund in respect of amounts payable to the Trustee under this Section 8. SECTION 9 Administration and Records. 8 9.1 Records. The Trustee shall keep or cause to be kept accurate and detailed accounts of any investments, receipts, disbursements and other transactions hereunder, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company or an Executive. The Trustee shall preserve all such accounts, books and records, in original form or on microfilm, magnetic tape or any other similar process, for such period as the Trustee may determine, but the Trustee may destroy such accounts, books and records only after first notifying the Company and each Executive in writing of its intention to do so and transferring to the Company and each Executive any of such accounts, books and records that the Company or such Executive shall request. 9.2 Settlement of Accounts. Within 60 days after the close of each calendar half-year, and within 60 days after the removal or resignation of the Trustee or the termination of the Trust, the Trustee shall file with each Executive a written account setting forth all investments, receipts, disbursements and other transactions effected by it during the preceding six-month period or during the period from the close of the preceding six-month period to the date of such removal, resignation or termination and pertaining to the Account of such Executive, including a description of all investments and securities purchased and sold, with the cost or net proceeds of such purchases or sales, and showing all cash, securities and other property held at the end of such six-month period or other period. The Trustee shall also file with the Company a copy of each such account. It shall be the duty of the Company to review such written accounts, and of each Executive to review such written account applicable to him, promptly within 60 days from the date of filing any such account and if, within such 60-day period, neither the Executive nor the Company files with the Trustee a written notice of objection to any of the Trustee's acts or transactions, the initial account shall become an account stated between the Trustee, the Company and such Executive. If the Company or an Executive files a written notice of objection with the Trustee, the Trustee may file with the Company and each applicable Executive an adjusted account, in which case it shall be the duty of the Company and such Executive to review such adjusted account promptly within 30 days from the date of its filing. If, within such 30-day period, the Company and such Executive fails to file a written notice of objection to any of the Trustee's acts or transactions as so adjusted with the Trustee, the adjusted account shall become an account stated between the Trustee, such Executive and the Company. Unless an account is fraudulent, when it becomes an account stated it shall be finally settled, and the Trustee shall, to the maximum extent permitted by applicable law, be forever released and discharged from all liability and accountability with respect to the propriety of its acts and transactions shown in such account. 9.3 Audit. The Trustee shall from time to time permit an independent public accountant selected by the Company or by the Executives to have access during ordinary business hours to such records as may be necessary to audit the Trustee's accounts. 9.4 Judicial Settlement. Nothing contained in this Trust Agreement shall be 9 construed as depriving the Trustee, the Company or any Executive of the right to have a judicial settlement of the Trustee's accounts. Upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereto shall be the Trustee, the Company and, to the extent of any dispute involving the Account of an Executive, such Executive. 9.5 Delivery of Records to Successor. In the event of the removal or resignation of the Trustee, the Trustee shall deliver to the successor Trustee all records which shall be required by the successor Trustee to enable it to carry out the provisions of this Trust Agreement. 9.6 Tax Filings. In addition to any returns required of the Trustee by law (e.g., any information return required to be filed on IRS Form 1041), the Trustee shall prepare and file such tax reports and other returns as the Company and the Trustee may from time to time agree. SECTION 10 Removal or Resignation of the Trustee and Designation of Successor Trustee. 10.1 Removal. The Trustee may be removed with or without cause upon at least 90 days' notice in writing to the Trustee from the Company and Mr. Powderly. No removal of the Trustee shall be effective until the Company has appointed in writing a successor Trustee, which must be a nationally recognized bank or trust company, such successor has accepted the appointment in writing and such successor has been approved by Mr. Powderly. 10.2 Resignation. The Trustee may resign at any time upon at least 90 days' notice in writing to the Company, except that any such resignation shall not be effective until the Company has appointed in writing a successor Trustee, which must be a nationally recognized bank or trust company, and such successor has accepted the appointment in writing and has been approved by Mr. Powderly. At any time after 30 days following the sending of such notice, if the Company is unable to appoint a successor Trustee or if a successor Trustee has not accepted an appointment or has not been approved by Mr. Powderly, the Trustee shall be entitled, at the expense of the Company, to petition a United States District Court or any other court having jurisdiction to appoint its successor. 10.3 Successor Trustee. Each successor Trustee, during such period as it shall act as such, shall have the powers and duties herein conferred upon the Trustee, and the word "Trustee" wherever used herein, except where the context otherwise requires, shall be deemed to include any successor Trustee. Upon designation of a successor Trustee and delivery to the resigned or removed Trustee of written acceptance by the successor Trustee of such designation, such resigned or removed Trustee shall promptly assign, transfer, deliver and pay over to such Trustee, in conformity with the requirements of applicable law, the funds and properties in its control or possession then constituting the Trust Fund. SECTION 11 Enforcement of Trust Agreement. 11.1 Rights of Parties to Enforce the Trust Agreement. The Company and the Trustee shall have the right to enforce any provision of this Trust Agreement. Each Executive shall 10 have the right as a beneficiary of the Trust to enforce any provision of this Trust Agreement that affects the right, title and interest of such Executive in the Trust. In any action or proceeding affecting the Trust, the only necessary parties shall be the Company, the Trustee and the affected Executives and, except as otherwise required by applicable law, no other person shall be entitled to any notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust. 11.2 Limitation on Rights of Executives and Beneficiaries. Except for the right to enforce the Trust Agreement as provided in this Section 11, Executives shall have no rights with respect to the Trust Fund. SECTION 12 Termination. 12.1 Continuation of Trust. Except as provided in this Section and Section 16, the Trust shall be irrevocable and shall continue until (a) all payments required by Section 7 have been made or (b) until the Trust contains no assets and retains no claims to recover assets from the Company pursuant to any provision hereof, whichever shall first occur. SECTION 13 Amendment. 13.1 Amendments in General. This Trust Agreement may not be amended except by a written instrument signed by the Company, each Executive and the Trustee. SECTION 14 Non-alienation. 14.1 Prohibition Against Certain Transfer, Pledges, Etc. Except as otherwise provided by this Agreement and except as otherwise may be required by applicable law, (a) no amount payable to or in respect of any Executive at any time under the Trust shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, or encumbrance of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge, or otherwise encumber any such amount, whether presently or thereafter payable, shall be void and (b) the Trust Fund shall in no manner be liable for or subject to the debts or liabilities of any Executive. SECTION 15 Communications. 15.1 To the Company and Committee. Communications to the Company shall be addressed to: Astoria Financial Corporation One Astoria Federal Plaza Lake Success, New York 11042-1085 11 Attention: Corporate Secretary provided, however, that upon the Company's written request, such communications shall be sent to such other address as the Company may specify. 15.2 To the Trustee. Communications to the Trustee shall be addressed to: State Street Bank and Trust Company P.O. Box 351 Boston, Massachusetts 02101 Attention: provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. 15.3 To an Executive. Communications to an Executive or to his beneficiaries shall be addressed to the Executive or his beneficiaries, respectively, at the address indicated on the Benefit Schedule as in effect at the time of the communication. 15.4 Binding upon Receipt. No communication shall be binding on the party to whom it is intended until it is received by such party. 15.5 Authority to Act. The Corporate Secretary of the Company shall from time to time certify to the Trustee the person or persons authorized to act for the Company and shall provide the Trustee with such information regarding the Company as the Trustee may reasonably request. The Trustee may continue to rely on any such certification until notified to the contrary. 15.6 Authenticity of Instruments. The Trustee shall be fully protected in acting upon any instrument, certificate, or paper reasonably believed by it to be genuine and to be signed or presented by the proper person or persons, and the Trustee shall be under no duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as conclusive evidence of the truth and accuracy of the statements therein contained, unless it has actual knowledge that it is untrue or inaccurate. SECTION 16 Claims of Bankruptcy Creditors. 16.1 Bankruptcy Creditors. In the event of the Company's "insolvency," the assets of the Trust shall be available to pay the claims of any creditor of the Company to whom a distribution may be made in accordance with state and federal bankruptcy laws. The Company shall be deemed to be "insolvent" if such Company is subject to a pending proceeding as a debtor under the federal Bankruptcy Code (or any successor federal statute) or any state bankruptcy code. In the event the Company becomes insolvent, the Chief Executive Officer of the Company shall notify the Trustee of the event as soon as practicable. Upon receipt of such notice, or if the Trustee receives 12 other written allegations of such Company's insolvency from a third party considered by the Trustee to be reliable and responsible, the Trustee shall cease making payments of Benefits from the assets of the Trust, shall hold the assets in the Trust for the benefit of such Company's creditors and shall take such steps as are necessary to determine within a reasonable period of time whether such Company is insolvent. In making such determination, the Trustee may rely upon a certificate of the Board of Directors and the Chief Executive Officer of the Company or a determination by a court of competent jurisdiction that the Company is or is not insolvent. In the case of the Trustee's determination of the Company's insolvency, the Trustee will deliver assets of the Trust to satisfy claims of the Company's creditors as directed pursuant to a final order of a court of competent jurisdiction. The Trustee shall reduce the amounts allocated to each Executive's Account by a pro rata portion of any amount so delivered, based on the value of Executives' Accounts on the last business day of the calendar quarter immediately prior to the calendar quarter in which such amount is delivered. 16.2 Resumption of Benefits. In the event the Trustee ceases making payments of Benefits pursuant to Section 16.1, the Trustee shall resume making payments of Benefits under this Trust Agreement only after the Trustee has determined that the Company is not then insolvent or upon receipt of an order of a court of competent jurisdiction requiring the payment of Benefits. 16.3 Reimbursement by the Company. In the event that any amount is paid from the Trust Fund to bankruptcy creditors of any Company pursuant to Section 16, the Trustee shall demand and the Company shall contribute to the Trust a sum equal to the amount paid by the Trust to such creditors. The Trustee shall pursue such demand vigorously through all reasonably available means. Any such amount recovered by the Trustee shall be allocated among the Executive's Accounts in accordance with the ratio in which such Accounts were reduced pursuant to Section 16.1 hereof. SECTION 17 Miscellaneous Provisions. 17.1 Binding Effect. This Trust Agreement shall be binding on the Company and the Trustee and their respective successors and assigns. 17.2 Inquiry as to Authority. A third party dealing with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. 17.3 Responsibility for the Company Action. The Trustee assumes no obligation or responsibility with respect to any action required by this Trust Agreement on the part of the Company, the Board of Directors of the Company, the Executives or any beneficiaries. The Trustee shall be under no duties except such duties as are specifically set forth as such in this Trust Agreement or under applicable law, and no implied covenant or obligation shall be read into this Trust Agreement against the Trustee. 13 17.4 Successor to Trustee. Any corporation into which the Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger, reorganization or consolidation to which the Trustee may be a party, or any corporation to which all or substantially all the trust business of the Trustee may be transferred shall be the successor of the Trustee hereunder without the execution or filing of any instrument or the performance of any act. 17.5 Titles Not to Control. Titles to the Sections of this Trust Agreement are included for convenience only and shall not control the meaning or interpretation of any provision of this Trust Agreement. 17.6 Laws of Commonwealth of Massachuseus to Govern. This Trust Agreement and the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the laws of the Commonwealth of Massachusetts, without reference to the principles of conflicts of law. 17.7 Severability. The provisions hereof shall be severable and the unenforceability of any such provision shall not effect the enforceability of any other provision hereof. 17.8 ERISA. Nothing herein shall be construed to subject the Trust to the Employee Retirement Income Security Act of 1974, as amended. 14 IN WITNESS WHEREOF, this Trust Agreement has been duly executed by the parties hereto as of the day and year first above written. ASTORIA FINANCIAL CORPORATION By: /s/ George L. Engelke, Jr. ---------------------------------- Attest: /s/ William K. Sheerin ------------------------------- STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE By: /s/ [Signature], Vice President ---------------------------------- Attest: ------------------------------- 15 Appendix A INVESTMENT POLICY GUIDELINES ASTORIA FINANCIAL CORPORATION TRUST FUND The investment objective for the Astoria Financial Corporation Trust Fund ("the fund" or "the portfolio") is to provide for benefit payments as described in greater detail in the trust agreement. After the initial funding, the fund will be allowed to compound interest payments with no withdrawals until 2000. At that time, the fund will begin to pay out its balance in five equal installments to each participant over five years. The portfolio will be invested in tax exempt notes, tax-exempt bonds and tax-exempt money market funds. The funds will be invested within the following guidelines: Asset Quality: All of the holdings will be of investment grade with not more than 25% of all bond holdings rated "BBB" / "Baa" or comparable short term ratings by either Standard & Poor's or Moody's Investors Services. The fund may invest in tax exempt bonds and tax exempt notes, tax exempt commercial paper, and tax exempt money market funds. New York issues are preferred for their double tax exempt status. The fund may invest temporarily in U.S. Government obligations or taxable money market funds if there is a lack of available tax exempt issues or funds. Asset Allocation Given the relatively short time horizon for the account, we expect to be fully invested in tax exempt bonds and notes up until 2000 when we will gradually build cash, either through sales or maturities, to meet withdrawal requirements. Enough cash will be kept in reserve to fund transactions costs and fees, but, generally, the cash balance will not exceed 10% of the value of the fund. Exposure to any one issue or entity, other than general obligation bonds, should not exceed 25% of the market value of the portfolio. Maturity Parameters: This fund will be managed as a short to intermediate term tax exempt bond fund. Depending on market conditions and the shrinking time horizon of the trust, the fund will have an average weighted maturity of between zero and five years. The fund will not purchase any securities with maturities of greater than ten years. The portfolio may be "immunized" to meet known cash flow requirements, particularly the withdrawals of the participants. Reporting: Performance reports will be sent to the beneficiaries of the Astoria Financial Corporation Trust Fund on a quarterly basis starting with March 31, 1995. The appropriate benchmark for comparison will be the Lehman Brothers Municipal Index. I understand and agree to the aforementioned guidelines: Date: - --------------------------------------- -------------------------------- Title: /s/ Kimberly D Gluck Date: January 12. 1994 - --------------------------------------- -------------------------------- Title: Senior Investment Officer, State Street EX-12 10 ex12-1.txt EXHIBIT 12.1 EXHIBIT 12.1 Statement Regarding Computation of Ratios COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) Astoria Financial Corporation's ratio of earnings to fixed charges (including interest on deposits) for the year ended December 31, 2003 was as follows:
For the Year Ended December 31, 2003 ------------------------------------ (In Thousands) Income before income tax expense..... $293,222 Income tax expense................... 96,376 -------- Net income........................... $196,846 ======== Fixed charges: Interest on borrowed funds........... $452,502 Interest on deposits................. 225,251 1/3 rent expense..................... 2,404 -------- Total fixed charges............ $680,157 ======== Earnings (for ratio calculation)..... $973,379 ======== Ratio of earnings to fixed charges... 1.43x
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) Astoria Financial Corporation's ratio of earnings to fixed charges (excluding interest on deposits) for the year ended December 31, 2003 was as follows:
For the Year Ended December 31, 2003 ------------------------------------ (In Thousands) Income before income tax expense..... $293,222 Income tax expense................... 96,376 -------- Net income........................... $196,846 ======== Fixed charges: Interest on borrowed funds........... $452,502 1/3 rent expense..................... 2,404 -------- Total fixed charges............ $454,906 ======== Earnings (for ratio calculation)..... $748,128 ======== Ratio of earnings to fixed charges... 1.64x
For purposes of computing the ratios of earnings to fixed charges, earnings consists of income before income taxes plus fixed charges. Fixed charges excluding interest on deposits consist of interest on short-term and long-term debt, interest related to capitalized leases and capitalized interest and one-third of rent expense, which approximates the interest component of that expense. Fixed charges including interest on deposits consist of the foregoing items plus interest on deposits. EX-21 11 ex21-1.txt EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of Astoria Financial Corporation
Jurisdiction of Incorporation --------------- Subsidiaries of Astoria Financial Corporation Astoria Federal Savings and Loan Association a/k/a Astoria Federal Savings or Astoria Federal United States Astoria Capital Trust I Delaware AF Insurance Agency, Inc. New York Subsidiaries of Astoria Federal Savings and Loan Association AF Agency, Inc. New York Astoria Federal Mortgage Corp. New York Astoria Federal Savings and Loan Association Revocable Grantor Trust New York Entrust Holding Corp. New York Infoserve Corporation New York Star Preferred Holding Corporation New Jersey Suffco Service Corporation New York
Astoria Federal has four subsidiaries which may qualify for alternative tax treatment under Article 9A of the New York State Tax Law and therefore, although inactive, are retained by Astoria Federal. Astoria Federal has five additional subsidiaries, one of which is a single purpose entity that has an interest in a real estate investment, which is not material to our financial condition; one of which had an interest in a real estate investment which was sold in December 2003; and two of which have no assets or operations but may be used to acquire interests in real estate in the future. The fifth such subsidiary serves as a holding company for one of the other four. Astoria Federal has two additional subsidiaries which are inactive, one of which Astoria Federal intends to dissolve. Subsidiaries of Star Preferred Holding Corporation Astoria Preferred Funding Corporation Delaware EX-23 12 ex23.txt EXHIBIT 23 Exhibit 23 Independent Auditors' Consent The Board of Directors Astoria Financial Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-86248, 33-86250, 33-98500, 333-36807 and 333-64895) on Form S-8, (Nos. 333-101694, 333-29901, 333-58897 and 333-30792) on Form S-4 and (No. 33-98532) on Form S-3 of Astoria Financial Corporation of our report dated March 5, 2004, relating to the consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003, which report appears in the December 31, 2003 Annual Report on Form 10-K of Astoria Financial Corporation. Our report contained an explanatory paragraph that described the adoption of a new accounting principle as discussed in the notes to those statements. /s/ KPMG LLP New York, New York March 11, 2004 EX-31 13 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATIONS I, George L. Engelke, Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K of Astoria Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986) (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ George L. Engelke, Jr. - ----------------------------------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer Astoria Financial Corporation EX-31 14 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS I, Monte N. Redman, certify that: 1. I have reviewed this Annual Report on Form 10-K of Astoria Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986) (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ Monte N. Redman - ---------------------------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer Astoria Financial Corporation EX-32 15 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, George L. Engelke, Jr., is the Chairman, President and Chief Executive Officer of Astoria Financial Corporation (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: (A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and (B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. March 12, 2004 /s/ George L. Engelke, Jr. -------------------- ----------------------------- Dated George L. Engelke, Jr. EX-32 16 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Monte N. Redman, is the Executive Vice President and Chief Financial Officer of Astoria Financial Corporation (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: (A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and (B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. March 12, 2004 /s/ Monte N. Redman ------------------ --------------------- Dated Monte N. Redman -----END PRIVACY-ENHANCED MESSAGE-----