-----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, MUCzQwHJBM+3Mmp+fcP0I5qzuYFOt9t4tsaTAjLwXdLS0P2VX7g2p0DcG+wE0SlR 6dHMRj5QZ/p+e1SyEO5JDQ== 0000950117-05-000893.txt : 20050309 0000950117-05-000893.hdr.sgml : 20050309 20050309152612 ACCESSION NUMBER: 0000950117-05-000893 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050309 DATE AS OF CHANGE: 20050309 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: 05669295 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 a39359.txt ASTORIA FINANCIAL CORPORATION ================================================================================ 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, 2004 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 001-11967 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [_] The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2004, 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 $2.70 billion. The number of shares of the registrant's Common Stock outstanding as of March 2, 2005 was 109,751,265 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 18, 2005 and any adjournment thereof, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2004, are incorporated by reference into Part III. ================================================================================ ASTORIA FINANCIAL CORPORATION 2004 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- Part I Item 1. Business..............................................................2 Item 2. Properties...........................................................29 Item 3. Legal Proceedings....................................................29 Item 4. Submission of Matters to a Vote of Security Holders..................30 Part II Item 5. Market for Astoria Financial Corporation's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.....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...........68 Item 8. Financial Statements and Supplementary Data..........................70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................70 Item 9A. Controls and Procedures..............................................71 Item 9B. Other Information....................................................71 Part III Item 10. Directors and Executive Officers of Astoria Financial Corporation....71 Item 11. Executive Compensation...............................................72 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................................72 Item 13. Certain Relationships and Related Transactions.......................72 Item 14. Principal Accountant Fees and Services...............................73 Part IV Item 15. Exhibits and Financial Statement Schedules...........................73 SIGNATURES........................................................................74
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may be identified by the use of the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "outlook," "plan," "potential," "predict," "project," "should," "will," "would" and similar terms and phrases, including references to assumptions. Forward-looking statements are based on various assumptions and analyses made by us in light of our management's experience and its perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, without limitation, the following: o the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control; o there may be increases in competitive pressure among financial institutions or from non-financial institutions; o changes in the interest rate environment may reduce interest margins or affect the value of our investments; o changes in deposit flows, loan demand or real estate values may adversely affect our business; o changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently; o general economic conditions, either nationally or locally in some or all areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate; o legislative or regulatory changes may adversely affect our business; o technological changes may be more difficult or expensive than we anticipate; o success or consummation of new business initiatives may be more difficult or expensive than we anticipate; or o litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. 1 PART I As used in this Form 10-K, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries, principally Astoria Federal Savings and Loan Association. All share and per share data included in this Form 10-K have been retroactively adjusted to reflect the three-for-two common stock split in the form of a 50% stock dividend which was declared by our Board of Directors on January 19, 2005. On March 1, 2005 stockholders received one additional share of our common stock for every two shares owned. ITEM 1. BUSINESS General We are a Delaware corporation organized in 1993 as the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association and its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake Success, New York and our principal business is the operation of our wholly-owned subsidiary, Astoria Federal. Astoria Federal's primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and 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, Astoria Federal also invests in construction loans and consumer and other loans. In addition, Astoria Federal invests in U.S. government, government agency and government-sponsored enterprise, or GSE, securities and other investments permitted by federal laws and regulations. Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and our cost of funds, which consists of the interest paid on our deposits and borrowings. Our net income is also affected by our provision for loan losses, non-interest income, general and administrative expense, other non-interest expense and income tax expense. Non-interest income generally includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits; occupancy, equipment and systems expense; federal deposit insurance premiums; advertising; and other operating expenses. Other non-interest expense consisted of a loss on 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 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. AF Insurance Agency, Inc. is a wholly-owned subsidiary which is consolidated with Astoria Financial Corporation for financial reporting purposes. Our other subsidiary, Astoria Capital Trust I, is not consolidated with Astoria Financial Corporation for financial reporting purposes as a result of our adoption of Financial Accounting Standards Board, or FASB, revised Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46(R), effective January 1, 2004. Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, and $3.9 million of common securities which are 100% owned by Astoria Financial Corporation, and using the proceeds to acquire Junior Subordinated Debentures issued by Astoria 2 Financial Corporation. The Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have substantially identical repayment provisions as the Junior Subordinated Debentures. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities. We have acquired, and may continue to acquire or organize either directly or indirectly through Astoria Federal, other subsidiaries and financial institutions. We continue to evaluate merger and acquisition activity as part of our strategic objective for long term growth. 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, 2004, our loan portfolio totaled $13.26 billion, or 56.6% of total assets. We originate mortgage loans either directly through our banking and loan production offices in the New York metropolitan area or indirectly through brokers and our third party loan origination program. Mortgage loan originations and purchases totaled $4.35 billion for the year ended December 31, 2004 and $7.29 billion for the year ended December 31, 2003. Mortgage loan originations include originations of loans held-for-sale totaling $323.2 million for the year ended December 31, 2004 and $613.3 million for the year ended December 31, 2003. Our retail loan origination program accounted for $1.83 billion of originations during 2004 and $3.14 billion of originations during 2003. We also have an extensive broker network in twenty-three states: New York, New Jersey, Connecticut, Pennsylvania, Massachusetts, Delaware, Maryland, Ohio, Virginia, North Carolina, South Carolina, Georgia, Illinois, California, Florida, Michigan, New Hampshire, Rhode Island, Missouri, Tennessee, Indiana, Kentucky and Alabama; and the District of Columbia. Our broker loan origination program consists of relationships with mortgage brokers and accounted for $1.36 billion of originations during 2004 and $2.61 billion of originations during 2003. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers in forty-four states and the District of Columbia and accounted for purchases of $1.16 billion during 2004 and $1.54 billion during 2003. Mortgage loans purchased through our third party loan origination program are subject to the same underwriting standards as our retail and broker originations. See the "Loan Portfolio Composition" table on page 7 and the "Loan Maturity, Repricing and Activity" tables on pages 8 and 9. 3 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, 2004, $9.05 billion, or 68.7%, of our total loan portfolio consisted of one-to-four family mortgage loans, of which $8.42 billion, or 93.0%, 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. 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, once in the adjustment period the underlying payments of the borrower rise, increasing the potential for default. ARM loans may be offered with an initial interest rate which is less than the fully indexed rate for the loan at the time of origination. We determine the initial discounted rate in accordance with market and competitive factors. To recognize the credit risks associated with ARM loans initially offered below their fully-indexed rates, we generally underwrite our one-year ARM loans assuming a rate equal to 200 basis points over the initial discounted rate, but not less than 7.00%. For ARM loans with longer adjustment periods, and therefore less credit risk due to the longer period for the borrower's income to adjust to anticipated higher future payments, we underwrite the loans using the initial rate, which may be a discounted rate. We use the same underwriting standards for our retail, broker and third party mortgage loan originations. Our policy on owner-occupied, one-to-four family loans is to lend up to 80% of the appraised value of the property securing the loan. Generally, for mortgage loans which have a loan-to-value ratio of greater than 80%, we require the mortgagor to obtain private mortgage insurance. In addition, we offer a variety of proprietary products which allow the borrower to obtain financing of up to 90% loan-to-value without private mortgage insurance. This type of financing does not comprise a significant portion of our portfolio. Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various GSEs or other investors with 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, 2004, loans serviced for others totaled $1.67 billion. One-to-four family loan originations and purchases, including originations of loans held-for-sale, decreased $2.37 billion to $3.20 billion in 2004, from $5.57 billion in 2003. This decrease was primarily the result of the decrease in mortgage refinance activity due to the increase in interest rates during the second half of 2003 and the full year of 2004. 4 Multi-Family and Commercial Real Estate Lending While we continue to primarily be a one-to-four family mortgage lender, over the past several years we have increased our emphasis on multi-family and commercial real estate loan originations. As of December 31, 2004, our total loan portfolio contained $2.56 billion, or 19.4%, of multi-family mortgage loans and $944.9 million, or 7.2%, of commercial real estate loans. During 2004, we originated $1.05 billion of multi-family, commercial real estate and mixed use loans compared to $1.65 billion in 2003. 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 smaller degree, we also originate loans throughout New York State and in various other states including New Jersey, Connecticut, Pennsylvania, Florida, Massachusetts, Delaware and Maryland. Originations in states other than New York represented 19.4% of our total originations of multi-family and commercial real estate loans in 2004, of which 16.5% were originated in New Jersey and Connecticut. We are authorized by our Board of Directors to further expand the areas in which we originate multi-family and commercial real estate loans. In making such loans, we primarily consider the ability of the net operating income generated by the real estate to support the debt service, the financial resources, income level and managerial expertise of the borrower, the marketability of the property and our lending experience with the borrower. Our current policy is to require a minimum debt service coverage ratio of 1.20 times for multi-family and commercial real estate loans. Additionally, on multi-family loans, our current policy is to finance up to 80% of the lesser of the purchase price or appraised value of the property securing the loan on purchases or 80% of the appraised value on refinances. On commercial real estate loans, our current policy is to finance up to 75% of the lesser of the purchase price or appraised value of the property securing the loans on purchases or 75% of the appraised value on refinances. The majority of the multi-family loans in our portfolio are secured by six- to fifty-unit apartment buildings and mixed use properties (more residential than business units). As of December 31, 2004, our single largest multi-family loan had an outstanding balance of $10.9 million and was current and secured by a 281-unit apartment complex in Bronx, New York. At December 31, 2004, 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, 2004, our single largest commercial real estate loan had an outstanding principal balance of $7.9 million and was current and secured by a multi-story office building in Mineola, New York. At December 31, 2004, the average balance of loans in our commercial real estate portfolio was approximately $1.1 million. Historically, multi-family and commercial real estate loans generally involve a greater degree of credit risk than one-to-four family loans because they typically have larger balances and are more affected by adverse conditions in the economy. As such, these loans require more ongoing evaluation and monitoring. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market or the economy or changes in government regulation. 5 Construction Loans As of December 31, 2004, $117.8 million, or 0.9%, 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, 2004, our average construction loan commitment was approximately $2.9 million and the average outstanding 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, 2004, $507.3 million, or 3.9%, of our total loan portfolio consisted of consumer and other loans which were primarily home equity lines of credit. We also offer overdraft protection, lines of credit, commercial loans, passbook loans and student loans. Consumer and other loans, with the exception of home equity and commercial lines of credit, are offered primarily on a fixed rate, short-term basis. The underwriting standards we employ for consumer and other loans include a determination of the borrower's payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the 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 $21.8 million of commercial business loans at December 31, 2004. These loans are underwritten based upon the earnings of the borrower and the value of the collateral securing such loans, if any. Loan Approval Procedures and Authority Except for individual loans in excess of $15.0 million or when the overall lending relationship exceeds $60.0 million (unless the Board of Directors has set a higher limit with respect to a particular borrower), mortgage loan approval authority has been delegated by the Board of Directors to our underwriters and Loan Committee, which consists of certain members of executive management and other Astoria Federal officers. For loans between $10.0 million and $15.0 million, the approval of two non-officer directors is also required. 6 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. 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, ------------------------------------------------------------------------ 2004 2003 2002 ------------------------------------------------------------------------ Percent Percent Percent of of of (Dollars in Thousands) Amount Total Amount Total Amount Total - ------------------------------------------------------------------------------------------------------------ Mortgage loans (gross): One-to-four family $ 9,054,747 68.68% $ 8,971,048 71.13% $ 9,209,360 76.86% Multi-family 2,558,935 19.41 2,230,414 17.69 1,599,985 13.35 Commercial real estate 944,859 7.17 880,296 6.98 744,623 6.21 Construction 117,766 0.89 99,046 0.79 56,475 0.47 - ------------------------------------------------------------------------------------------------------------ Total mortgage loans 12,676,307 96.15 12,180,804 96.59 11,610,443 96.89 - ------------------------------------------------------------------------------------------------------------ Consumer and other loans (gross): Home equity 466,087 3.53 386,846 3.07 323,494 2.70 Commercial 21,819 0.17 21,937 0.17 22,569 0.19 Lines of Credit, Overdraft 11,835 0.09 12,963 0.10 15,475 0.13 Other 7,547 0.06 8,400 0.07 11,100 0.09 - ------------------------------------------------------------------------------------------------------------ Total consumer and other loans 507,288 3.85 430,146 3.41 372,638 3.11 - ------------------------------------------------------------------------------------------------------------ Total loans (gross) 13,183,595 100.00% 12,610,950 100.00% 11,983,081 100.00% Net unamortized premiums and deferred loan costs 79,684 76,037 76,280 - ------------------------------------------------------------------------------------------------------------ Total loans 13,263,279 12,686,987 12,059,361 Allowance for loan losses (82,758) (83,121) (83,546) - ------------------------------------------------------------------------------------------------------------ Total loans, net $13,180,521 $12,603,866 $11,975,815 ============================================================================================================ At December 31, --------------------------------------------- 2001 2000 --------------------------------------------- Percent Percent of of (Dollars in Thousands) Amount Total Amount Total - --------------------------------------------------------------------------------- Mortgage loans (gross): One-to-four family $10,105,063 83.59% $ 9,850,390 86.79% Multi-family 1,094,312 9.05 801,917 7.07 Commercial real estate 598,334 4.95 480,211 4.23 Construction 50,739 0.42 34,599 0.30 - --------------------------------------------------------------------------------- Total mortgage loans 11,848,448 98.01 11,167,117 98.39 - --------------------------------------------------------------------------------- Consumer and other loans (gross): Home equity 189,259 1.57 133,748 1.18 Commercial 18,124 0.15 8,822 0.08 Lines of Credit, Overdraft 18,046 0.15 20,603 0.18 Other 14,765 0.12 19,383 0.17 - --------------------------------------------------------------------------------- Total consumer and other loans 240,194 1.99 182,556 1.61 - --------------------------------------------------------------------------------- Total loans (gross) 12,088,642 100.00% 11,349,673 100.00% Net unamortized premiums and deferred loan costs 78,619 72,622 - --------------------------------------------------------------------------------- Total loans 12,167,261 11,422,295 Allowance for loan losses (82,285) (79,931) - --------------------------------------------------------------------------------- Total loans, net $12,084,976 $11,342,364 =================================================================================
7 Loan Maturity, Repricing and Activity The following table shows the contractual maturities of our loans receivable at December 31, 2004 and does not reflect the effect of prepayments or scheduled principal amortization.
At December 31, 2004 ------------------------------------------------------------------------------ One-to- Consumer Four Multi- Commercial and Total Loans (In Thousands) Family Family Real Estate Construction Other Receivable - ------------------------------------------------------------------------------------------------------------- Amount due: Within one year $ 5,451 $ 1,751 $ 2,048 $ 74,176 $ 17,929 $ 101,355 After one year: One to three years 11,847 24,152 7,850 39,612 17,058 100,519 Three to five years 51,379 17,289 19,458 3,978 7,654 99,758 Five to ten years 451,643 1,094,355 487,974 -- 12,185 2,046,157 Ten to twenty years 358,522 1,075,960 398,807 -- 14,679 1,847,968 Over twenty years 8,175,905 345,428 28,722 -- 437,783 8,987,838 - ------------------------------------------------------------------------------------------------------------- Total due after one year 9,049,296 2,557,184 942,811 43,590 489,359 13,082,240 - ------------------------------------------------------------------------------------------------------------- Total amount due $9,054,747 $2,558,935 $944,859 $117,766 $507,288 $13,183,595 Net unamortized premiums and deferred loan costs 79,684 Allowance for loan losses (82,758) - ------------------------------------------------------------------------------------------------------------- Loans receivable, net $13,180,521 =============================================================================================================
The following table sets forth at December 31, 2004, the dollar amount of our loans receivable contractually maturing after December 31, 2005, 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, 2005 -------------------------------------- (In Thousands) Fixed Adjustable Total - ------------------------------------------------------------------ Mortgage loans: One-to-four family $ 630,618 $ 8,418,678 $ 9,049,296 Multi-family 363,111 2,194,073 2,557,184 Commercial real estate 109,174 833,637 942,811 Construction -- 43,590 43,590 Consumer and other loans 17,538 471,821 489,359 - ------------------------------------------------------------------ Total $1,120,441 $11,961,799 $13,082,240 - ------------------------------------------------------------------
8 The following table sets forth our loan originations, purchases, sales and principal repayments for the periods indicated, including loans held-for-sale.
For the Year Ended December 31, --------------------------------------- (In Thousands) 2004 2003 2002 - -------------------------------------------------------------------------------------- Mortgage loans (gross) (1): At beginning of year $12,202,231 $11,671,567 $11,889,940 Mortgage loans originated: One-to-four family 2,043,538 4,036,573 2,992,746 Multi-family 798,120 1,231,944 750,196 Commercial real estate 256,183 418,107 259,986 Construction 91,704 64,300 50,942 - -------------------------------------------------------------------------------------- Total mortgage loans originated 3,189,545 5,750,924 4,053,870 - -------------------------------------------------------------------------------------- Purchases of mortgage loans (2) 1,160,118 1,536,139 1,534,999 Principal repayments (3,517,383) (6,126,919) (5,334,940) Sales of mortgage loans (322,079) (645,908) (463,984) Originations (in excess of) less than advances on construction loans (12,189) 18,519 (6,076) Transfer of loans to real estate owned (1,365) (2,028) (1,900) Net loans charged off (153) (63) (342) - -------------------------------------------------------------------------------------- At end of year $12,698,725 $12,202,231 $11,671,567 ====================================================================================== Consumer and other loans (gross) (3): At beginning of year $ 431,792 $ 374,183 $ 242,092 Consumer and other loans originated 333,393 286,238 279,905 Principal repayments (253,156) (225,113) (143,592) Sales of consumer and other loans (3,128) (3,154) (3,518) Net loans charged off (210) (362) (704) - -------------------------------------------------------------------------------------- At end of year $ 508,691 $ 431,792 $ 374,183 ======================================================================================
(1) Includes loans classified as held-for-sale totaling $22.4 million, $21.4 million and $61.2 million at December 31, 2004, 2003 and 2002, 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 $1.4 million, $1.6 million and $1.5 million at December 31, 2004, 2003 and 2002, respectively. Asset Quality General One of our key operating objectives has been and continues to be to maintain a high level of asset quality. Our concentration on one-to-four family mortgage lending, the maintenance of sound credit standards for new loan originations and a strong real estate market have resulted in our maintaining a very low level of non-performing assets relative to both the size of our loan portfolio and 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. 9 Non-performing Assets Non-performing assets include non-accrual loans, mortgage loans delinquent 90 days or more and still accruing interest and real estate owned, or REO. Total non-performing assets increased to $33.5 million at December 31, 2004, from $31.3 million at December 31, 2003. Non-performing loans, the most significant component of non-performing assets, increased $2.9 million to $32.6 million at December 31, 2004, from $29.7 million at December 31, 2003. The ratio of non-performing loans to total loans was 0.25% at December 31, 2004, compared to 0.23% at December 31, 2003. Our ratio of non-performing assets to total assets was 0.14% at December 31, 2004 and 2003. The allowance for loan losses as a percentage of total non-performing loans was 254.02% at December 31, 2004, compared to 280.10% at December 31, 2003. For a further discussion of the allowance for loan losses and non-performing assets and loans, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," or "MD&A." We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. As of December 31, 2004, $12.3 million of mortgage loans classified as non-performing had missed only two payments. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we continue to accrue interest on mortgage loans delinquent 90 days or more as to their maturity date, but not their interest due. In general, 90 days prior to a loan's maturity, the borrower is reminded of the maturity date. Where the borrower has continued to make monthly payments to us and where we do not have a reason to believe that any loss will be incurred on the loan, we have treated these loans as current and have continued to accrue interest. Such loans totaled $573,000 at December 31, 2004 and $563,000 at December 31, 2003. The net carrying value of our REO totaled $920,000 at December 31, 2004 and $1.6 million at December 31, 2003 and consisted of one-to-four family properties. REO is carried net of all allowances for losses at the lower of cost or fair value less estimated selling costs. Classified Assets Our Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to our Board of Directors quarterly. Our Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of our 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 65 for additional information on our classified assets. 10 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, 2004, net of their related allowance for loan losses of $2.2 million, totaled $15.9 million. Interest income recognized on impaired loans amounted to $616,000 for the year ended December 31, 2004. For further detail on our impaired loans, see Note 4 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Allowance for Loan Losses For a discussion of our accounting policy related to the allowance for loan losses, see "Critical Accounting Policies" in Item 7, "MD&A." In addition to the requirements of accounting principles generally accepted in the United States of America, or GAAP, related to loss contingencies, a federally chartered savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all 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, 2004, our portfolio of mortgage-backed and other securities totaled $8.71 billion, or 37.2% of total assets. 11 Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations; securities of government agencies and GSEs; mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs; certain certificates of deposit of insured banks and federally chartered savings associations; certain bankers acceptances; and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. See Note 1 and Note 10 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for further discussion of such derivative financial instruments. Securities Our securities portfolio is comprised primarily of mortgage-backed securities. At December 31, 2004, our mortgage-backed securities totaled $8.54 billion, or 98.1% of total securities, of which $8.41 billion, or 96.5% of total securities, were REMIC and CMO mortgage-backed securities, substantially all of which had fixed rates. During the year ended December 31, 2004, we purchased $3.07 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, $7.85 billion, or 93.4%, are guaranteed by Fannie Mae, or FNMA, Freddie Mac, or FHLMC, or Ginnie Mae, or GNMA, as issuer. The balance of this portfolio is comprised of privately issued securities, substantially all of which have a credit rating of AAA. In addition to our REMIC and CMO mortgage-backed securities, at December 31, 2004, we had $135.7 million, or 1.6% of total securities, in mortgage-backed pass-through certificates guaranteed by either FNMA, FHLMC or GNMA. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and more easily used to collateralize our borrowings. In general, our mortgage-backed securities are weighted at no more than 20% for OTS risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized one-to-four family mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, they, along with whole loans, remain subject to the risk of a fluctuating interest rate environment. Changes in interest rates affect both the prepayment rate and estimated fair value of mortgage-backed securities and mortgage loans. The other securities portfolio totaled $167.7 million, or 1.9% of total securities, and consisted of FNMA and FHLMC preferred stock, 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, 2004, the amortized cost of such callable securities totaled $125.1 million. No securities were called during the year ended December 31, 2004. At December 31, 2004, our securities available-for-sale totaled $2.41 billion and our securities held-to-maturity totaled $6.30 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." 12 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), although at December 31, 2004 and 2003 we had no investments in federal funds sold. Money market instruments are used to invest our available funds resulting from cash flow and to help satisfy liquidity needs. For a further discussion of our 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." 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, --------------------------------------------------------------------- 2004 2003 2002 --------------------------------------------------------------------- Percent Percent Percent (Dollars in Thousands) Amount of Total Amount of Total Amount of Total - ------------------------------------------------------------------------------------------------------------------------ Securities available-for-sale: Mortgage-backed securities: GSE pass-through certificates $ 126,570 5.26% $ 166,724 6.28% $ 249,459 8.93% REMICs and CMOs: GSE issuance 2,077,902 86.33 2,227,851 83.90 616,552 22.08 Non-GSE issuance 75,715 3.15 103,740 3.91 1,587,622 56.86 FNMA and FHLMC preferred stock 123,548 5.13 131,361 4.95 136,682 4.89 Other securities 3,148 0.13 25,316 0.96 202,266 7.24 - ------------------------------------------------------------------------------------------------------------------------ Total securities available-for-sale $2,406,883 100.00% $2,654,992 100.00% $2,792,581 100.00% ======================================================================================================================== Securities held-to-maturity: Mortgage-backed securities: GSE pass-through certificates $ 9,154 0.15% $ 14,345 0.25% $ 24,534 0.49% REMICs and CMOs: GSE issuance 5,772,676 91.58 4,958,633 85.60 3,595,244 71.31 Non-GSE issuance 480,053 7.62 772,728 13.34 1,306,113 25.91 Obligations of the U.S. Government and GSEs -- -- -- -- 65,776 1.30 Obligations of states and political subdivisions and corporate debt securities 41,053 0.65 47,021 0.81 49,590 0.99 - ------------------------------------------------------------------------------------------------------------------------ Total securities held-to-maturity $6,302,936 100.00% $5,792,727 100.00% $5,041,257 100.00% ========================================================================================================================
The following table sets forth the aggregate amortized cost and estimated fair value of our securities, substantially all of which are mortgage-backed securities, where the aggregate book value of securities from a single issuer exceeds ten percent of our stockholders' equity at December 31, 2004.
Amortized Estimated (In Thousands) Cost Fair Value - -------------------------------------------------------------------------------- FHLMC $5,021,986 $5,017,664 FNMA 2,819,514 2,788,373 Countrywide Home Loans, Inc. 182,942 183,373 FHLB-NY (1) 164,456 164,447 Residential Funding Corporation Affiliates 141,638 136,398
- ---------- (1) Includes FHLB-NY stock. 13 The table below sets forth certain information regarding the amortized costs, estimated fair values, weighted average yields and contractual maturities of our repurchase agreements, FHLB-NY stock and mortgage-backed and other securities available-for-sale and held-to-maturity portfolios at December 31, 2004.
Within One to Five to One Year Five Years Ten Years -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average (Dollars in Thousands) Cost Yield Cost Yield Cost Yield - --------------------------------------------------------------------------------------------------------------------- Repurchase agreements $267,578 2.19% $ -- --% $ -- --% ===================================================================================================================== FHLB-NY stock (1)(2) $ -- --% $ -- --% $ -- --% ===================================================================================================================== Mortgage-backed and other securities available-for-sale: GSE pass-through certificates $ -- --% $ 687 6.15% $13,262 6.86% REMICs and CMOs: GSE issuance -- -- 173 6.55 -- -- Non-GSE issuance -- -- -- -- -- -- FNMA and FHLMC preferred stock (1) -- -- -- -- -- -- Other securities 251 3.69 2,485 4.61 -- -- - --------------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $ 251 3.69% $ 3,345 5.03% $13,262 6.86% ===================================================================================================================== Mortgage-backed and other securities held-to-maturity: GSE pass-through certificates $ 6 7.26% $ 1,939 8.23% $ 2,571 6.60% REMICs and CMOs: GSE issuance -- -- -- -- -- -- Non-GSE issuance -- -- -- -- -- -- Obligations of states and political subdivisions and corporate debt securities -- -- 9,987 5.80 -- -- - --------------------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $ 6 7.26% $11,926 6.20% $ 2,571 6.60% ===================================================================================================================== Over Ten Years Total Securities --------------------- ---------------------------------- Weighted Estimated Weighted Amortized Average Amortized Fair Average (Dollars in Thousands) Cost Yield Cost Value Yield - ------------------------------------------------------------------------------------------------------------- Repurchase agreements $ -- --% $ 267,578 $ 267,578 2.19% ============================================================================================================= FHLB-NY stock (1)(2) $ 163,700 2.22% $ 163,700 $ 163,700 2.22% ============================================================================================================= Mortgage-backed and other securities available-for-sale: GSE pass-through certificates $ 109,080 4.59% $ 123,029 $ 126,570 4.84% REMICs and CMOs: GSE issuance 2,125,376 3.98 2,125,549 2,077,902 3.98 Non-GSE issuance 78,974 3.44 78,974 75,715 3.44 FNMA and FHLMC preferred stock (1) 123,495 5.86 123,495 123,548 5.86 Other securities 416 3.58 3,152 3,148 4.40 - ------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $2,437,341 4.08% $2,454,199 $2,406,883 4.10% ============================================================================================================= Mortgage-backed and other securities held-to-maturity: GSE pass-through certificates $ 4,638 8.24% $ 9,154 $ 9,691 7.78% REMICs and CMOs: GSE issuance 5,772,676 4.48 5,772,676 5,778,885 4.48 Non-GSE issuance 480,053 4.43 480,053 476,707 4.43 Obligations of states and political subdivisions and corporate debt securities 31,066 6.73 41,053 41,477 6.50 - ------------------------------------------------------------------------------------------------------------- Total securities held-to-maturity $6,288,433 4.49% $6,302,936 $6,306,760 4.49% =============================================================================================================
(1) As equity securities have no maturities, they are classified in the over ten years category. (2) The carrying amount of FHLB-NY stock equals cost. 14 Sources of Funds General Our primary source of funds is the cash flow provided by our investing activities, including principal and interest payments on loans and mortgage-backed and other securities. Our other sources of funds are provided by operating activities (primarily net income) and financing activities, including deposits and borrowings. Deposits We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer passbook and statement savings accounts, 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. At December 31, 2004, our deposits totaled $12.32 billion. Of the total deposit balance, $1.55 billion, or 12.6%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2004. When we determine the levels of our deposit rates, consideration is given to local competition, yields of U.S. Treasury securities and the rates charged for other sources of funds. We continue to experience intense competition for deposits, particularly money market and checking accounts, from certain local competitors who have offered these accounts at premium rates. We have not offered premium rates on these accounts because we do not consider it a cost effective strategy. Despite continued intense local competition for checking accounts, we have been successful in growing our total NOW and demand deposit account balances during the year ended December 31, 2004, including our business checking deposits. We continue to maintain 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 44.4% of total deposits at December 31, 2004. 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) 2004 2003 2002 - -------------------------------------------------------------------- Opening balance $11,186,594 $11,067,196 $10,903,693 Net deposits (withdrawals) 899,234 (105,853) (124,497) Interest credited 237,429 225,251 288,000 - -------------------------------------------------------------------- Ending balance $12,323,257 $11,186,594 $11,067,196 ==================================================================== Net increase $ 1,136,663 $ 119,398 $ 163,503 ==================================================================== Percentage increase 10.16% 1.08% 1.50% ====================================================================
The following table sets forth the maturity periods of our certificates of deposit in amounts of $100,000 or more at December 31, 2004.
(In Thousands) Amount - --------------------------------- Within three months $ 251,999 Three to six months 126,662 Six to twelve months 221,389 Over twelve months 984,197 - --------------------------------- Total $1,584,247 =================================
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, ------------------------------------------------------------------------------------------------- 2004 2003 2002 ------------------------------------------------------------------------------------------------- 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 $ 2,973,054 25.18% 0.40% $ 2,907,541 25.96% 0.45% $ 2,754,000 24.80% 1.05% Money market 1,088,915 9.22 0.58 1,403,363 12.53 0.71 1,876,107 16.90 1.72 NOW 927,632 7.86 0.10 851,723 7.60 0.18 732,905 6.60 0.43 Non-interest bearing NOW and demand deposit 607,190 5.14 -- 618,082 5.52 -- 536,961 4.84 -- - ------------------------------------------------------------------------------------------------------------------------------- Total 5,596,791 47.40 0.34 5,780,709 51.61 0.43 5,899,973 53.14 1.09 - ------------------------------------------------------------------------------------------------------------------------------- Certificates of deposit (1): Within one year 955,919 8.10 1.26 1,424,825 12.72 1.55 1,493,726 13.45 2.31 One to three years 2,340,879 19.82 2.80 1,688,220 15.07 3.51 1,790,529 16.12 4.48 Three to five years 2,645,262 22.40 4.82 2,071,864 18.51 5.22 1,658,333 14.94 5.67 Over five years 126,132 1.07 4.95 86,749 0.77 4.95 79,177 0.71 5.53 Jumbo 142,822 1.21 1.65 148,067 1.32 1.74 181,845 1.64 2.75 - ------------------------------------------------------------------------------------------------------------------------------- Total 6,211,014 52.60 3.44 5,419,725 48.39 3.62 5,203,610 46.86 4.19 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits $11,807,805 100.00% 1.97% $11,200,434 100.00% 1.97% $11,103,583 100.00% 2.54% ===============================================================================================================================
(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, 2004 and the balances of our certificates of deposit outstanding at December 31, 2004, 2003 and 2002.
Period to maturity from December 31, 2004 At December 31, --------------------------------------------------- ------------------------------------ Within One to two Two to three Over three (In Thousands) one year years years years 2004 2003 2002 - ------------------------------------------------------------------------------ ------------------------------------ Certificates of deposit: 1.99% or less $ 959,292 $ 22,867 $ -- $ -- $ 982,159 $1,446,137 $ 919,465 2.00% to 2.99% 1,075,796 1,082,430 46,688 67 2,204,981 797,506 1,003,774 3.00% to 3.99% 24,004 668,186 729,346 479,539 1,901,075 1,268,117 625,858 4.00% to 4.99% 87,059 159,876 97,132 355,869 699,936 611,975 775,861 5.00% to 5.99% 970 233,610 301,827 52,637 589,044 678,556 955,627 6.00% and over 425,446 45,494 -- -- 470,940 699,107 872,453 - --------------------------------------------------------------------------------------------------------------------- Total $2,572,567 $2,212,463 $1,174,993 $888,112 $6,848,135 $5,501,398 $5,153,038 =====================================================================================================================
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 consolidated statement of financial condition. At December 31, 2004, borrowings totaled $9.47 billion. 16 In addition, at December 31, 2004, we had a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $100.0 million, of which $50.0 million, which is included in total borrowings, was outstanding under the one-month line of credit. Both lines of credit are priced at the federal funds rate plus a spread (generally between 10 and 15 basis points) and reprice daily. 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, 2004, we had $2.18 billion of borrowings which are callable within one year and at various times thereafter and have contractual remaining maturities of up to four 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, 2004, 2003 and 2002, 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. At December 31, 2004, Astoria Federal ranked fourth in deposit market share, with an 8.3% market share, in the Long Island market, which includes the counties of Queens, Brooklyn, Nassau and Suffolk, based on the Federal Deposit Insurance Corporation, or FDIC, "Summary of Deposits - Market Share Report" dated June 30, 2004, as adjusted for acquisitions which closed in the latter half of 2004. Astoria Federal originates mortgage loans through its banking and loan production offices in the New York metropolitan area, through an extensive broker network in twenty-three states and the District of Columbia and through a third party loan origination program in forty-four states and the District of Columbia. Our broker and third party loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, they provide geographic diversification, reducing our exposure to concentrations of credit risk. At December 31, 2004, $6.93 billion, or 54.7%, of our total mortgage loan portfolio was secured by properties located in 43 states other than New York. Excluding New York, we have a concentration of greater than 5.0% of our total mortgage loan portfolio in four states: New Jersey, which comprises 12.0%, Connecticut, which comprises 8.8%; Virginia, which comprises 5.9%; and Illinois, which comprises 5.7%. 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 17 area market. All are our competitors to varying degrees. Our competition for loans, both locally and in the aggregate, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. We also have experienced continued intense competition for deposits, particularly money market and checking accounts, from certain local competitors who have offered these accounts at premium 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 2004, the national economy continued to strengthen. The national and local real estate markets have remained strong and continue to support new and existing home sales, which has helped us maintain our strong credit quality and purchase mortgage activity. During 2004, there has been interest rate volatility within individual calendar quarters which has resulted in volatility in cash flows and refinance activity, although not to the magnitude which we had experienced in 2003, when declining interest rates had resulted in extraordinary increases in refinance and prepayment activity. The Federal Open Market Committee, or FOMC, raised the federal funds rate five times (a total of 125 basis points) during 2004, all since the end of June. While short-term U.S. Treasury yields have shown somewhat similar increases in the second half of 2004, the two and three year U.S. Treasury yields have shown only modest increases and the five, ten and thirty year U.S. Treasury yields have decreased since June 30, 2004, resulting in a significant flattening of the U.S. Treasury yield curve, which is expected to continue in 2005. Our earnings are significantly affected by changes in market interest rates and U.S. Treasury yield curves, among other things. See Item 7, "MD&A" and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for further discussion on how changes in market interest rates and U.S. Treasury yield curves affect our results of operations. Subsidiary Activities We have two direct wholly-owned subsidiaries, Astoria Federal and AF Insurance Agency, Inc., which are reported on a consolidated basis at December 31, 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. We have one other direct subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes as a result of our adoption of FIN 46(R) effective January 1, 2004. Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million of Capital Securities and $3.9 million of common securities and using the proceeds to acquire $128.9 million of Junior Subordinated Debentures issued by us. See Note 1 and Note 8 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of the Capital Securities, Junior Subordinated Debentures and the deconsolidation of Astoria Capital Trust I upon adoption of FIN 46(R). At December 31, 2004, 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 an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $8.1 million for the year ended December 31, 2004, which represented 10.2% of non-interest income. Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed in November 2000 in connection with the establishment of a BOLI program by Astoria Federal. Premiums paid to 18 purchase BOLI in 2000 and 2002 totaled $350.0 million. The carrying amount of our investment in BOLI was $374.7 million, or 1.6% of total assets, at December 31, 2004. 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 $5.61 billion at December 31, 2004. Suffco Service Corporation serves as document custodian in connection with mortgage loans being serviced for FNMA and certain other investors. 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, and three of which have no assets or operations but may be used to acquire interests in real estate in the future. The fifth such subsidiary serves as a holding company for one of the other four. Astoria Federal has three additional subsidiaries which are inactive, two of which Astoria Federal intends to dissolve. Personnel As of December 31, 2004, we had 1,716 full-time employees and 291 part-time employees, or 1,862 full time equivalents. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. Regulation and Supervision General Astoria Federal is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and by the FDIC, as its deposit insurer. We, as a unitary savings and loan holding company, are regulated, examined and supervised by the OTS. Astoria Federal is a member of the FHLB-NY and its deposit accounts are insured up to applicable limits by the FDIC under the Savings Association Insurance Fund, or SAIF, except for those deposits acquired from The Greater New York Savings Bank, which are insured by the FDIC under the Bank Insurance Fund, or BIF. We and Astoria Federal must file reports with the OTS concerning our activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. The OTS periodically performs safety and soundness examinations of Astoria Federal and us and tests our compliance with various regulatory requirements. The FDIC reserves the right to do so as well. The OTS has primary enforcement responsibility over federally chartered savings associations and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. 19 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, 2004, Astoria Federal exceeded each of its capital requirements with a tangible capital ratio of 5.99%, leverage capital ratio of 5.99% and total risk-based capital ratio of 12.44%. The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk, or IRR, concentration of risk and the risks of non-traditional activities. The OTS regulations do not include a specific IRR component of the risk-based capital requirement. However, the OTS monitors the IRR of individual institutions through a variety of means, including an analysis of the change in net portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth. The OTS has also 20 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, 2004, 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 2004 for the assessment for the FICO payments was $1.8 million. Loans to One Borrower Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such 21 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, 2004, Astoria Federal's largest aggregate amount of loans to one borrower totaled $67.1 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Astoria Federal. 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, 2004, 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, 2004. Therefore, Astoria Federal qualified under the QTL test. A savings association that fails the QTL test and does not convert to a bank charter generally will be prohibited from: (1) engaging in any new activity not permissible for a national bank, (2) paying dividends not permissible under national bank regulations, and (3) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, if the association does not requalify under the QTL test within three years after failing the test, the association would be prohibited from engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from the FHLB as promptly as possible. Limitation on Capital Distributions The OTS regulations impose limitations upon certain capital distributions by savings associations, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OTS regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan holding company, Astoria Federal currently must file a notice with the OTS at least 30 days prior to each capital distribution. However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, then Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution. Our ability to pay dividends, service our debt obligations and repurchase our common stock is dependent primarily upon receipt of dividend payments from Astoria Federal. Astoria Federal may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified Astoria Federal that it was in need of more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA, an insured depository institution such as Astoria Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the FDIA). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. 22 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. Effective July 1, 2004, the OTS adopted a final rule replacing examination fees for savings and loan holding companies with semi-annual assessments. The OTS is phasing in the assessments at a rate of 25% of the first semi-annual assessment on July 1, 2004, 50% of the second semi-annual assessment on January 1, 2005 and 100% of the third semi-annual assessment on July 1, 2005. For the year ended December 31, 2004, 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 five CRA examinations. Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreements in place at this time. Transactions with Related Parties Astoria Federal is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA, Regulation W issued by the Federal Reserve Board, or FRB, as well as additional limitations as adopted by the Director of the OTS. OTS regulations regarding transactions with affiliates conform to Regulation W. These provisions, among 23 other things, prohibit, limit or place restrictions upon a savings institution extending credit to, or entering into certain transactions with, its affiliates (which for Astoria Federal would include us and our non-federally chartered savings association subsidiaries, if any), principal stockholders, directors and executive officers. In addition, the OTS regulations include additional restrictions on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding transactions with affiliates. Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as Astoria Federal, that is subject to the insider lending restrictions of Section 22(h) of the FRA. Standards for Safety and Soundness Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the OTS, together with the other federal bank regulatory agencies, adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant to FDICIA to require a savings association that is given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OTS. If, after being so notified, a savings association fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing corrective actions and may issue an order directing other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a savings association fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. For further discussion, see "Regulation and Supervision - Federally Chartered Savings Association Regulation - Prompt Corrective Regulatory Action." Insurance Activities Astoria Federal is generally permitted to engage in certain insurance activities through its subsidiaries. However, Astoria Federal is subject to regulations prohibiting depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. The regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers. Privacy Protection Astoria Federal is subject to OTS regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These regulations require Astoria Federal to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The 24 regulations also require Astoria Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, Astoria Federal is required to provide its customers with the ability to "opt-out" of having Astoria Federal share their nonpublic personal information with unaffiliated third parties. Astoria Federal is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Anti-Money Laundering and Customer Identification Astoria Federal is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act and the related OTS regulations impose the following requirements with respect to financial institutions: o Establishment of anti-money laundering programs. o Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time. o Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering. o Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks. In addition, bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on FRA and Bank Merger Act applications. Federal Home Loan Bank System Astoria Federal is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Astoria Federal, as a member of the FHLB-NY, is currently required to acquire and hold shares of capital stock in the FHLB-NY 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, 2004 of $163.7 million. Dividends from the FHLB-NY to Astoria Federal amounted to $3.5 million for the year ended December 31, 2004, $10.6 million for the year ended December 31, 2003 and $10.7 million for the year ended December 31, 25 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. The dividend payment received in October 2004 was at a rate of 2.22% and the most recent dividend payment received in January 2005 was at a rate of 3.05%. Federal Reserve System FRB regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $7.0 million and $47.6 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 $47.6 million. The first $7.0 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Astoria Federal is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce Astoria Federal's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. Holding Company Regulation We are a unitary savings and loan association holding company within the meaning of the HOLA. As such, we are registered with the OTS and are subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over us and our savings association subsidiary. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan association holding companies that are "grandfathered," i.e., unitary savings and loan association holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as us, retain their authority under the prior law. All other unitary savings and loan association holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan association holding companies. The HOLA prohibits a savings and loan association holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association or holding company thereof without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Federal Securities Laws We are subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Exchange Act. 26 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." 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. 27 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. 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. 28 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, 2004, we were authorized to operate 86 full-service banking offices, of which 50 were owned and 36 were leased. At December 31, 2004, we owned our principal executive office and the office for our mortgage operations, both located in Lake Success, New York. At December 31, 2004, we also leased our regional lending office located in New York, New York, as well as the facility where we maintain our loan documentation in Farmingdale, New York. We believe such facilities are suitable and adequate for our operational needs. On December 23, 2004, we had a fire at our Oakdale banking office, which we own, which resulted in total destruction of the facility. Customers were directed to our other local banking offices for their banking transactions. We have adequate insurance to cover the expenses related to the loss and are planning to rebuild the banking office during 2005. At December 31, 2004, we leased our previous mortgage operating facility in Mineola, New York which we no longer occupy. At December 31, 2004 this facility was fully sublet. For further information regarding our lease obligations, see Item 7, "MD&A" and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." ITEM 3. LEGAL PROCEEDINGS In the ordinary course of our business, we are routinely made defendant in or a party to a number of pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity. 29 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 trial for the suit entitled The Long Island Savings Bank, FSB, et al. vs. The United States in the United States Court of Federal Claims commenced on January 18, 2005. 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, 2004 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES On January 19, 2005, our Board of Directors declared a three-for-two common stock split in the form of a 50% stock dividend. On March 1, 2005, stockholders received one additional share of our common stock for every two shares owned. As previously discussed, all share and per share data included in this Form 10-K have been retroactively adjusted to reflect this stock split. Our common stock trades on the New York Stock Exchange, or NYSE, under the symbol "AF." The table below shows the high and low sale prices reported on the NYSE for our common stock during the periods indicated.
2004 2003 --------------------------------- High Low High Low - -------------------------------------------------- First Quarter $28.37 $23.63 $18.87 $15.49 Second Quarter 25.73 22.17 19.45 15.51 Third Quarter 24.82 22.21 22.77 18.00 Fourth Quarter 27.81 23.15 25.69 20.59
As of February 28, 2005, we had approximately 3,750 shareholders of record. As of December 31, 2004, there were 110,304,669 shares of common stock outstanding. The following schedule summarizes the cash dividends paid per common share for 2004 and 2003.
2004 2003 - ------------------------------ First Quarter $0.16 $0.13 Second Quarter 0.17 0.14 Third Quarter 0.17 0.15 Fourth Quarter 0.17 0.15
On January 19, 2005, our Board of Directors declared a quarterly cash dividend of $0.20 per common share, which was paid on March 1, 2005, to common stockholders of record as of the close of business on February 15, 2005. 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. 30 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 regulatory capital requirements on Astoria Federal's ability to pay dividends. See Item 1, "Business - Federal Taxation" and Note 12 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" for an explanation of the tax impact of the unlikely event that Astoria Federal (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes; (2) redeems its stock; or (3) liquidates. The following table sets forth the repurchases of our common stock by month during the three months ended December 31, 2004.
Total Number Maximum Total of Shares Number of Shares Number of Average Purchased as Part that May Yet Be Shares Price Paid of Publicly Purchased Under the Period Purchased per Share Announced Plans Plans - ------------------------------------------------------------------------------------------- October 1, 2004 through October 31, 2004 810,000 $24.58 810,000 8,277,300 November 1, 2004 through November 30, 2004 1,065,000 26.78 1,065,000 7,212,300 December 1, 2004 through December 31, 2004 367,500 27.36 367,500 6,844,800 - ------------------------------------------------------------------------------------------- Total 2,242,500 $26.08 2,242,500 ===========================================================================================
All of the shares repurchased during the three months ended December 31, 2004 were repurchased under our tenth stock repurchase plan, approved by our Board of Directors on May 19, 2004, which authorized the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. On June 1, 2004, our Chief Executive Officer, George L. Engelke, Jr., submitted his annual certification to the NYSE indicating that he was not aware of any violation by Astoria Financial Corporation of NYSE corporate governance listing standards as of the June 1, 2004 certification date. 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) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $23,415,869 $22,461,594 $21,701,758 $22,671,635 $22,340,731 Federal funds sold and repurchase agreements 267,578 65,926 510,252 1,309,164 171,525 Mortgage-backed and other securities available-for-sale 2,406,883 2,654,992 2,792,581 3,549,183 7,703,222 Mortgage-backed and other securities held-to-maturity 6,302,936 5,792,727 5,041,257 4,463,928 1,712,191 Loans receivable, net 13,180,521 12,603,866 11,975,815 12,084,976 11,342,364 Deposits 12,323,257 11,186,594 11,067,196 10,903,693 10,071,687 Borrowed funds, net 9,469,835 9,632,037 8,825,046 9,825,661 10,324,216 Stockholders' equity 1,369,764 1,396,531 1,553,998 1,542,586 1,513,163
For the Year Ended December 31, -------------------------------------------------------------- (In Thousands, Except Per Share Data) 2004 2003 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $1,045,901 $1,057,291 $1,266,262 $1,438,563 $1,517,934 Interest expense 575,335 677,753 801,838 981,605 1,023,353 - -------------------------------------------------------------------------------------------------------------------- Net interest income 470,566 379,538 464,424 456,958 494,581 Provision for loan losses -- -- 2,307 4,028 4,014 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 470,566 379,538 462,117 452,930 490,567 Non-interest income 80,084 119,561 107,407 90,105 69,246 Non-interest expense: General and administrative 225,011 205,877 195,827 178,767 190,040 Extinguishment of debt -- -- 2,202 -- -- Amortization of goodwill -- -- -- 19,078 19,078 - -------------------------------------------------------------------------------------------------------------------- Total non-interest expense 225,011 205,877 198,029 197,845 209,118 - -------------------------------------------------------------------------------------------------------------------- Income before income tax expense and cumulative effect of accounting change 325,639 293,222 371,495 345,190 350,695 Income tax expense 106,102 96,376 123,066 120,036 134,146 - -------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 219,537 196,846 248,429 225,154 216,549 Cumulative effect of accounting change, net of tax -- -- -- (2,294) -- - -------------------------------------------------------------------------------------------------------------------- Net income 219,537 196,846 248,429 222,860 216,549 Preferred dividends declared -- 4,500 6,000 6,000 6,000 - -------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 219,537 $ 192,346 $ 242,429 $ 216,860 $ 210,549 ==================================================================================================================== Basic earnings per common share $ 2.03 $ 1.68 $ 1.94 $ 1.60 $ 1.46 Diluted earnings per common share $ 2.00 $ 1.66 $ 1.90 $ 1.57 $ 1.44
32
At or For the Year Ended December 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios and Other Data: Return on average assets 0.97% 0.87% 1.12% 0.99% 0.97% Return on average stockholders' equity 15.81 13.26 15.87 14.13 16.70 Return on average tangible stockholders' equity (1) 18.25 15.15 18.00 16.12 20.01 Average stockholders' equity to average assets 6.12 6.54 7.07 7.00 5.81 Average tangible stockholders' equity to average tangible assets (1)(2) 5.35 5.78 6.28 6.19 4.90 Stockholders' equity to total assets 5.85 6.22 7.16 6.80 6.77 Net interest rate spread 2.09 1.72 2.11 1.91 1.98 Net interest margin 2.17 1.78 2.23 2.12 2.27 Average interest-earning assets to average interest-bearing liabilities 1.03x 1.02x 1.03x 1.05x 1.06x General and administrative expense to average assets 0.99% 0.91% 0.88% 0.79% 0.85% Efficiency ratio (3) 40.86 41.25 34.25 32.68 33.71 Cash dividends paid per common share $ 0.67 $ 0.57 $ 0.51 $ 0.41 $ 0.34 Dividend payout ratio 33.50% 34.34% 26.84% 26.11% 23.61% Asset Quality Ratios: Non-performing loans to total loans (4) 0.25 0.23 0.29 0.31 0.32 Non-performing loans to total assets (4) 0.14 0.13 0.16 0.16 0.16 Non-performing assets to total assets (4)(5) 0.14 0.14 0.16 0.18 0.18 Allowance for loan losses to non-performing loans (4) 254.02 280.10 242.04 221.70 220.88 Allowance for loan losses to non-accrual loans 258.57 285.51 249.53 229.60 226.85 Allowance for loan losses to total loans 0.62 0.66 0.69 0.68 0.70 Other Data: Number of deposit accounts 975,155 963,120 990,873 985,473 972,777 Mortgage loans serviced for others (in thousands) $1,670,062 $1,895,102 $2,671,085 $3,322,087 $3,929,483 Number of full service banking offices 86 86 86 86 86 Regional lending offices 4 3 1 1 1 Full time equivalent employees 1,862 1,971 1,956 1,885 1,862
(1) Average tangible stockholders' equity represents average stockholders' equity less average goodwill. (2) Average tangible assets represents average assets less average goodwill. (3) Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus non-interest income. (4) Non-performing loans consist of all non-accrual loans and all mortgage loans delinquent 90 days or more as to their maturity date but not their interest due and exclude loans which have been restructured and are accruing and performing in accordance with the restructured terms. Restructured accruing loans totaled $2.8 million, $3.9 million, $5.0 million, $5.4 million and $5.2 million at December 31, 2004, 2003, 2002, 2001, and 2000, respectively. (5) 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. As a premier Long Island community bank, our goal is to enhance shareholder value while building a solid banking franchise. We focus on growing our core businesses of mortgage lending and retail banking while maintaining superior asset quality and controlling operating expenses. Additionally, we continue to provide returns to shareholders through increased dividends and our stock repurchases. We have been successful in achieving this goal over the past several years and that trend continued during 2004. During the year ended December 31, 2004, the national and local real estate markets remained strong and continued to support new and existing home sales. The increase in U.S. Treasury yields during the second half of 2003 resulted in a decrease in refinance activity and related cash flows during the fourth quarter of 2003 which continued into 2004. The FOMC raised the federal funds rate five times during 2004, all since the end of June. While short-term U.S. Treasury yields have shown somewhat similar increases in the second half of 2004, the two and three year U.S. Treasury yields have shown only modest increases and the five, ten and thirty year U.S. Treasury yields have decreased since June 30, 2004, resulting in a significant flattening of the U.S. Treasury yield curve. During 2004, there has been interest rate volatility within individual calendar quarters which has resulted in volatility in cash flows and refinance activity, although not to the magnitude which we had experienced in 2003. Total deposits increased during the year ended December 31, 2004. This increase was primarily attributable to an increase in certificates of deposit as a result of the success of our marketing campaigns which have focused on attracting medium- and long-term certificates of deposit as part of our interest rate risk management strategy to extend liabilities as well as to enable us to reduce borrowings. We continue to experience intense competition for deposits, particularly money market and checking accounts, from certain local competitors who have offered these accounts at premium rates. We have not offered premium rates on these accounts because we do not consider it a cost effective strategy. Our total loan portfolio increased during the year ended December 31, 2004. This increase was primarily in our multi-family and commercial real estate loan portfolio, which is attributable to our increased emphasis on the origination of these loans over the past several years. Also contributing to the increase in our total loan portfolio was an increase in home equity lines of credit and a modest increase in our one-to-four family mortgage loan portfolio where originations and purchases exceeded the levels of repayments in the 2004 fourth quarter, resulting in an increase in the balance of this portfolio from December 31, 2003. Our total non-performing assets increased during the year ended December 31, 2004, primarily in the fourth quarter, yet continue to remain at very low levels in relation to the size of our loan portfolio and relative to our peers. Our securities portfolio also increased during the year ended December 31, 2004, as we continued to purchase mortgage-backed securities to effectively redeploy our securities and excess mortgage cash flows, as well as a portion of the cash flows from deposit growth. Deposit growth was also utilized to reduce our overall borrowings during the year ended December 31, 2004. Net income for 2004 increased from the prior year. This increase was primarily due to an increase in net interest income, partially offset by a decrease in non-interest income and an increase in non-interest 34 expense. The increase in net interest income was primarily attributable to a decrease in interest expense on borrowings related to the refinancing of higher cost borrowings which matured throughout 2003 and the first quarter of 2004 at substantially lower rates. The decrease in interest expense on borrowings was partially offset by an increase in interest expense on deposits and a decrease in interest income. The decrease in non-interest income relates primarily to an other-than-temporary impairment write-down on our FHLMC perpetual preferred securities in the 2004 fourth quarter, coupled with decreases in mortgage banking income, net and other non-interest income. The increase in non-interest expense relates primarily to increases in compensation and benefits expense, occupancy, equipment and systems expense and other expense. Although the slope of the U.S. Treasury yield curve, which has flattened considerably in 2004 and is projected to continue to flatten during 2005, presents a challenge, we should continue to experience solid core business growth in 2005. Deposit growth is expected to remain robust as we launch several new deposit products, specifically a short-term liquid certificate of deposit account and a new business money market account, to augment our very successful efforts in attracting medium term certificate of deposit accounts. We will also continue to focus on building our checking account deposit base. With respect to mortgage lending, particularly one-to-four family lending, the strength of the purchase mortgage market and the reduced level of loan prepayments should result in continued strong one-to-four family loan portfolio growth in 2005. We also anticipate solid growth in the multi-family and commercial real estate loan portfolios in 2005. Notwithstanding core business growth, based on the projected further flattening of the U.S. Treasury yield curve, we expect to limit asset growth by reducing the securities and borrowing portfolios through normal cash flow in 2005. At the same time, we expect to continue to repurchase our stock, as we continue to view this activity as a very desirable use of capital. Critical Accounting Policies Note 1 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of 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 Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB Statement No. 35 114." Such evaluation, which includes a review of loans on which full collectibility is not reasonably assured, considers the estimated fair value of the underlying collateral, if any, current and anticipated economic and regulatory conditions, current and historical loss experience of similar loans and other factors that determine risk exposure to arrive at an adequate loan loss allowance. Individual loan loss reviews are completed quarterly for all classified loans. Individual loan loss reviews are generally completed annually for multi-family, commercial real estate and construction loans which exceed $2.5 million at origination, commercial business loans which exceed $200,000 at origination, one-to-four family loans which exceed $1.0 million at origination and debt restructurings. In addition, we generally review annually at least fifty percent of the outstanding balances of multi-family, commercial real estate and construction loans to single borrowers with concentrations in excess of $2.5 million. The primary considerations in establishing specific valuation allowances are the appraised value of a loan's underlying collateral and the loan's payment history. Other current and anticipated economic conditions on which our specific valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values and the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of specific valuation allowances. The OTS periodically reviews our specific reserve methodology during regulatory examinations and any comments regarding changes to reserves are considered by management in determining specific allowances. Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessments of economic and regulatory conditions are subject to assumptions and judgments by management. Specific valuation allowances could differ materially as a result of changes in these assumptions and judgments. General valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. The determination of the adequacy of the valuation allowance takes into consideration a variety of factors. We segment our loan portfolio into like categories by composition and size and perform analyses against each category. These include historical loss experience and delinquency levels and trends. We analyze our historical loan loss experience by category (loan type) over 5, 10, and 12-year periods. Losses within each loan category are stress tested by applying the highest level of charge-offs and the lowest amount of recoveries as a percentage of the average portfolio balance during those respective time horizons. The resulting allowance percentages are used as an integral part of our judgment in developing estimated loss percentages to apply to the portfolio. We also consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures. In addition, we evaluate and consider the impact that existing and projected economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. We also evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data; however, our focus is primarily on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. Our allowance coverage percentages are used to estimate the amount of probable losses inherent in our loan portfolio in determining our general valuation allowances. Our evaluations of general valuation allowances are inherently subjective because, even though they are based on objective data, it is management's interpretation of that data that determines the amount of the appropriate allowance. Therefore, we periodically review the actual performance and charge-off history of our portfolio and compare that to our previously determined allowance coverage percentages. In doing so, we evaluate 36 the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to our assumptions and analyses. During 2002 we performed an analysis of the actual charge-off history of our loan portfolio compared to our previously determined allowance coverage percentages and specific valuation allowances. Our analysis indicated that our estimate of losses inherent in our one-to-four family, multi-family and commercial real estate loan portfolios exceeded our actual charge-off history. We believe that the general decline in medium- to long-term U.S. Treasury yields beginning in 2000, coupled with the FOMC's series of interest rate cuts during 2001 and 2002, substantially improved the ability of borrowers to service debt and was the predominant factor that caused our actual charge-off experience between June 1, 2000 and June 30, 2002 to be less than had been estimated. Similar to the industry in general, our historical charge-off experience was higher prior to the dramatic decline in market rates. The significant considerations for not lowering coverage percentages prior to the third quarter of 2002 were: (1) the 2000-2002 economic downturn; (2) the unseasoned nature of the portfolio; and (3) the lack of migration analysis for the loans folded into the portfolio in connection with acquisitions completed in late 1997 and 1998. While we have not changed our methodology for determining our general valuation allowance as a result of the 2002 analysis, we have placed a greater emphasis on charge-off experience in determining the way the allowance for loan losses is distributed across the loan portfolio. As a result, in the third quarter of 2002, we adjusted our allowance coverage percentages for our portfolio segments. Historically, multi-family, commercial real estate and construction loans generally involve a greater degree of credit risk than one-to-four family loans because they typically have larger balances and are more affected by adverse conditions in the economy. The change in our portfolio composition over the past several years has not had a significant impact on our overall allowance for loan losses since (1) the growth in our multi-family, commercial real estate and construction loan portfolios was offset by a decline in our one-to-four family portfolio and (2) we adjusted our allowance coverage percentages for our portfolio segments as a result of the 2002 analysis. We will continue to evaluate our charge-off experience in our multi-family, commercial real estate and construction loan portfolios in determining whether any further adjustments to the allowance coverage percentages are warranted. Our loss experience in 2004 has been consistent with our experience over the past two years. Our 2004 analyses did not result in any change in our methodology for determining our general and specific valuation allowances or our emphasis on the factors that we consider in establishing such allowances. Accordingly, such analyses did not indicate that changes in our allowance coverage percentages were required. Our allowance for loan losses to total loans was 0.62% at December 31, 2004, compared to 0.66% at December 31, 2003 and 0.69% at December 31, 2002. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio. As indicated above, actual results could differ from our estimates as a result of changes in economic or market conditions. Changes in estimates could result in a material change in the allowance for loan losses. While we believe that the allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, future adjustments may be necessary if economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations. For additional information regarding our allowance for loan losses, see "Provision for Loan Losses" and "Asset Quality." 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 37 upon quoted market prices of similar loans which we sell servicing released. Impairment exists if the carrying value of MSR exceeds the estimated fair value. We stratify our MSR by underlying loan type, primarily fixed and adjustable, and further stratify the fixed rate loans by interest rate. Individual impairment allowances for each stratum are established when necessary and then adjusted in subsequent periods to reflect changes in impairment. The estimated fair values of each MSR stratum are obtained through independent third party valuations 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, 2004, our MSR, net, had an estimated fair value of $16.8 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and a weighted average life of 4.8 years. At December 31, 2003, our MSR, net, had an estimated fair value of $18.0 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.34%, a weighted average constant prepayment rate on mortgages of 15.82% and a weighted average life of 4.5 years. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time. Assuming an increase in interest rates of 100 basis points at December 31, 2004, the estimated fair value of our MSR would have been $6.0 million greater. Assuming a decrease in interest rates of 100 basis points at December 31, 2004, the estimated fair value of our MSR would have been $7.4 million lower. Goodwill Impairment Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. As of December 31, 2004, the carrying value of our goodwill totaled $185.2 million. When performing the impairment test, if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. 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, 2004, we performed our annual goodwill impairment test. We determined the fair value of our reporting unit to be in excess of its carrying value by $1.27 billion, using the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The identification of additional reporting units or the use of other valuation techniques could result in materially different evaluations of impairment. 38 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, 2004, are based on published or securities dealers' market values and are affected by changes in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings. At December 31, 2004, we had 142 securities with an estimated fair value totaling $4.67 billion which had an unrealized loss totaling $75.3 million. Of the securities in an unrealized loss position at December 31, 2004, $1.05 billion, with an unrealized loss of $47.0 million, have been in a continuous unrealized loss position for more than twelve months. At December 31, 2004, 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 2004 fourth quarter, we recorded a $16.5 million other-than-temporary impairment write-down charge on $120.0 million face value of perpetual preferred stock issued by FHLMC which is included as a component of non-interest income. The FHLMC perpetual preferred securities are investment grade securities, rated AA- by Standard & Poor's and Aa3 by Moody's Investors Service, held in our available-for-sale securities portfolio. Prior to recording the other-than-temporary impairment write-down charge, temporary impairment was recorded as an unrealized mark-to-market loss on securities available-for-sale and reflected, net of tax, as a reduction to stockholders' equity through other comprehensive income. Accordingly, the reclassification of the unrealized after-tax loss to an other-than-temporary impairment charge to earnings did not affect stockholders' equity or related capital ratios. The decision to recognize the other-than-temporary impairment charge is based on a conservative interpretation of existing accounting literature. Similar to debt securities, changes in the estimated fair value of these FHLMC perpetual preferred securities are primarily attributable to changes in market interest rates. However, as these securities are equity instruments with no stated maturity date, they cannot be evaluated in the same manner as the changes in the estimated fair value of debt instruments, according to existing authoritative literature. While we believed the estimated fair value of these securities would have increased back to their amortized cost in the future, we could not predict with certainty that such a recovery would have occurred in the near term, particularly since a recovery would be predicated on a decline in market interest rates. The write-down does not change our expectation of the long-term value of these investment grade securities. During the 2004 fourth quarter, the Financial Accounting Standards Board, or FASB, announced plans for a full reconsideration of existing authoritative literature concerning other-than-temporary impairment of securities. For additional information, see "Impact of Accounting Standards and Interpretations" and Note 3 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." Liquidity and Capital Resources Our primary source of funds is cash provided by principal and interest payments on loans and mortgage-backed and other securities. The most significant liquidity challenge we face is the variability in cash flows as a result of mortgage refinance activity. As mortgage interest rates increase, customers' refinance activities tend to decelerate causing the cash flow from both our mortgage loan portfolio and our mortgage-backed securities portfolio to decrease. When mortgage rates decrease, the opposite tends 39 to occur. Principal payments on loans and mortgage-backed securities and proceeds from calls and maturities of other securities totaled $6.42 billion for the year ended December 31, 2004 and $13.42 billion for the year ended December 31, 2003. The decrease in loan and security repayments was primarily the result of the decreased level of mortgage loan refinance activity we experienced in 2004. The decreased level of mortgage loan refinance activity is primarily the result of an increase in interest rates during the second half of 2003 and during 2004. Medium- and long-term U.S. Treasury yields (maturities of two to ten years) increased 132 basis points on average from June 30, 2003 to December 31, 2004. While the overall trend of rising interest rates has reduced the level of refinance activity and related cash flows from what we experienced during 2003, there has been significant volatility in rates throughout 2004 which has resulted in varying cash flows and refinance activity. In addition to cash provided by principal and interest payments on loans and securities, our other sources of funds include cash provided by operating activities, deposits and borrowings. Net cash provided by operating activities totaled $277.4 million during the year ended December 31, 2004 and $358.2 million during the year ended December 31, 2003. Deposits increased $1.14 billion during the year ended December 31, 2004 and $119.4 million during the year ended December 31, 2003. The net increases in deposits for the years ended December 31, 2004 and 2003 reflect our continued emphasis on attracting customer deposits through competitive rates, extensive product offerings and quality service. As previously discussed, the net increase in deposits for the year ended December 31, 2004 is primarily attributable to an increase in certificates of deposit as a result of the success of our marketing campaigns which have focused on attracting medium- and long-term certificates of deposit as part of our interest rate risk management strategy to extend liabilities as well as to enable us to reduce borrowings. During the year ended December 31, 2004, $3.90 billion of certificates of deposit, with a weighted average rate of 2.45% and a weighted average maturity at inception of sixteen months, matured and $5.02 billion of certificates of deposit were issued or repriced, with a weighted average rate of 2.66% and a weighted average maturity at inception of twenty months. In addition, despite continued intense local competition for checking accounts, we have been successful in growing our total NOW and demand deposit account balances during the year ended December 31, 2004, including our business checking deposits, due in large part to our concerted sales and marketing efforts, including our PEAK sales process. See page 51 for further detail regarding deposit activity. Net borrowings decreased $162.2 million during the year ended December 31, 2004 and increased $807.0 million during the year ended December 31, 2003. The decrease in net borrowings during the year ended December 31, 2004 reflects the repayment of certain high cost borrowings as they matured. During the year ended December 31, 2004, $3.44 billion in medium-term borrowings with a weighted average rate of 5.14% matured, of which $2.40 billion were extended through new medium-term borrowings with a weighted average rate of 2.71% and a weighted average original term of 3.3 years. All other borrowings that matured during the year ended December 31, 2004 were either repaid or rolled over into short-term borrowings. The increase in net borrowings during the year ended December 31, 2003 was primarily the result of additional medium-term borrowings entered into during the first quarter of 2003, during the low interest rate environment, to fund asset growth in excess of deposit growth. The use of medium-term borrowings helps protect against the impact on interest expense of future interest rate increases. Our primary use of funds is for the origination and purchase of mortgage loans. Gross mortgage loans originated and purchased during the year ended December 31, 2004 totaled $4.35 billion, of which $3.19 billion were originations and $1.16 billion were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2003, totaling $7.29 billion, of which $5.75 billion were originations and $1.54 billion were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $323.2 million during the year ended December 31, 2004 and $613.3 million during the year ended December 31, 2003. The decrease in loan originations and purchases for the year ended December 31, 2004 compared to the year ended December 31, 2003 reflects the previously discussed reduction in the level of mortgage refinance activity during 2004. Purchases of mortgage-backed securities totaled $3.07 billion during the year ended December 31, 2004 and $9.30 billion during the year ended December 31, 2003. The decrease 40 in mortgage-backed securities purchases during the year ended December 31, 2004 also reflects the decrease in cash flows resulting from the reduction in refinance activity. We maintain liquidity levels to meet our operational needs in the normal course of our business. The levels of our liquid assets during any given period are dependent on our operating, investing and financing activities. Cash and due from banks and repurchase agreements, our most liquid assets, totaled $406.4 million at December 31, 2004, compared to $239.8 million at December 31, 2003. This increase reflects the net effect of our operating, investing and financing activities. Borrowings maturing over the next twelve months total $3.15 billion with a weighted average rate of 2.80%. We have the flexibility to either repay or rollover these borrowings as they mature. In addition, we have $2.57 billion in certificates of deposit with a weighted average rate of 2.90% maturing over the next twelve months. We expect to retain or replace a significant portion of such deposits based on our competitive pricing and historical experience. The following table details borrowing and certificate of deposit maturities and their weighted average rates as of December 31, 2004:
Borrowings Certificates of Deposit -------------------- ----------------------- Weighted Weighted Average Average (Dollars in Millions) Amount Rate Amount Rate - --------------------------------------------- ----------------------- Contractual Maturity: 2005 $3,150(1) 2.80% $2,573 2.90% 2006 1,424 2.63 2,212 3.49 2007 1,870(2) 3.04 1,175 4.19 2008 2,450(3) 5.02 465 3.87 2009 200 3.00 340 4.17 2010 and thereafter 379 7.11 83 4.87 ------ ---- ------ ---- Total $9,473 3.57% $6,848 3.46% ====== ==== ====== ====
(1) Includes $2.18 billion of short term borrowings with a weighted average rate of 2.35%. (2) Includes $50.0 million of borrowings which are callable by the counterparty in 2005 and at various times thereafter. (3) Includes $2.13 billion of borrowings which are callable by the counterparty in 2005 and at various times thereafter. Additional sources of liquidity at the holding company level have included issuances of securities into the capital markets, including private issuances of trust preferred securities through our subsidiary, Astoria Capital Trust I, and senior debt. Holding company debt obligations, which are included in other borrowings, are further described below. Our Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The terms of the Junior Subordinated Debentures limit our ability to pay dividends or otherwise make distributions if we are in default or have elected to defer interest payments otherwise due under the Junior Subordinated Debentures. Such limitations do not apply, however, to dividends payable in our common stock, or our dividend reinvestment plan, our stock option plans or our stockholders rights plan. We have $80.0 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, which began in 2004. The terms of these notes preclude a sale of more than 30% of our deposit liabilities and preclude us from incurring long-term debt, which excludes debt of Astoria Federal incurred in the ordinary course of business, including FHLB-NY advances, in excess of 90% of our consolidated stockholders' equity. The terms also require that we maintain a consolidated capital to assets ratio of not less than 4.0%; a 41 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. However, the terms of our 7.67% senior unsecured notes do not preclude our merger or sale of all or substantially all of our assets. As of December 31, 2004, we were in compliance with each of these covenants, and we do not anticipate these covenants will have a material effect on our operations. We have $250.0 million of 5.75% senior unsecured notes which are due in 2012 and are redeemable, in whole or in part, at any time at a "make-whole" redemption price, together with accrued interest to the redemption date. The terms of our $250.0 million 5.75% senior unsecured notes restrict our ability to sell, transfer or pledge as collateral the shares of Astoria Federal or any other significant subsidiary or of all, or substantially all, of the assets of Astoria Federal or any other significant subsidiary, other than in connection with a sale or transfer involving Astoria Financial Corporation. Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market demand, interest rates, our capital levels, Astoria Federal's ability to pay dividends to Astoria Financial Corporation, our credit profile and 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 2004, Astoria Federal paid dividends to Astoria Financial Corporation totaling $522.5 million, amounting to 219.0% of Astoria Federal's net income for 2004. Astoria Financial Corporation's primary uses of funds include the payment of dividends, payment of principal and interest on its debt obligations and repurchases of common stock. Astoria Financial Corporation made principal and interest payments on the senior unsecured notes and Junior Subordinated Debentures totaling $54.6 million in 2004. Our payment of dividends and repurchases of our common stock, which are further discussed below, totaled $297.1 million in 2004. Our ability to pay dividends, service our debt obligations and repurchase common stock is dependent primarily upon receipt of capital distributions from Astoria Federal. Since Astoria Federal is a federally chartered savings association, there are limits on its ability to make distributions to Astoria Financial Corporation. Additionally, all proposed distributions must be submitted to the OTS for review. For further discussion of limitations on capital distributions from Astoria Federal, see "Regulation and Supervision" in Item 1, "Business." We declared cash dividends on our common stock totaling $72.0 million during the year ended December 31, 2004 and $65.6 million during the year ended December 31, 2003. On January 19, 2005, we declared a quarterly cash dividend of $0.20 per share on shares of our common stock which was paid on March 1, 2005 to stockholders of record as of the close of business on February 15, 2005. During the year ended December 31, 2004, we completed our ninth stock repurchase plan, which was approved by our Board of Directors on October 16, 2002. This plan authorized the purchase, at management's discretion, of 15,000,000 shares, or approximately 11% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan authorizing the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. Stock repurchases under our tenth stock repurchase plan commenced immediately following the completion of the ninth stock repurchase plan on July 9, 2004. Under these plans, during the year ended December 31, 2004, we repurchased 9,067,500 shares of our common stock at an aggregate cost of $225.1 million, of which 5,155,200 shares at an aggregate cost of $127.6 million were repurchased pursuant to our tenth stock repurchase plan. For further information on our common stock repurchases, see Item 5, "Market for Astoria Financial Corporation's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." 42 See "Financial Condition" for a further discussion of the changes in stockholders' equity. At December 31, 2004, Astoria Federal's capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 5.99%, leverage capital ratio of 5.99% and total risk-based capital ratio of 12.44%. The minimum regulatory requirements are a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and total risk-based capital ratio of 8.00%. Off-Balance Sheet Arrangements and Contractual Obligations We are a party to financial instruments with off-balance sheet risk in the normal course of our business in order to meet the financing needs of our customers and in connection with our overall interest rate risk management strategy. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments, lease commitments and derivative instruments as described below. Lending commitments include commitments to originate and purchase loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments. In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. Derivative instruments may include interest rate caps, locks and swaps which are recorded as either assets or liabilities in the consolidated statements of financial condition at fair value. We are exposed to credit risk in the event of non-performance by counterparties to derivative instruments. In the event of default by a counterparty, we would be subject to an economic loss that corresponds to the cost to replace the agreement. We control the credit risk associated with our derivative instruments 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 have commitments to fund loans held-for-sale and commitments to sell loans which are considered derivative instruments. Commitments to sell loans totaled $56.0 million at December 31, 2004 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 fair values of our mortgage banking derivative instruments are immaterial to our financial condition and results of operations. 43 The following table details our contractual obligations at December 31, 2004.
Payments due by period ----------------------------------------------------------- Less than One to Three to More than (In Thousands) Total One Year Three Years Five Years Five Years - ------------------------------------------------------------------------------------------------------------------------ Contractual Obligations: Borrowings with original terms greater than three months $7,292,866 $ 970,000 $3,294,000 $2,650,000 $378,866 Minimum rental payments due under non-cancelable operating leases 79,938 6,957 13,894 11,549 47,538 Commitments to originate and purchase loans (1) 616,284 616,284 -- -- -- Commitments to fund unused lines of credit (2) 396,994 396,994 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Total $8,386,082 $1,990,235 $3,307,894 $2,661,549 $426,404 ========================================================================================================================
(1) Commitments to originate and purchase loans include commitments to originate loans held-for-sale. (2) Unused lines of credit relate primarily to home equity lines of credit. In addition to the contractual obligations previously discussed, we have contingent liabilities related to assets sold with recourse and standby letters of credit. 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 $565.8 million at December 31, 2004. The carrying amount of our liability for loans sold with recourse at December 31, 2004 is immaterial to our financial condition and results of operations. We estimate the liability for loans sold with recourse based on an analysis of our loss experience related to similar loans sold with recourse. We do not believe that our recourse obligations subject us to risk of material loss. 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 $34.9 million at December 31, 2004. 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 $5.2 million at December 31, 2004. See Note 1, Note 10 and Note 11 of Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data," for additional information regarding our commitments, contingent liabilities and derivative instruments. Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2004 and 2003 Financial Condition Total assets increased $954.3 million to $23.42 billion at December 31, 2004, from $22.46 billion at December 31, 2003. The primary reasons for the increase in total assets were the increases in loans receivable and mortgage-backed securities. This growth was funded primarily through an increase in deposits. Mortgage loans, net, increased $497.4 million to $12.75 billion at December 31, 2004, from $12.25 billion at December 31, 2003. This increase was primarily due to an increase in our multi-family mortgage loan portfolio. Gross mortgage loans originated and purchased during the year ended December 31, 2004 totaled $4.35 billion, of which $3.19 billion were originations and $1.16 billion were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2003 totaling $7.29 billion, of which $5.75 billion were originations and $1.54 44 billion were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $323.2 million during the year ended December 31, 2004 and $613.3 million during the year ended December 31, 2003. Mortgage loan repayments decreased to $3.52 billion for the year ended December 31, 2004, from $6.11 billion for the year ended December 31, 2003. The decreases in the levels of mortgage loan originations, purchases and repayments reflect the decline in refinance activity previously discussed. Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. During 2004, the reduction in repayment activity and continued strong loan origination volume, primarily in the fourth quarter, resulted in a modest increase in our one-to-four family loan portfolio from December 31, 2003. Our one-to-four family mortgage loans increased $83.7 million to $9.05 billion at December 31, 2004, from $8.97 billion at December 31, 2003, and represented 68.7% of our total loan portfolio at December 31, 2004. The strong growth we experienced in the fourth quarter of 2004 offset the impact of repayments outpacing originations during the first nine months of 2004 and is expected to continue in 2005. While we continue to be primarily a one-to-four family mortgage lender, we have increased our emphasis on multi-family and commercial real estate loan originations over the past several years. Our multi-family mortgage loan portfolio increased $328.5 million to $2.56 billion at December 31, 2004, from $2.23 billion at December 31, 2003. Our commercial real estate loan portfolio increased $64.6 million to $944.9 million at December 31, 2004, from $880.3 million at December 31, 2003. Multi-family and commercial real estate loan originations totaled $1.05 billion for the year ended December 31, 2004 and $1.65 billion for the year ended December 31, 2003. The average loan balance within our combined multi-family and commercial real estate portfolio continues to be less than $1.0 million and the average loan-to-value ratio, based on current principal balance and original appraised value, continues to be less than 65%. Prepayment activity within our multi-family and commercial real estate loan portfolio is generally not as significant as that which we have experienced in our one-to-four family mortgage loan portfolio due in part to the prepayment penalties associated with these loans. Consumer and other loans, net, increased $78.9 million to $517.1 million at December 31, 2004, from $438.2 million at December 31, 2003. This increase is primarily in home equity lines of credit as a result of the continued strong housing market and low interest rate environment. Mortgage-backed securities increased $298.0 million to $8.54 billion at December 31, 2004, from $8.24 billion at December 31, 2003. This increase was primarily the result of purchases of fixed rate REMICs and CMOs totaling $3.07 billion, partially offset by principal payments received of $2.64 billion and sales of $145.2 million. We continue to purchase mortgage-backed securities to effectively redeploy our securities and excess mortgage cash flows in addition to cash flows from deposit growth. At December 31, 2004, our securities portfolio is comprised primarily of fixed rate REMIC and CMO mortgage-backed securities. The amortized cost of our fixed rate REMICs and CMOs totaled $8.44 billion at December 31, 2004. Included in this total is $1.49 billion of securities which have a remaining gross premium of $12.2 million, a weighted average current coupon of 4.94%, a weighted average collateral coupon of 6.00% and a weighted average life of 2.2 years. The remaining $6.95 billion of these securities have a remaining gross discount of $25.8 million, a weighted average current coupon of 4.20%, a weighted average collateral coupon of 5.73% and a weighted average life of 3.3 years. Included in the totals for discount securities are $819.8 million of securities at par. Other securities decreased $36.0 million to $167.7 million at December 31, 2004, from $203.7 million at December 31, 2003, primarily due to sales of $20.3 million, coupled with the other-than-temporary impairment write-down on our FHLMC perpetual preferred securities, previously discussed, and principal paydowns. Deposits increased $1.13 billion to $12.32 billion at December 31, 2004, from $11.19 billion at December 31, 2003. The increase in deposits was primarily due to an increase of $1.35 billion in certificates of deposit to $6.85 billion at December 31, 2004 and an increase of $87.3 million in NOW and demand deposit accounts to $1.58 billion at December 31, 2004, partially offset by a decrease of $267.5 million in our money market accounts to $965.3 million at December 31, 2004. The increase in 45 our certificates of deposit was primarily the result of the success of our marketing campaigns, previously discussed. The decrease in our money market accounts is attributable to continued intense competition for these accounts. Certain local competitors have continued to offer premium rates for money market and checking accounts. We have not offered premium rates on these accounts because we do not consider it a cost effective strategy. However, despite continued intense competition for checking accounts, we have been successful in increasing our total NOW and demand deposit account balances during the year ended December 31, 2004, including our business checking deposits, due in large part to our concerted sales and marketing efforts, including our PEAK sales process. Total borrowings, net, decreased $162.2 million to $9.47 billion at December 31, 2004, from $9.63 billion at December 31, 2003. This decrease is primarily the result of a $155.0 million decrease in reverse repurchase agreements. The net decrease in total borrowings reflects the repayment of certain high cost borrowings that matured. For additional information, see "Liquidity and Capital Resources." Stockholders' equity decreased to $1.37 billion at December 31, 2004, from $1.40 billion at December 31, 2003. The decrease in stockholders' equity was the result of common stock repurchased of $225.1 million and dividends declared of $72.0 million. These decreases were partially offset by net income of $219.5 million, the effect of stock options exercised and related tax benefit of $24.1 million, a decrease in accumulated other comprehensive loss, net of tax, of $17.9 million, which was primarily due to the increase in the fair value of our securities available-for-sale, and the amortization of the allocated portion of shares held by the Employee Stock Ownership Plan, or ESOP, of $8.7 million. Results of Operations General Net income for the year ended December 31, 2004 increased $22.7 million to $219.5 million, from $196.8 million for the year ended December 31, 2003. Diluted earnings per common share totaled $2.00 per share for the year ended December 31, 2004 and $1.66 per share for the year ended December 31, 2003. Return on average assets increased to 0.97% for the year ended December 31, 2004, from 0.87% for the year ended December 31, 2003. Return on average stockholders' equity increased to 15.81% for the year ended December 31, 2004, from 13.26% for the year ended December 31, 2003. Return on average tangible stockholders' equity, which represents average stockholders' equity less average goodwill, increased to 18.25% for the year ended December 31, 2004, from 15.15% for the year ended December 31, 2003. The increase in the return on average assets is primarily due to the increase in net income. The increase in the returns on average stockholders' equity and average tangible stockholders' equity is primarily due to the increase in net income, coupled with the decrease in the average balance of stockholders' equity for the year ended December 31, 2004, compared to the year ended December 31, 2003. Our results of operations for the year ended December 31, 2004 include a $16.5 million, before-tax ($9.6 million, after-tax), other-than-temporary impairment write-down charge on $120.0 million face value of perpetual preferred stock issued by FHLMC. This charge reduced diluted earnings per common share by $0.09 per share for the year ended December 31, 2004. This charge also reduced our return on average assets by 4 basis points, return on average stockholders' equity by 69 basis points, and return on average tangible stockholders' equity by 79 basis points. We believe it is important for shareholders to understand the incremental impact of this charge. For a further discussion of the other-than-temporary impairment write-down, see "Critical Accounting Policies - Securities Impairment." Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning 46 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, 2004, net interest income increased $91.1 million to $470.6 million, from $379.5 million for the year ended December 31, 2003. The net interest margin increased to 2.17% for the year ended December 31, 2004, from 1.78% for the year ended December 31, 2003. The increases in net interest income and the net interest margin for the year ended December 31, 2004, were primarily the result of a decrease in interest expense, partially offset by a decrease in interest income. The decrease in interest expense was attributable to a decrease in our cost of funds, which is primarily due to the repayment and refinancing of various higher cost borrowings. The decrease in interest income was primarily due to the decrease in the yield on interest-earning assets as a result of the extraordinarily high level of mortgage loan and mortgage-backed securities repayments we experienced throughout 2003 resulting in reinvestment in assets at lower rates. Partially offsetting the negative impact of the reinvestment in assets at lower rates was an increase in the average balance of total interest-earning assets and a reduction in net premium amortization on mortgage-backed securities and mortgage loans. Net premium amortization on our mortgage-backed securities and mortgage loan portfolios decreased $81.0 million to $32.0 million for the year ended December 31, 2004, from $113.0 million for the year ended December 31, 2003. The average balance of net interest-earning assets increased $241.3 million to $665.7 million for the year ended December 31, 2004, from $424.4 million for the year ended December 31, 2003. The increase in the average balance of net interest-earning assets was primarily the result of an increase of $343.2 million in the average balance of total interest-earning assets to $21.66 billion for the year ended December 31, 2004, from $21.32 billion for the year ended December 31, 2003, partially offset by an increase of $102.0 million in the average balance of total interest-bearing liabilities to $20.99 billion for the year ended December 31, 2004, from $20.89 billion for the year ended December 31, 2003. Also contributing to the increase in the average balance of net interest-earning assets was the decrease in non-interest-earning assets, primarily as a result of the reduction in the monthly mortgage-backed securities principal payments receivable due to the reduction in the mortgage-backed securities cash flow. The net interest rate spread increased to 2.09% for the year ended December 31, 2004, from 1.72% for the year ended December 31, 2003, primarily due to a decrease in the average cost of interest-bearing liabilities, partially offset by a decrease in the average yield on interest-earning assets. The average cost of interest-bearing liabilities decreased to 2.74% for the year ended December 31, 2004, from 3.24% for the year ended December 31, 2003. The average yield on interest-earning assets decreased to 4.83% for the year ended December 31, 2004, from 4.96% for the year ended December 31, 2003. The changes in average interest-earning assets and interest-bearing liabilities and their related yields and costs are discussed in greater detail under "Interest Income" and "Interest Expense." 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, 2004, 2003 and 2002. 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. 47
For the Year Ended December 31, ------------------------------------- 2004 ------------------------------------- Average Average Yield/ (Dollars in Thousands) Balance Interest Cost - -------------------------------------------------------------------------------- Assets: Interest-earning assets: Mortgage loans (1): One-to-four family $ 8,894,219 $ 428,229 4.81% Multi-family, commercial real estate and construction 3,419,369 220,703 6.45 Consumer and other loans (1) 478,195 21,312 4.46 ----------- ---------- Total loans 12,791,783 670,244 5.24 Mortgage-backed securities (2) 8,395,987 358,583 4.27 Other securities (2)(3) 384,033 15,934 4.15 Federal funds sold and repurchase agreements 86,625 1,140 1.32 ----------- ---------- Total interest-earning assets 21,658,428 1,045,901 4.83 Goodwill 185,151 ---------- Other non-interest-earning assets 848,106 ----------- Total assets $22,691,685 =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings $ 2,973,054 11,920 0.40 Money market 1,088,915 6,379 0.59 NOW and demand deposit 1,534,822 921 0.06 Certificates of deposit 6,211,014 218,209 3.51 ----------- ---------- Total deposits 11,807,805 237,429 2.01 Borrowed funds 9,184,928 337,906 3.68 ----------- ---------- Total interest-bearing liabilities 20,992,733 575,335 2.74 ---------- Non-interest-bearing liabilities 310,662 ----------- Total liabilities 21,303,395 Stockholders' equity 1,388,290 ----------- Total liabilities and stockholders' equity $22,691,685 =========== Net interest income/net interest rate spread (4) $ 470,566 2.09% ========== ==== Net interest-earning assets/ net interest margin (5) $ 665,695 2.17% =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.03x =========== 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 1,176,908 1,120,809 ----------- ----------- Total assets $22,677,243 $22,141,751 =========== =========== 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 9,690,325 452,502 4.67 9,101,064 513,838 5.65 ----------- ---------- ----------- ------- Total interest-bearing liabilities 20,890,759 677,753 3.24 20,204,647 801,838 3.97 Non-interest-bearing liabilities 302,391 ---------- 372,130 ------- ----------- ----------- Total liabilities 21,193,150 20,576,777 Stockholders' equity 1,484,093 1,564,974 ----------- ----------- Total liabilities and stockholders' equity $22,677,243 $22,141,751 =========== =========== Net interest income/net interest rate spread (4) $ 379,538 1.72% $ 464,424 2.11% ========== ==== ========== ==== Net interest-earning assets/ net interest margin (5) $ 424,425 1.78% $ 631,144 2.23% =========== ==== =========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.02x 1.03x =========== ===========
(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 FHLB-NY 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. 48 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, 2004 Year Ended December 31, 2003 Compared to Compared to Year Ended December 31, 2003 Year Ended December 31, 2002 -------------------------------- --------------------------------- Increase (Decrease) Increase (Decrease) -------------------------------------------------------------------- (In Thousands) Volume Rate Net Volume Rate Net - --------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans: One-to-four family $ (4,895) $ (33,420) $ (38,315) $(63,312) $ (96,395) $(159,707) Multi-family, commercial real estate and construction 44,943 (28,025) 16,918 51,111 (10,003) 41,108 Consumer and other loans 3,050 (985) 2,065 5,224 (3,600) 1,624 Mortgage-backed securities (3,819) 25,180 21,361 92,179 (132,580) (40,401) Other securities (6,933) (6,088) (13,021) (28,339) (11,917) (40,256) Federal funds sold and repurchase agreements (627) 229 (398) (8,110) (3,229) (11,339) - --------------------------------------------------------------------------------------------------------- Total 31,719 (43,109) (11,390) 48,753 (257,724) (208,971) - --------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings 275 (1,553) (1,278) 1,564 (17,462) (15,898) Money market (2,027) (1,528) (3,555) (6,760) (15,818) (22,578) NOW and demand deposit 57 (662) (605) 449 (2,099) (1,650) Certificates of deposit 28,268 (10,652) 17,616 8,994 (31,617) (22,623) Borrowed funds (22,627) (91,969) (114,596) 31,815 (93,151) (61,336) - --------------------------------------------------------------------------------------------------------- Total 3,946 (106,364) (102,418) 36,062 (160,147) (124,085) - --------------------------------------------------------------------------------------------------------- Net change in net interest income $ 27,773 $ 63,255 $ 91,028 $ 12,691 $ (97,577) $ (84,886) =========================================================================================================
Interest Income Interest income for the year ended December 31, 2004 decreased slightly to $1.05 billion, from $1.06 billion for the year ended December 31, 2003. This decrease was primarily the result of a decrease in the average yield on interest-earning assets to 4.83% for the year ended December 31, 2004, from 4.96% for the year ended December 31, 2003, substantially offset by an increase of $343.2 million in the average balance of interest-earning assets to $21.66 billion for the year ended December 31, 2004, from $21.32 billion for the year ended December 31, 2003. The decrease in the average yield on interest-earning assets was primarily due to decreases in the average yields on mortgage loans and other securities, partially offset by an increase in the average yield on mortgage-backed securities. The decreases in the average yields on our mortgage loan portfolios are attributable to a reduction in coupon rates resulting from the extraordinarily high levels of repayments in these portfolios, primarily during 2003, resulting in reinvestment in those assets at lower rates, coupled with the significant growth in the multi-family, commercial real estate and construction loan portfolio in a relatively low interest rate environment. Partially offsetting this decrease in coupon rates was the significant decrease in net premium amortization as a result of the reduction in refinance activity in 2004. The increase in the average yield on mortgage-backed securities was primarily the result of the significant decrease in net premium amortization as a result of the reduction in refinance activity in 2004, as well as the reduced amount of unamortized premium remaining in our portfolio, partially offset by a reduction in coupon rates. The increase in the average balance of interest-earning assets was primarily due to increases in the 49 average balances of multi-family, commercial real estate and construction loans and consumer and other loans, partially offset by decreases in the average balances of other securities, one-to-four family mortgage loans, mortgage-backed securities and federal funds sold and repurchase agreements. Interest income on one-to-four family mortgage loans decreased $38.3 million to $428.2 million for the year ended December 31, 2004, from $466.5 million for the year ended December 31, 2003, which was the result of a decrease in the average yield to 4.81% for the year ended December 31, 2004, from 5.19% for the year ended December 31, 2003, coupled with a decrease of $96.4 million in the average balance of such loans. The decrease in the average yield on one-to-four family mortgage loans reflects the impact of the low interest rate environment as higher rate loans were repaid and replaced with lower yielding new originations and purchases throughout most of 2003. However, the yield has been positively impacted by a reduction of mortgage loan premium amortization as a result of the decreased refinance activity during 2004 as compared to 2003. The decrease in the average balance of one-to-four family mortgage loans is the result of repayments continuing to outpace originations and purchases of one-to-four family mortgage loans during the first nine months of 2004. However, as a result of reduced prepayment activity and continued strong purchase mortgage activity, during the 2004 fourth quarter, originations and purchases exceeded the levels of repayments resulting in a modest increase in the balance of the portfolio from December 31, 2003 to December 31, 2004. Interest income on multi-family, commercial real estate and construction loans increased $16.9 million to $220.7 million for the year ended December 31, 2004, from $203.8 million for the year ended December 31, 2003, which was primarily the result of an increase of $661.9 million in the average balance of such loans, partially offset by a decrease in the average yield to 6.45% for the year ended December 31, 2004, from 7.39% for the year ended December 31, 2003. The increase in the average balance of multi-family, commercial real estate and construction loans reflects our increased emphasis on originations of such loans over the past several years, coupled with the fact that repayment activity within this portfolio is generally not as significant as that which we have experienced on our one-to-four family mortgage loan portfolio in part due to the prepayment penalties associated with these loans. The decrease in the average yield on multi-family, commercial real estate and construction loans reflects the significant growth in this portfolio in the relatively low interest rate environment, coupled with a decrease of $3.4 million in prepayment penalties which totaled $12.6 million in 2004 compared to $16.0 million in 2003. Interest income on mortgage-backed securities increased $21.4 million to $358.6 million for the year ended December 31, 2004, from $337.2 million for the year ended December 31, 2003. This increase was the result of an increase in the average yield to 4.27% for the year ended December 31, 2004, from 3.97% for the year ended December 31, 2003, partially offset by a slight decrease of $95.1 million in the average balance of the portfolio. The increase in the average yield on mortgage-backed securities reflects the reduction in net premium amortization during 2004. Net premium amortization on mortgage-backed securities decreased $62.8 million to $8.1 million for the year ended December 31, 2004, from $70.9 million for the year ended December 31, 2003. The benefit from the reduction in the amount of net premium amortization was partially offset by a reduction in coupon rates resulting from the substantial turnover we experienced in this portfolio during 2003 as higher yielding securities paid off and were replaced with lower yielding securities. As previously discussed, we continued to purchase mortgage-backed securities to effectively redeploy our securities and excess mortgage cash flows, in addition to cash flows from deposit growth, which resulted in an increase in the balance of mortgage-backed securities at December 31, 2004, compared to December 31, 2003. The slight decrease in the average balance of the mortgage-backed securities portfolio for the year ended December 31, 2004, compared to the year ended December 31, 2003, is the result of the volatility in cash flows we experienced in 2004, due to the interest rate volatility which occurred between quarters in 2004. Interest income on other securities decreased $13.1 million to $15.9 million for the year ended December 31, 2004, from $29.0 million for the year ended December 31, 2003. This decrease resulted 50 from a decrease of $145.6 million in the average balance of this portfolio, coupled with a decrease in the average yield to 4.15% for the year ended December 31, 2004, from 5.47% for the year ended December 31, 2003. The decrease in the average balance of other securities was primarily due to a decrease in the average balance of FHLB-NY stock reflecting the reduction in the level of FHLB-NY borrowings, coupled with a reduction in the levels of other securities as a result of securities which were sold or called in 2003 and early 2004. The decrease in the average yield is primarily the result of the reduction in the FHLB-NY dividend. Dividends on FHLB-NY stock totaled $3.5 million for the year ended December 31, 2004 and $10.6 million for the year ended December 31, 2003. As previously discussed, the FHLB-NY suspended dividend payments in the 2003 fourth quarter but resumed payments in January 2004 at a reduced rate from that which they had paid prior to the suspension. Interest Expense Interest expense for the year ended December 31, 2004 decreased $102.5 million to $575.3 million, from $677.8 million for the year ended December 31, 2003. This decrease was primarily the result of a decrease in the average cost of interest-bearing liabilities to 2.74% for the year ended December 31, 2004, from 3.24% for the year ended December 31, 2003, slightly offset by an increase of $102.0 million in the average balance of interest-bearing liabilities to $20.99 billion for the year ended December 31, 2004, from $20.89 billion for the year ended December 31, 2003. The decrease in the overall average cost of our interest-bearing liabilities primarily reflects the impact of the repayment and refinancing of higher cost borrowings as they matured at substantially lower rates. The slight increase in the average balance of interest-bearing liabilities was primarily due to an increase in the average balance of deposits, substantially offset by a decrease in the average balance of borrowed funds. Interest expense on deposits increased $12.1 million, to $237.4 million for the year ended December 31, 2004, from $225.3 million for the year ended December 31, 2003, reflecting an increase of $607.4 million in the average balance of total deposits which was primarily due to an increase in the average balance of certificates of deposit, partially offset by a decrease in the average balance of money market accounts. The average cost of deposits in each of the deposit categories decreased for the year ended December 31, 2004, as compared to the year ended December 31, 2003, as a result of the low interest rate environment. However, our overall average cost of deposits remained at 2.01% for the year ended December 31, 2004, primarily due to the significant increase in the average balance of certificates of deposit which have a higher average cost than our other deposit products. Interest expense on certificates of deposit increased $17.6 million resulting from an increase of $791.3 million in the average balance, partially offset by a decrease in the average cost to 3.51% for the year ended December 31, 2004, from 3.70% for the year ended December 31, 2003. The increase in the average balance of certificates of deposit was primarily the result of the success of our marketing campaigns which have focused on attracting medium- and long-term certificates of deposit as part of our interest rate risk management strategy to extend liabilities as well as to enable us to reduce borrowings. During the year ended December 31, 2004, $3.90 billion of certificates of deposit, with a weighted average rate of 2.45% and a weighted average maturity at inception of sixteen months, matured and $5.02 billion of certificates of deposit were issued or repriced, with a weighted average rate of 2.66% and a weighted average maturity at inception of twenty months. While the average cost of certificates of deposit decreased during the year ended December 31, 2004 compared to the year ended December 31, 2003, as a result of the low interest rate environment, the impact of the issuance or repricing of certificates of deposit at higher rates than those maturing may result in an increase in the average cost of certificates of deposit going forward. Interest expense on money market accounts decreased $3.6 million reflecting a decrease of $314.4 million in the average balance, coupled with a decrease in the average cost to 0.59% for the year ended December 31, 2004, from 0.71% for the year ended December 31, 2003. The decrease in the average 51 balance of money market accounts is attributable to the continued intense competition for these accounts, previously discussed. The decrease in the average cost of money market accounts is a result of the low interest rate environment. Interest expense on savings accounts decreased $1.3 million which was attributable to a decrease in the average cost to 0.40% for the year ended December 31, 2004, from 0.45% for the year ended December 31, 2003, partially offset by an increase of $65.5 million in the average balance. Interest expense on NOW and demand deposit accounts decreased $605,000 as a result of a decrease in the average cost to 0.06% for the year ended December 31, 2004, from 0.10% for the year ended December 31, 2003, slightly offset by an increase of $65.0 million in the average balance of these accounts. The increases in the average balances of savings and NOW and demand deposit accounts are consistent with our emphasis on core deposit generation. Interest expense on borrowed funds decreased $114.6 million to $337.9 million for the year ended December 31, 2004, from $452.5 million for year ended December 31, 2003, resulting from a decrease in the average cost of borrowings to 3.68% for the year ended December 31, 2004, from 4.67% for the year ended December 31, 2003, coupled with a decrease of $505.4 million in the average balance. The decrease in the average cost of borrowings is the result of the repayment of certain higher cost borrowings as they matured and the refinancing of the remainder at substantially lower rates. The decrease in the average balance of borrowed funds was primarily the result of the repayment of certain higher cost borrowings as they matured, primarily through the increase in certificates of deposits as a result of the success of our marketing campaigns, previously discussed. Provision for Loan Losses During the years ended December 31, 2004 and 2003, no provision for loan losses was recorded. We review our allowance coverage percentages on a quarterly basis. Our 2004 analyses did not indicate that a change in our allowance for loan losses was warranted. Our net charge-off experience during the year ended December 31, 2004 remained at an annualized rate of less than one basis point of average loans outstanding for the period. We believe our current allowance for loan losses is adequate to reflect the risks inherent in our loan portfolio. The allowance for loan losses totaled $82.8 million at December 31, 2004 and $83.1 million at December 31, 2003. Net loan charge-offs totaled $363,000 for the year ended December 31, 2004 compared to $425,000 for the year ended December 31, 2003. Non-performing loans increased $2.9 million to $32.6 million at December 31, 2004, from $29.7 million at December 31, 2003. The allowance for loan losses as a percentage of non-performing loans decreased to 254.02% at December 31, 2004, from 280.10% at December 31, 2003, primarily due to the increase in non-performing loans from December 31, 2003 to December 31, 2004. The allowance for loan losses as a percentage of total loans decreased to 0.62% at December 31, 2004, from 0.66% at December 31, 2003. For further discussion of non-performing loans and allowance for loan losses, see "Critical Accounting Policies" and "Asset Quality." Non-Interest Income Non-interest income for the year ended December 31, 2004 decreased $39.5 million to $80.1 million, from $119.6 million for the year ended December 31, 2003. All components of non-interest income for the year ended December 31, 2004 decreased as compared to the year ended December 31, 2003. However, the decrease in total non-interest income was primarily due to the $16.5 million other-than-temporary impairment write-down of securities, previously discussed under "Critical Accounting Policies - Securities Impairment," and the decreases in mortgage banking income, net, and other non-interest income. 52 Mortgage banking income, net, which includes loan servicing fees, net gain on sales of loans, amortization of MSR and valuation allowance adjustments for the impairment of MSR, decreased $5.6 million to $4.7 million for the year ended December 31, 2004, from $10.3 million for the year ended December 31, 2003. This decrease was primarily due to decreases in net gain on sales of loans and loan servicing fees, partially offset by a decrease in amortization of MSR. Net gain on sales of loans decreased $8.6 million to $3.5 million for the year ended December 31, 2004, from $12.1 million for the year ended December 31, 2003. The decrease in net gain on sales of loans was primarily due to a significant decrease in the volume of fixed rate loans originated and sold into the secondary market during 2004, coupled with less favorable pricing opportunities during the year ended December 31, 2004 as compared to the year ended December 31, 2003. Loan servicing fees decreased $2.1 million to $5.8 million for the year ended December 31, 2004, from $7.9 million for the year ended December 31, 2003, primarily as a result of the decrease in the balance of loans serviced for others to $1.67 billion at December 31, 2004, from $1.90 billion at December 31, 2003. The decrease in the balance of loans serviced for others was the result of repayments in that portfolio exceeding the level of new servicing volume from loan sales. Amortization of MSR decreased $6.0 million to $6.8 million for the year ended December 31, 2004, from $12.8 million for the year ended December 31, 2003. The decrease in MSR amortization is attributable to the reduction in the level of mortgage loan repayments as a result of the decrease in mortgage loan refinance activity previously discussed. We recorded a recovery in the valuation allowance of MSR of $2.2 million for the year ended December 31, 2004 compared to a recovery of $3.1 million for the year ended December 31, 2003. Other non-interest income decreased $7.7 million to $6.8 million for the year ended December 31, 2004, from $14.5 million for the year ended December 31, 2003, primarily due to a $10.1 million gain on the sale of our interest in a joint venture real estate investment held by one of our wholly-owned subsidiaries in the 2003 fourth quarter, partially offset by income in 2004 from an investment in a limited partnership. Net gain on sales of securities decreased $2.6 million to $4.7 million for the year ended December 31, 2004, from $7.3 million for the year ended December 31, 2003. During 2004, we sold mortgage-backed securities with an amortized cost of $145.2 million and other securities with an amortized cost of $20.3 million. During 2003, we sold mortgage-backed securities with an amortized cost of $1.40 billion and other securities with an amortized cost of $45.6 million. Net gains on sales of securities are used as a natural hedge to offset MSR valuation allowance adjustments. Income from BOLI decreased $2.9 million to $17.1 million for the year ended December 31, 2004, from $20.0 million for the year ended December 31, 2003, primarily due to a reduction in the yield on the BOLI investment as a result of the low interest rate environment. Other loan fees decreased $2.8 million to $4.8 million for the year ended December 31, 2004, from $7.6 million for the year ended December 31, 2003, primarily due to decreases in mortgage related fees due to the decrease in loan origination and refinance activity previously discussed. Non-Interest Expense Non-interest expense increased $19.1 million to $225.0 million for the year ended December 31, 2004, from $205.9 million for the year ended December 31, 2003. This increase was primarily due to increases in compensation and benefits expense, occupancy, equipment and systems expense and other expense. Compensation and benefits expense increased $8.4 million to $118.7 million for the year ended December 31, 2004, from $110.3 million for the year ended December 31, 2003. This increase was primarily attributable to increases in salary expense and ESOP expense, partially offset by a reduction in pension expense. The increase in salary expense was primarily attributable to an increase in corporate bonuses for 2004 compared to 2003. No bonuses were paid to executive management for 53 2003. The increase in ESOP expense was primarily attributable to a higher average market value of our common stock during the year ended December 31, 2004 compared to the year ended December 31, 2003. Pension expense decreased primarily due to the increase in the expected return on plan assets in 2004 compared to 2003 as a result of the increase in the fair value of plan assets from December 31, 2002 to December 31, 2003. Occupancy, equipment and systems expense increased $4.7 million to $64.6 million for the year ended December 31, 2004, from $59.9 million for the year ended December 31, 2003. This increase was primarily due to increased furniture, fixtures and computer equipment expense and computer equipment depreciation, as a result of systems enhancements over the past two years, and an increase in office building expense, resulting from increased maintenance costs, primarily snow removal costs in the 2004 first quarter due to the harsh winter. Other expense increased $5.5 million to $33.4 million for the year ended December 31, 2004, from $27.9 million for the year ended December 31, 2003, primarily due to a $3.2 million arbitration settlement resulting from the final disposition of a compensation dispute between us and three former directors of Long Island Bancorp, Inc. and increased legal fees and other costs as a result of increased activity in preparation for trial in the action entitled The Long Island Savings Bank, FSB et al. vs. The United States in the United States Court of Federal Claims which commenced January 18, 2005. Additionally, we incurred $800,000 in consulting fees related to our implementation of the Sarbanes-Oxley Act of 2002. Although non-interest expense increased in 2004, we continue to focus on expense control, with expense ratios that are significantly lower than our peer averages. Our percentage of general and administrative expense to average assets increased to 0.99% for the year ended December 31, 2004, from 0.91% for the year ended December 31, 2003, primarily due to the increase in general and administrative expense. The efficiency ratio, which represents general and administrative expense divided by the sum of net interest income plus non-interest income, decreased to 40.86% for the year ended December 31, 2004, from 41.25% for the year ended December 31, 2003, primarily due to the increase in net interest income. Income Tax Expense For the year ended December 31, 2004, income tax expense totaled $106.1 million, representing an effective tax rate of 32.6%, compared to $96.4 million, representing an effective tax rate of 32.9%, for the year ended December 31, 2003. 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, net, 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 54 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 decreased $238.3 million to $8.97 billion at December 31, 2003, from $9.21 billion at December 31, 2002, and represented 71.1% of our total loan portfolio at December 31, 2003. 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. Although medium- and long-term U.S. Treasury yields 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 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. 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, net, increased $59.0 million to $438.2 million at December 31, 2003, from $379.2 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 $70.9 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. 55 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 a weighted average rate of 2.31% and a weighted average maturity at inception of thirteen months, matured and $3.60 billion of certificates of deposit were issued or repriced, with a weighted average rate of 1.93% and a weighted average maturity at inception of sixteen months. The decrease in our money market accounts is attributable to continued intense competition for these accounts. Certain local competitors have continued to offer premium rates for money market and checking accounts. We have not 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. 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. 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. 56 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 $1.66 per share for the year ended December 31, 2003 and $1.90 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 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 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 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, 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 $424.4 million for the year ended December 31, 2003, from $631.1 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 57 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." 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 yields 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. 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 yields 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. 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. 58 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 $57.2 million to $70.9 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 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. 59 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, 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. 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 60 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. 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. Mortgage banking income, net, 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 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. 61 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. 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. Pension expense increased $6.1 million to net expense of $5.7 million for the year ended December 31, 2003, from a net benefit of $358,000 for the year ended December 31, 2002. The increase in pension expense was 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 decline in the equities markets during 2002 resulted in a $23.7 million decrease in the fair value of plan assets, to $128.9 million at December 31, 2002 compared to $152.6 million at December 31, 2001, which resulted in a $1.9 million decrease in the expected return on plan assets for 2003, thereby increasing pension expense compared to 2002. An expected long term rate of return on plan assets of 8.00% was utilized in determining pension expense (benefit) for both 2003 and 2002. Additionally, the decline in the equities markets during 2002 resulted in a negative 11.00% actual return on plan assets for the year as compared to the expected long term positive rate of return of 8.00%. These divergent rates of return resulted in a $27.4 million actuarial loss in the fair value of our plan assets in 2002 which contributed to the significant increase in the unrecognized net actuarial loss to $44.3 million as of December 31, 2002. Also contributing to the unrecognized net actuarial loss was an $8.3 million actuarial loss in 2002 on our projected benefit liabilities from the decrease in the discount rate as a result of the low interest rate environment. The total increase in the unrecognized net actuarial loss in 2002 resulted in the unrecognized net actuarial loss at December 31, 2002 exceeding 10% of the greater of the projected benefit obligation or the market related value of plan assets. We amortize unrecognized gains and losses on the minimum basis as prescribed by SFAS No. 87, "Employers' Accounting for Pensions." As a result, we amortized $3.4 million of the unrecognized net actuarial loss as an expense in 2003 compared to amortization of only $46,000 for 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. 62 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 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. 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 increased $2.2 million to $33.5 million at December 31, 2004, from $31.3 million at December 31, 2003. The ratio of non-performing loans to total loans increased to 0.25% at December 31, 2004, from 0.23% at December 31, 2003. The ratio of non-performing assets to total assets was 0.14% at December 31, 2004 and 2003. See Item 1, "Business" for further discussion of our asset quality. Non-Performing Assets The following table sets forth information regarding non-performing assets.
At December 31, ------------------------------------------------ (Dollars in Thousands) 2004 2003 2002 2001 2000 - -------------------------------------------------------------------------------------------------- Non-accrual delinquent mortgage loans (1) $31,462 $28,321 $31,997 $34,848 $34,332 Non-accrual delinquent consumer and other loans 544 792 1,485 991 903 Mortgage loans delinquent 90 days or more and still accruing interest (2) 573 563 1,035 1,277 952 - -------------------------------------------------------------------------------------------------- Total non-performing loans 32,579 29,676 34,517 37,116 36,187 Real estate owned, net (3) 920 1,635 1,091 2,987 3,801 - -------------------------------------------------------------------------------------------------- Total non-performing assets $33,499 $31,311 $35,608 $40,103 $39,988 ================================================================================================== Non-performing loans to total loans 0.25% 0.23% 0.29% 0.31% 0.32% Non-performing loans to total assets 0.14 0.13 0.16 0.16 0.16 Non-performing assets to total assets 0.14 0.14 0.16 0.18 0.18
(1) Includes multi-family and commercial real estate loans totaling $11.5 million, $6.1 million, $2.9 million, $3.6 million and $2.5 million at December 31, 2004, 2003, 2002, 2001 and 2000, respectively. (2) Loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest due. (3) Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is recorded at the lower of cost or fair value, less estimated selling costs. 63 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 $1.8 million for the year ended December 31, 2004, $1.9 million for the year ended December 31, 2003 and $2.3 million for the year ended December 31, 2002. This compares to actual payments recorded as interest income, with respect to such loans, of $1.0 million for the year ended December 31, 2004, $1.2 million for the year ended December 31, 2003 and $1.6 million for the year ended December 31, 2002. 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 $2.8 million at December 31, 2004, $3.9 million at December 31, 2003, $5.0 million at December 31, 2002, $5.4 million at December 31, 2001 and $5.2 million at December 31, 2000. In addition to non-performing assets, we had $4.1 million of potential problem loans at December 31, 2004 compared to $839,000 at December 31, 2003. Such loans are 60-89 days delinquent as shown in the following table. Delinquent Loans The following table shows a comparison of delinquent loans at December 31, 2004, 2003 and 2002.
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, 2004: Mortgage loans: One-to-four family 6 $ 805 98 $20,497 Multi-family 4 460 12 8,843 Commercial real estate -- -- 4 2,695 Construction (1) 2 1,994 -- -- Consumer and other loans 56 880 57 544 - -------------------------------------------------------------------------------- Total delinquent loans 68 $4,139 171 $32,579 ================================================================================ Delinquent loans to total loans 0.03% 0.25% At December 31, 2003: Mortgage loans: One-to-four family 5 $ 192 143 $22,744 Multi-family 1 60 10 3,448 Commercial real estate -- -- 4 2,692 Consumer and other loans 83 587 90 792 - -------------------------------------------------------------------------------- Total delinquent loans 89 $ 839 247 $29,676 ================================================================================ Delinquent loans to total loans 0.01% 0.23% 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%
(1) Construction loans classified as 60-89 days past due at December 31, 2004 consist solely of loans which are delinquent 60-89 days as to their maturity date but not their interest due. In January 2005, the loans were extended to May 1, 2005 and are current and performing in accordance with the extended loan agreement terms. 64 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, 2004. There were no assets classified as loss at December 31, 2004.
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 -- $ -- 104 $20,842 4 $ 271 Multi-family 4 5,540 16 9,947 -- -- Commercial real estate 2 2,695 4 1,870 1 990 Construction 5 2,735 -- -- -- -- Consumer and other loans 1 177 58 545 -- -- - ------------------------------------------------------------------------------------------ Total loans 12 11,147 182 33,204 5 1,261 Real estate owned: One-to-four family -- -- 5 920 -- -- - ------------------------------------------------------------------------------------------ Total classified assets 12 $11,147 187 $34,124 5 $1,261 ==========================================================================================
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) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------- Allowance for losses on loans: Balance at beginning of year $83,121 $83,546 $82,285 $79,931 $76,578 Provision charged to operations -- -- 2,307 4,028 4,014 Charge-offs: One-to-four family (231) (194) (325) (506) (963) Multi-family -- -- (83) (3) (8) Commercial real estate -- -- (268) (464) -- Construction -- -- (281) -- -- Consumer and other loans (656) (1,142) (1,251) (1,554) (1,678) - ---------------------------------------------------------------------------------------------------- Total charge-offs (887) (1,336) (2,208) (2,527) (2,649) - ---------------------------------------------------------------------------------------------------- Recoveries: One-to-four family 78 111 241 263 802 Multi-family -- -- 83 -- 136 Commercial real estate -- 20 291 -- 496 Construction -- -- -- 9 79 Consumer and other loans 446 780 547 581 475 - ---------------------------------------------------------------------------------------------------- Total recoveries 524 911 1,162 853 1,988 - ---------------------------------------------------------------------------------------------------- Net charge-offs (363) (425) (1,046) (1,674) (661) - ---------------------------------------------------------------------------------------------------- Balance at end of year $82,758 $83,121 $83,546 $82,285 $79,931 ==================================================================================================== Net charge-offs to average loans outstanding 0.00% 0.00% 0.01% 0.01% 0.01% Allowance for loan losses to total loans 0.62 0.66 0.69 0.68 0.70 Allowance for loan losses to non-performing loans 254.02 280.10 242.04 221.70 220.88 Allowance for losses on REO: Balance at beginning of year $ -- $ 4 $ -- $ 3 $ 171 Provision (recovery) recorded to operations -- 4 4 (64) (109) Charge-offs -- (8) -- (17) (113) Recoveries -- -- -- 78 54 - ---------------------------------------------------------------------------------------------------- Balance at end of year $ -- $ -- $ 4 $ -- $ 3 ====================================================================================================
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 65 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, --------------------------------------------------------------------- 2004 2003 2002 --------------------- --------------------- --------------------- % 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 $36,697 68.68% $39,614 71.13% $45,485 76.86% Multi-family 18,124 19.41 16,440 17.69 12,449 13.35 Commercial real estate 11,785 7.17 11,006 6.98 10,099 6.21 Construction 1,996 0.89 1,695 0.79 786 0.47 Consumer and other loans 14,156 3.85 14,366 3.41 14,727 3.11 - ------------------------------------------------------------------------------------------------------- Total allowance for loan losses $82,758 100.00% $83,121 100.00% $83,546 100.00% =======================================================================================================
At December 31, --------------------------------------------- 2001 2000 --------------------- --------------------- % of Loans % of Loans to to (Dollars in Thousands) Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------- One-to-four family $49,122 83.59% $49,826 86.79% Multi-family 8,612 9.05 6,721 7.07 Commercial real estate 8,529 4.95 7,771 4.23 Construction 1,329 0.42 573 0.30 Consumer and other loans 14,693 1.99 15,040 1.61 - ------------------------------------------------------------------------------- Total allowance for loan losses $82,285 100.00% $79,931 100.00% ===============================================================================
Impact of Accounting Standards and Interpretations In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment," or SFAS No. 123(R), which requires public entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects. SFAS No. 123(R) is effective as of the beginning of the first interim or annual reporting period beginning after June 15, 2005 with early adoption encouraged. SFAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Additionally, beginning on the required effective date, public entities will recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The cumulative effect of initially applying SFAS No. 123(R), if any, is recognized as of the required effective date. For periods before the required effective date, public entities may elect, although they are not required, to retroactively restate financial statements for prior periods to recognize compensation cost on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. We have not yet determined the transition method we will apply upon our adoption of SFAS No. 123(R). The impact of our adoption of SFAS No. 123(R) on our results of operations for 2005 will depend on the transition method we select. Regardless of the transition method we select upon adoption, the impact on our results of operations in 2006 is expected to be a reduction in net income comparable to the reduction shown in the 2004 pro forma disclosures under SFAS No. 123, which are included in Note 1 of Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data." On September 30, 2004, the FASB issued Staff Position No. EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which delays the effective date for the measurement and recognition guidance contained in Emerging Issues Task Force, or EITF, Issue No. 03-1. EITF Issue No. 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired and was originally effective for other-than-temporary impairment evaluations made in reporting periods 66 beginning after June 15, 2004. The delay in the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF Issue No. 03-1 does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. Subsequent to the issuance of Staff Position No. EITF Issue 03-1-1, the FASB announced plans for a full reconsideration of existing authoritative literature concerning other-than-temporary impairment of securities. On May 19, 2004, the FASB issued Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was effective for the first interim or annual period beginning after June 15, 2004. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Act, introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. Staff Position No. 106-2 requires employers who conclude their plans were "actuarially equivalent" at December 8, 2003 and the Medicare Act's effects are a "significant event" to account for the federal subsidy either on a retroactive basis to January 1, 2004 or prospectively from the date of adoption of Staff Position No. 106-2. If the Medicare Act's effects are not a "significant event," they are not accounted for until the plan's next measurement date following the adoption of Staff Position No. 106-2, which for us was December 31, 2004. Upon adoption of Staff Position No. 106-2, we determined our plan to be "actuarially equivalent" and determined the Medicare Act's effects were not a "significant event." The impact of our adoption of Staff Position No. 106-2 was not material to our financial condition and results of operations. See Note 15 of Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," for additional disclosures regarding the impact of our adoption of Staff Position No. 106-2. In December 2003, the FASB issued FIN 46(R). All public entities were required to fully implement FIN 46(R) no later than the end of the first reporting period ending after March 15, 2004. Effective January 1, 2004, we implemented FIN 46(R), which required us to deconsolidate our subsidiary, Astoria Capital Trust I. The impact of this deconsolidation on our financial statements was to increase consolidated total assets by $3.9 million, reflecting our investment in the common securities of Astoria Capital Trust I, and increase consolidated total borrowings by $3.9 million, reflecting the difference between the aggregate principal amount of the Junior Subordinated Debentures we issued to Astoria Capital Trust I and the aggregate principal amount of Capital Securities issued by Astoria Capital Trust I in the private placement completed in 1999. Additionally, we redesignated our two interest rate swap agreements as fair value hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust I. Our prior period consolidated financial statements have been restated to reflect the deconsolidation. 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. 67 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 69, referred to as the Gap Table, sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004 that we anticipate will reprice or mature in each of the future time periods shown using certain assumptions based on our historical experience and other market-based data available to us. The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in mortgage prepayment activity. The major factors affecting mortgage prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where the underlying collateral is located, seasonal factors, demographic variables and the assumability of the underlying mortgages. The Gap Table does not indicate the impact of general interest rate movements on our net interest income because the actual repricing dates of various assets and liabilities will differ from our estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. The uncertainty and volatility of interest rates, economic conditions and other markets which affect the value of these call options, as well as the financial condition and strategies of the holders of the options, increase the difficulty and uncertainty in predicting when 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 $125.1 million classified according to their maturity dates, of which $108.8 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 interest rate environment. As indicated in the Gap Table, our one-year cumulative gap at December 31, 2004 was 68 negative 2.87%. This compares to a one-year cumulative gap of negative 6.83% at December 31, 2003. The change in our one-year cumulative gap is primarily attributable to a decrease in borrowings due in one year or less at December 31, 2004, as compared to December 31, 2003, as a result of the repayment or refinancing of $3.44 billion of medium-term borrowings which matured during 2004, of which $2.40 billion were extended through new medium-term borrowings with a weighted average original term of 3.3 years. Partially offsetting the impact of the reduction in borrowings due in one year or less is a decrease in estimated mortgage loan repayments as of December 31, 2004, as compared to December 31, 2003, as a result of the decrease in refinance activity previously discussed.
At December 31, 2004 ------------------------------------------------------------------ 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) $3,127,237 $ 3,293,598 $5,453,229 $ 792,607 $12,666,671 Consumer and other loans (1) 480,545 27,602 -- -- 508,147 Repurchase agreements 267,578 -- -- -- 267,578 Mortgage-backed and other securities available-for-sale and FHLB stock 622,797 761,826 427,947 810,897 2,623,467 Mortgage-backed and other securities held-to-maturity 1,550,612 2,156,144 1,187,294 1,416,741 6,310,791 - ------------------------------------------------------------------------------------------------------------ Total interest-earning assets 6,048,769 6,239,170 7,068,470 3,020,245 22,376,654 Net unamortized purchase premiums and deferred costs (2) 18,495 15,621 30,510 1,635 66,261 - ------------------------------------------------------------------------------------------------------------ Net interest-earning assets (3) 6,067,264 6,254,791 7,098,980 3,021,880 22,442,915 - ------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Savings 161,236 322,472 322,472 2,122,940 2,929,120 Money market 810,586 16,284 16,284 122,134 965,288 NOW and demand deposit 45,039 90,080 90,080 1,355,515 1,580,714 Certificates of deposit 2,572,567 3,387,456 804,952 83,160 6,848,135 Borrowed funds, net (4) 3,149,183 3,292,624 2,648,820 377,843 9,468,470 - ------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 6,738,611 7,108,916 3,882,608 4,061,592 21,791,727 - ------------------------------------------------------------------------------------------------------------ Interest sensitivity gap (671,347) (854,125) 3,216,372 (1,039,712) $ 651,188 ============================================================================================================ Cumulative interest sensitivity gap $ (671,347) $(1,525,472) $1,690,900 $ 651,188 ============================================================================================================ Cumulative interest sensitivity gap as a percentage of total assets (2.87)% (6.51)% 7.22% 2.78% Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 90.04% 88.98% 109.54% 102.99%
(1) Mortgage and consumer and other loans include loans held-for-sale and exclude non-performing loans and the allowance for loan losses. (2) Net unamortized purchase premiums and deferred costs are prorated. (3) Includes securities available-for-sale at amortized cost. (4) Excludes the hedge accounting adjustment on our Junior Subordinated Debentures. NII Sensitivity Analysis In managing IRR, we also use an internal income simulation model for our NII sensitivity analyses. These analyses measure changes in projected net interest income over various time periods resulting from hypothetical changes in interest rates. The interest rate scenarios most commonly analyzed reflect gradual and reasonable changes over a specified time period, which is typically one year. The base net interest income projection utilizes similar assumptions as those reflected in the Gap Table, assumes that cash flows are reinvested in similar assets and liabilities and that interest rates as of the reporting date 69 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, 2005 would decrease by approximately 4.50% from the base projection. At December 31, 2003, in the up 200 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2004 would have decreased by approximately 0.54% from the base projection. The current low interest rate environment prevents us from performing an income simulation for a decline in interest rates of the same magnitude and timing as our rising interest rate simulation, since 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, 2005 would decrease by approximately 1.12% from the base projection. At December 31, 2003, in the down 100 basis point scenario, our projected net interest income for the twelve month period beginning January 1, 2004 would have decreased by approximately 3.46% from the base projection. Various shortcomings are inherent in both the Gap Table and NII sensitivity analyses. Certain assumptions may not reflect the manner in which actual yields and costs respond to market changes. Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in interest rates may also affect our operating environment and operating strategies as well as those of our competitors. In addition, certain adjustable rate assets have limitations on the magnitude of rate changes over specified periods of time. Accordingly, although our NII sensitivity analyses may provide an indication of our IRR exposure, such analyses are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and our actual results will differ. Additionally, certain assets, liabilities and items of income and expense which may be affected by changes in interest rates, albeit to a much lesser degree, and which do not affect net interest income, are excluded from this analysis. These include income from BOLI, changes in the fair value of MSR and the mark-to-market adjustments on certain derivative instruments. With respect to these items alone, and assuming the entire yield curve was to increase 200 basis points, through quarterly parallel increments of 50 basis points and remain at that level thereafter, our projected net income for the twelve month period beginning January 1, 2005 would increase by approximately $6.3 million. Conversely, 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 income for the twelve month period beginning January 1, 2005 would decrease by approximately $5.9 million, with respect to these items alone. For information regarding our credit risk, see "Asset Quality," in Item 7, "MD&A." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For our Consolidated Financial Statements, see the index on page 76. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 70 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, 2004. 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. There were no changes in our internal controls over financial reporting that occurred during the three months ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See page 77 for our Management Report on Internal Control Over Financial Reporting and page 78 for the related Report of Independent Registered Public Accounting Firm. The Sarbanes-Oxley Act Section 302 Certifications regarding the quality of our public disclosures have been filed with the SEC as exhibit 31.1 and exhibit 31.2 to this Annual Report on Form 10-K. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ASTORIA FINANCIAL CORPORATION Information regarding directors and executive officers who are not directors of Astoria Financial Corporation is presented in the tables under the heading "Board Nominees, Directors and Executive Officers" and under the heading "Committees and Meetings of the Board" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, 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 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, and is incorporated herein by reference. The Audit Committee Charter is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our Audit Committee Charter will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. 71 Code of Business Conduct and Ethics We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer and principal financial officer, which is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our code of business conduct and ethics will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. Corporate Governance Our Corporate Governance Guidelines and Nominating and Corporate Governance Committee Charter are available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of such documents will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive (and director) compensation is included under the headings "Summary Compensation Table," "Fiscal Year End Option/SAR Values," "Pension Plans," "Director Compensation," "Employment Agreements," "Incentive Option Plans," that portion of the "Report of the Compensation Committee on Executive Compensation" entitled "Long-term Incentive Compensation," and "Compensation Committee Interlocks and Insider Participation" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 18, 2005 which will be filed with the SEC within 120 days from December 31, 2004, and is incorporated herein by reference. The Compensation Committee Charter is available on our investor relations website at http://ir.astoriafederal.com under the heading "Corporate Governance." In addition, copies of our Compensation Committee Charter will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at no charge. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" 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 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, and is incorporated herein by reference. 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 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, and is incorporated herein by reference. 72 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is included under the headings "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees" in our definitive Proxy Statement to be utilized in connection with our Annual Meeting of Shareholders to be held on May 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements See Index to Consolidated Financial Statements on page 76. 2. Financial Statement Schedules Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto under Item 8, "Financial Statements and Supplementary Data." (b) Exhibits See Index of Exhibits on page 116. 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Astoria Financial Corporation /s/ George L. Engelke, Jr. Date: March 9, 2005 ------------------------------------ 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 9, 2005 ------------------------------------ George L. Engelke, Jr. Chairman, President and Chief Executive Officer /s/ Monte N. Redman March 9, 2005 ------------------------------------ Monte N. Redman Executive Vice President and Chief Financial Officer /s/ Gerard C. Keegan March 9, 2005 ------------------------------------ Gerard C. Keegan Vice Chairman, Chief Administrative Officer and Director /s/ Andrew M. Burger March 9, 2005 ------------------------------------ Andrew M. Burger Director /s/ John J. Conefry, Jr. March 9, 2005 ------------------------------------ John J. Conefry, Jr. Director /s/ Denis J. Connors March 9, 2005 ------------------------------------ Denis J. Connors Director /s/ Robert J. Conway March 9, 2005 ------------------------------------ Robert J. Conway Director /s/ Thomas J. Donahue March 9, 2005 ------------------------------------ Thomas J. Donahue Director /s/ Peter C. Haeffner, Jr. March 9, 2005 ------------------------------------ Peter C. Haeffner, Jr. Director 74 /s/ Ralph F. Palleschi March 9, 2005 ------------------------------------ Ralph F. Palleschi Director /s/ Thomas V. Powderly March 9, 2005 ------------------------------------ Thomas V. Powderly Director /s/ Leo J. Waters March 9, 2005 ------------------------------------ Leo J. Waters Director /s/ Donald D. Wenk March 9, 2005 ------------------------------------ Donald D. Wenk Director 75 CONSOLIDATED FINANCIAL STATEMENTS OF ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX
Page ---- Management Report on Internal Control Over Financial Reporting................ 77 Reports of Independent Registered Public Accounting Firm...................... 78 Consolidated Statements of Financial Condition at December 31, 2004 and 2003.. 80 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002................................................................... 81 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002........................................... 82 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002.............................................................. 83 Notes to Consolidated Financial Statements.................................... 84
76 MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Astoria Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Astoria Financial Corporation's internal control system is a process designed to provide reasonable assurance to the company's management and board of directors regarding the preparation and fair presentation of published financial statements. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of Astoria Financial Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Astoria Financial Corporation's assets that could have a material effect on our financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Astoria Financial Corporation management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, the company's internal control over financial reporting is effective based on those criteria. Astoria Financial Corporation's independent registered public accounting firm has issued an audit report on our assessment of, and the effective operation of, the company's internal control over financial reporting as of December 31, 2004. This report appears on page 78. 77 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Astoria Financial Corporation We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Astoria Financial Corporation and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated March 3, 2005 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP New York, New York March 3, 2005 78 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of Astoria Financial Corporation We have audited the accompanying consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries (the "Company") as of December 31, 2004 and 2003, 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, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Astoria Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 3, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP New York, New York March 3, 2005 79 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31, ------------------------- (In Thousands, Except Share Data) 2004 2003 - -------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 138,809 $ 173,828 Repurchase agreements 267,578 65,926 Available-for-sale securities: Encumbered 2,104,239 1,997,953 Unencumbered 302,644 657,039 - -------------------------------------------------------------------------------------------------------- 2,406,883 2,654,992 Held-to-maturity securities, fair value of $6,306,760 and $5,809,117, respectively: Encumbered 5,273,385 5,508,864 Unencumbered 1,029,551 283,863 - -------------------------------------------------------------------------------------------------------- 6,302,936 5,792,727 Federal Home Loan Bank of New York stock, at cost 163,700 213,450 Loans held-for-sale, net 23,802 23,023 Loans receivable 13,263,279 12,686,987 Allowance for loan losses (82,758) (83,121) - -------------------------------------------------------------------------------------------------------- Loans receivable, net 13,180,521 12,603,866 Mortgage servicing rights, net 16,799 17,952 Accrued interest receivable 79,144 77,956 Premises and equipment, net 157,107 160,089 Goodwill 185,151 185,151 Bank owned life insurance 374,719 370,310 Other assets 118,720 122,324 - -------------------------------------------------------------------------------------------------------- Total assets $23,415,869 $22,461,594 ======================================================================================================== LIABILITIES: Deposits $12,323,257 $11,186,594 Reverse repurchase agreements 7,080,000 7,235,000 Federal Home Loan Bank of New York advances 1,934,000 1,924,000 Other borrowings, net 455,835 473,037 Mortgage escrow funds 122,088 108,635 Accrued expenses and other liabilities 130,925 137,797 - -------------------------------------------------------------------------------------------------------- Total liabilities 22,046,105 21,065,063 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 5,000,000 shares authorized: Series A (1,800,000 shares authorized and -0- shares issued and outstanding) -- -- Series B (2,000,000 shares authorized and -0- shares issued and outstanding) -- -- Common stock, $.01 par value (200,000,000 shares authorized; 166,494,888 shares issued; and 110,304,669 and 118,005,381 shares outstanding, respectively) 1,665 1,665 Additional paid-in capital 811,777 798,583 Retained earnings 1,623,571 1,480,991 Treasury stock (56,190,219 and 48,489,507 shares, at cost, respectively) (1,013,726) (811,993) Accumulated other comprehensive loss (28,592) (46,489) Unallocated common stock held by ESOP (6,802,146 and 7,140,081 shares, respectively) (24,931) (26,226) - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,369,764 1,396,531 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $23,415,869 $22,461,594 ========================================================================================================
All share data has been retroactively adjusted to reflect the three-for-two common stock split declared in January 2005. See accompanying Notes to Consolidated Financial Statements. 80 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, ------------------------------------------ (In Thousands, Except Share Data) 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------ Interest income: Mortgage loans: One-to-four family $ 428,229 $ 466,544 $ 626,251 Multi-family, commercial real estate and construction 220,703 203,785 162,677 Consumer and other loans 21,312 19,247 17,623 Mortgage-backed securities 358,583 337,222 377,623 Other securities 15,934 28,955 69,211 Federal funds sold and repurchase agreements 1,140 1,538 12,877 - ------------------------------------------------------------------------------------------------------------ Total interest income 1,045,901 1,057,291 1,266,262 - ------------------------------------------------------------------------------------------------------------ Interest expense: Deposits 237,429 225,251 288,000 Borrowed funds 337,906 452,502 513,838 - ------------------------------------------------------------------------------------------------------------ Total interest expense 575,335 677,753 801,838 - ------------------------------------------------------------------------------------------------------------ Net interest income 470,566 379,538 464,424 Provision for loan losses -- -- 2,307 - ------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 470,566 379,538 462,117 - ------------------------------------------------------------------------------------------------------------ Non-interest income: Customer service fees 58,524 59,841 60,190 Other loan fees 4,805 7,556 7,696 Net gain on sales of securities 4,651 7,346 10,772 Other-than-temporary impairment write-down of securities (16,520) -- -- Mortgage banking income (loss), net 4,715 10,291 (2,261) Income from bank owned life insurance 17,134 19,978 21,398 Other 6,775 14,549 9,612 - ------------------------------------------------------------------------------------------------------------ Total non-interest income 80,084 119,561 107,407 - ------------------------------------------------------------------------------------------------------------ Non-interest expense: General and administrative: Compensation and benefits 118,684 110,349 106,704 Occupancy, equipment and systems 64,592 59,892 53,125 Federal deposit insurance premiums 1,775 1,896 1,996 Advertising 6,583 5,833 4,806 Other 33,377 27,907 29,196 - ------------------------------------------------------------------------------------------------------------ Total general and administrative 225,011 205,877 195,827 Extinguishment of debt -- -- 2,202 - ------------------------------------------------------------------------------------------------------------ Total non-interest expense 225,011 205,877 198,029 - ------------------------------------------------------------------------------------------------------------ Income before income tax expense 325,639 293,222 371,495 Income tax expense 106,102 96,376 123,066 - ------------------------------------------------------------------------------------------------------------ Net income $ 219,537 $ 196,846 $ 248,429 ============================================================================================================ Basic earnings per common share $ 2.03 $ 1.68 $ 1.94 ============================================================================================================ Diluted earnings per common share $ 2.00 $ 1.66 $ 1.90 ============================================================================================================ Basic weighted average common shares 107,930,909 114,574,956 125,272,391 Diluted weighted average common and common equivalent shares 109,806,855 115,942,058 127,379,477
All share and per share data have been retroactively adjusted to reflect the three-for-two common stock split declared in January 2005. See accompanying Notes to Consolidated Financial Statements. 81 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
Additional Preferred Common Paid-in (In Thousands, Except Share Data) Total Stock Stock Capital - -------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $1,542,586 $ 2,000 $1,665 $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 (10,925,100 shares) (211,103) -- -- -- Dividends on common and preferred stock ($0.51 per share and $3.00 per share, respectively) and amortization of purchase premium (70,160) -- -- (1,304) Exercise of stock options and related tax benefit (1,983,710 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 1,665 840,186 Comprehensive income: Net income 196,846 -- -- -- Other comprehensive (loss) income, net of tax: Net unrealized loss on securities (57,226) -- -- -- Amortization of unrealized loss on securities transferred to held-to-maturity 775 -- -- -- Reclassification of net unrealized loss on cash flow hedge 191 -- -- -- Minimum pension liability adjustment (29) -- -- -- ------- Comprehensive income 140,557 ------- Common stock repurchased (10,610,700 shares) (195,471) -- -- -- Redemption of preferred stock (54,500) (2,000) -- (52,500) Dividends on common and preferred stock ($0.57 per share and $2.25 per share, respectively) and amortization of purchase premium (70,076) -- -- (978) Exercise of stock options and related tax benefit (1,407,355 shares issued) 14,851 -- -- 6,058 Amortization relating to allocation of ESOP stock 7,172 -- -- 5,817 - -------------------------------------------------------------------------------------------------- Balance at December 31, 2003 1,396,531 -- 1,665 798,583 Comprehensive income: Net income 219,537 -- -- -- Other comprehensive income (loss), net of tax: Net unrealized gain on securities 17,748 -- -- -- Reclassification of net unrealized loss on cash flow hedge 191 -- -- -- Minimum pension liability adjustment (42) -- -- -- ------- Comprehensive income 237,434 ------- Common stock repurchased (9,067,500 shares) (225,052) -- -- -- Dividends on common stock ($0.67 per share) (71,982) -- -- -- Exercise of stock options and related tax benefit (1,366,788 shares issued) 24,142 -- -- 5,798 Amortization relating to allocation of ESOP stock 8,691 -- -- 7,396 - -------------------------------------------------------------------------------------------------- Balance at December 31, 2004 $1,369,764 $ -- $1,665 $811,777 ==================================================================================================
Accumulated Unallocated Other Common Retained Treasury Comprehensive Stock Held (In Thousands, Except Share Data) Earnings Stock (Loss) Income by ESOP - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 $1,207,187 $ (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 (10,925,100 shares) -- (211,103) -- -- Dividends on common and preferred stock ($0.51 per share and $3.00 per share, respectively) and amortization of purchase premium (68,856) -- -- -- Exercise of stock options and related tax benefit (1,983,710 shares issued) (19,253) 30,995 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,899 - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 1,367,507 (639,579) 9,800 (27,581) Comprehensive income: Net income 196,846 -- -- -- Other comprehensive (loss) income, net of tax: Net unrealized loss on securities -- -- (57,226) -- Amortization of unrealized loss on securities transferred to held-to-maturity -- -- 775 -- Reclassification of net unrealized loss on cash flow hedge -- -- 191 -- Minimum pension liability adjustment -- -- (29) -- Comprehensive income Common stock repurchased (10,610,700 shares) -- (195,471) -- -- Redemption of preferred stock -- -- -- -- Dividends on common and preferred stock ($0.57 per share and $2.25 per share, respectively) and amortization of purchase premium (69,098) -- -- -- Exercise of stock options and related tax benefit (1,407,355 shares issued) (14,264) 23,057 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,355 - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 2003 1,480,991 (811,993) (46,489) (26,226) Comprehensive income: Net income 219,537 -- -- -- Other comprehensive income (loss), net of tax: Net unrealized gain on securities -- -- 17,748 -- Reclassification of net unrealized loss on cash flow hedge -- -- 191 -- Minimum pension liability adjustment -- -- (42) -- Comprehensive income Common stock repurchased (9,067,500 shares) -- (225,052) -- -- Dividends on common stock ($0.67 per share) (71,982) -- -- -- Exercise of stock options and related tax benefit (1,366,788 shares issued) (4,975) 23,319 -- -- Amortization relating to allocation of ESOP stock -- -- -- 1,295 - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 2004 $1,623,571 $(1,013,726) $(28,592) $(24,931) ============================================================================================================
All share and per share data have been retroactively adjusted to reflect the three-for-two common stock split declared in January 2005. See accompanying Notes to Consolidated Financial Statements. 82 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, --------------------------------------- (In Thousands) 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 219,537 $ 196,846 $ 248,429 Adjustments to reconcile net income to net cash provided by operating activities: Net premium amortization on mortgage loans and mortgage-backed securities 32,017 113,031 52,602 Net amortization (accretion) on other securities, consumer and other loans and borrowings 4,066 981 (40,133) Net provision for loan and real estate losses -- 4 2,311 Depreciation and amortization 13,460 12,474 10,581 Net gain on sales of loans and securities (8,199) (19,482) (17,417) Other-than-temporary impairment write-down of securities 16,520 -- -- Gain on sale of joint venture real estate investment -- (10,058) -- Originations of loans held-for-sale (326,499) (616,804) (486,516) Proceeds from sales and principal repayments of loans held-for-sale 329,268 668,586 473,882 Amortization relating to allocation of ESOP stock 8,691 7,172 10,223 (Increase) decrease in accrued interest receivable (1,188) 10,952 7,365 Mortgage servicing rights amortization and valuation allowance adjustments, net of capitalized amounts 1,153 2,459 14,884 Income from bank owned life insurance, net of insurance proceeds received (4,409) (11,412) (16,147) (Increase) decrease in other assets (6,528) 12,376 15,980 Decrease in accrued expenses and other liabilities (453) (8,929) (118,623) - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 277,436 358,196 157,421 - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Originations of loans receivable (3,205,083) (5,468,504) (3,870,703) Loan purchases through third parties (1,171,606) (1,550,100) (1,546,535) Principal payments on loans receivable 3,769,995 6,344,694 5,478,798 Purchases of mortgage-backed securities held-to-maturity (2,475,096) (5,521,833) (4,608,574) Purchases of mortgage-backed securities available-for-sale (596,257) (3,780,394) (2,235,329) Purchases of other securities held-to-maturity -- -- (9,978) Purchases of other securities available-for-sale (508) (600) (21,022) Principal payments on mortgage-backed securities held-to-maturity 1,951,277 4,660,847 3,745,503 Principal payments on mortgage-backed securities available-for-sale 691,825 2,209,760 2,348,406 Proceeds from calls and maturities of other securities held-to-maturity 5,971 68,613 316,980 Proceeds from calls and maturities of other securities available-for-sale 635 133,280 256,211 Proceeds from sales of mortgage-backed securities available-for-sale 147,497 1,406,954 449,327 Proceeds from sales of other securities available-for-sale 22,692 50,056 -- Net redemptions of FHLB-NY stock 49,750 34,100 2,900 Proceeds from sales of real estate owned, net 2,157 1,528 3,643 Purchases of premises and equipment, net of proceeds from sales (10,478) (15,266) (18,125) 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 (817,229) (1,416,725) 191,502 - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 1,136,663 119,398 163,503 Net increase in borrowings with original terms of three months or less 870,000 810,000 500,000 Net proceeds from borrowings with original terms greater than three months 2,400,000 1,700,000 496,883 Repayments of borrowings with original terms greater than three months (3,435,000) (1,700,000) (2,000,450) Net increase (decrease) in mortgage escrow funds 13,453 4,282 (12,042) Cash paid for cash flow hedging instrument -- -- (3,297) Common stock repurchased (225,052) (195,471) (211,103) Cash dividends paid to stockholders (71,982) (72,076) (70,160) Redemption of preferred stock -- (54,500) -- Cash received for options exercised 18,344 8,793 11,742 - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 706,426 620,426 (1,124,924) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 166,633 (438,103) (776,001) Cash and cash equivalents at beginning of year 239,754 677,857 1,453,858 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 406,387 $ 239,754 $ 677,857 ========================================================================================================== Supplemental disclosures: Cash paid during the year: Interest $ 587,373 $ 680,504 $ 815,627 ========================================================================================================== Income taxes $ 99,892 $ 88,478 $ 112,652 ========================================================================================================== Additions to real estate owned $ 1,443 $ 2,075 $ 1,971 ==========================================================================================================
See accompanying Notes to Consolidated Financial Statements. 83 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies The following significant accounting and reporting policies of Astoria Financial Corporation and subsidiaries conform to 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 its wholly-owned subsidiaries Astoria Federal Savings and Loan Association and its subsidiaries, referred to as Astoria Federal, and AF Insurance Agency, Inc. As used in this annual report, "we," "us" and "our" refer to Astoria Financial Corporation and its consolidated subsidiaries, including Astoria Federal and AF Insurance Agency, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. In addition to Astoria Federal and AF Insurance Agency, Inc., we have another subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes as a result of our adoption of the Financial Accounting Standards Board, or FASB, revised Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN 46(R), effective January 1, 2004. Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, and $3.9 million of common securities and using the proceeds to acquire $128.9 million of Junior Subordinated Debentures issued by Astoria Financial Corporation. The impact of this deconsolidation on our financial statements was 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. See Note 8 for a further discussion of our Junior Subordinated Debentures. 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. All share and per share data included in the consolidated financial statements and the notes thereto have been retroactively adjusted to reflect the three-for-two common stock split declared in January 2005. The stock split was effected in the form of a 50% stock dividend which was distributed on March 1, 2005. A retroactive adjustment of $555,000 was made to increase common stock and reduce retained earnings to reflect the increase in shares issued. (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 $47.9 million at December 31, 2004 and $39.3 million at December 31, 2003. (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. 84 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (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, 2004, 2003 and 2002, 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. (e) Loans Held-for-Sale Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various government-sponsored enterprises, or GSEs, or other investors on a servicing released or retained basis. 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 Student Loan Marketing Association generally before repayment begins during the grace period of the loan. Loans held-for-sale are carried at the lower of cost or estimated fair value, as determined on an aggregate basis. Net unrealized losses, if any, are recognized in a valuation allowance through charges to earnings. Premiums and discounts and origination fees and costs on loans held-for-sale are deferred and recognized as a component of the gain or loss on sale. Gains and losses on sales of loans held-for-sale are recognized on settlement dates and are determined by the difference between the sale proceeds and the allocated cost basis of the loans. (f) Loans Receivable Loans receivable are carried at the unpaid principal balances, net of unamortized premiums and discounts and deferred loan origination costs and fees, which are recognized as yield adjustments using the interest method. We generally amortize these amounts over the contractual life of the related loans, adjusted for estimated prepayments when applicable. We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest due is monitored and income is recognized only to the extent cash is received until a return to accrual status is warranted. In some circumstances, we continue to accrue interest on mortgage loans delinquent 90 days or more as to their maturity date but not their interest due. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs, net of recoveries. Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Our periodic evaluation of the adequacy of the allowance is based on our past loan loss experience, trends in portfolio volume, quality, maturity and composition, the status and amount of impaired and other non-performing and past-due loans, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated fair value of any underlying collateral and current and prospective, as well as specific and general, economic conditions. We review certain loans for individual impairment and groups of smaller balance loans based on homogeneous pools. Loans we individually review for impairment are limited to multi-family mortgage loans, commercial real estate loans, construction loans, loans modified in a troubled debt restructuring and selected large one-to-four family mortgage loans. A loan is considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. Impaired loans are principally measured using the market price of the loan, if one exists, the estimated fair value of the 85 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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, or MSR We recognize as separate assets the rights to service mortgage loans. The right to service loans for others is generally obtained through the sale of loans with servicing retained. The initial recognition of originated MSR is based upon an allocation of the total cost of the related loans between the loans and the servicing rights based on their relative estimated fair values. The estimated fair value of MSR is based upon quoted market prices of similar loans which we sell servicing released. 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. 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 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 Goodwill is presumed to have an indefinite useful life and is not amortized, but rather is tested, at least annually, for impairment at the reporting unit level. For purposes of our goodwill impairment testing, we have identified a single reporting unit. We use the quoted market price of our common stock on our impairment testing date as the basis for determining the fair value of our reporting unit. If the fair value of our reporting unit exceeds its carrying amount, further evaluation is not necessary. However, if the fair value of our reporting unit is less than its carrying amount, further evaluation is required to compare the implied fair value of the reporting unit's goodwill to its carrying amount to determine if a write-down of goodwill is required. As of December 31, 2004, the carrying value of our goodwill totaled $185.2 million. On September 30, 2004, we performed our annual goodwill impairment test and determined the fair value of our reporting unit to be in excess of its carrying value by $1.27 billion. Accordingly, as of our annual impairment test date, there was no indication of goodwill impairment. We would test our goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. (j) Bank Owned Life Insurance, 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. 86 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (k) Real Estate Owned Real estate acquired through foreclosure or by deed in lieu of foreclosure is initially recorded at the lower of cost or fair value, less estimated selling costs. Thereafter, we maintain an allowance for decreases in value which are charged to income along with any additional expenses incurred on the property. Fair value is estimated through current appraisals. Write-downs required at the time of acquisition are charged to the allowance for loan losses. Real estate owned, net, which is included in other assets, amounted to $920,000 at December 31, 2004 and $1.6 million at December 31, 2003. (l) Reverse Repurchase Agreements (Securities Sold Under Agreements to Repurchase) We enter into sales of securities under agreements to repurchase with selected dealers and banks. Such agreements are accounted for as secured financing transactions since we maintain effective control over the transferred securities and the transfer meets the other criteria for such accounting. Obligations to repurchase securities sold are reflected as a liability in our consolidated statements of financial condition. The securities underlying the agreements are delivered to a custodial account for the benefit of the dealer or bank with whom each transaction is executed. The dealers or banks, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell us the same securities at the maturities of the agreements. We retain the right of substitution of collateral throughout the terms of the agreements. The securities underlying the agreements are classified as encumbered securities in our consolidated statements of financial condition. (m) Derivative Instruments As part of our asset/liability management program, we utilize, from time-to-time, interest rate caps, floors, locks or swaps to reduce our sensitivity to interest rate fluctuations. These agreements are derivative instruments which are recorded as either assets or liabilities in the consolidated statements of financial condition at fair value. Changes in the fair values of derivatives are reported in our results of operations or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in those fair values or cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis. Derivatives that qualify for hedge accounting treatment are designated as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, changes in the fair values of the derivative instruments 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. Other non-interest expense is increased or decreased by changes in the fair values of our derivatives. (n) Income Taxes Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. Tax benefits attributable to stock option exercises are credited to additional paid-in capital. 87 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (o) Earnings Per Common Share, 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 Astoria Federal Pension Plan, covering employees meeting specified eligibility criteria. Astoria Federal's policy is to fund pension costs in accordance with the minimum funding requirement. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. In addition, Astoria Federal has non-qualified and unfunded supplemental retirement plans covering certain officers and directors. We also sponsor a defined benefit health care plan that provides for postretirement medical and dental coverage to select individuals. The costs of postretirement benefits are accrued during an employee's active working career. We record compensation expense related to the ESOP at an amount equal to the shares allocated by the ESOP multiplied by the average fair value of our common stock during the reporting period, plus cash contributions made to participant accounts. For EPS disclosures, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are excluded from outstanding shares on a weighted average basis for EPS calculations. The difference between the fair value of shares for the period and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. (q) Stock Option Plans We apply the intrinsic value method of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock option plans. Accordingly, no stock-based employee compensation cost is reflected in net income, as all options granted under our stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and EPS if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
For the Year Ended December 31, ------------------------------- (In Thousands, Except Per Share Data) 2004 2003 2002 - ----------------------------------------------------------------------------------- Net income: As reported $219,537 $196,846 $248,429 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 5,072 5,417 4,338 -------- -------- -------- Pro forma $214,465 $191,429 $244,091 ======== ======== ======== Basic earnings per common share: As reported $ 2.03 $ 1.68 $ 1.94 ======== ======== ======== Pro forma $ 1.99 $ 1.63 $ 1.90 ======== ======== ======== Diluted earnings per common share: As reported $ 2.00 $ 1.66 $ 1.90 ======== ======== ======== Pro forma $ 1.95 $ 1.61 $ 1.87 ======== ======== ========
88 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In December 2004, the FASB issued revised SFAS No. 123, "Share-Based Payment," or SFAS No. 123(R), which requires public entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The fair-value-based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects. SFAS No. 123(R) is effective as of the beginning of the first interim or annual reporting period beginning after June 15, 2005 with early adoption encouraged. SFAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Additionally, beginning on the required effective date, public entities will recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The cumulative effect of initially applying SFAS No. 123(R), if any, is recognized as of the required effective date. For periods before the required effective date, public entities may elect, although they are not required, to retroactively restate financial statements for prior periods to recognize compensation cost on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. We have not yet determined the transition method we will apply upon our adoption of SFAS No. 123(R). The impact of our adoption of SFAS No. 123(R) on our results of operations for 2005 will depend on the transition method we select. Regardless of the transition method we select upon adoption, the impact on our results of operations in 2006 is expected to be a reduction in net income comparable to the reduction shown in the 2004 pro forma disclosures under SFAS No. 123 on the previous page. (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 $85.8 million during the year ended December 31, 2004 and $132.6 million during the year ended December 31, 2003. The maximum amount of such agreements outstanding at any month end was $267.6 million during the year ended December 31, 2004 and $272.3 million during the year ended December 31, 2003. As of December 31, 2004, three repurchase agreements totaling $267.6 million were outstanding. As of December 31, 2003, three repurchase agreements totaling $65.9 million were outstanding. The fair value of the securities held under these agreements was $273.8 million as of December 31, 2004 and $68.4 million as of December 31, 2003. None of the securities held under repurchase agreements were sold or repledged during the years ended December 31, 2004 and 2003. 89 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (3) Securities The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2004 and 2003 are as follows:
At December 31, 2004 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: GSE pass-through certificates $ 123,029 $ 3,628 $ (87) $ 126,570 REMICs and CMOs: GSE issuance 2,125,549 605 (48,252) 2,077,902 Non-GSE issuance 78,974 39 (3,298) 75,715 - ---------------------------------------------------------------------------------------------------- Total mortgage-backed securities 2,327,552 4,272 (51,637) 2,280,187 - ---------------------------------------------------------------------------------------------------- Other securities: FNMA and FHLMC preferred stock 123,495 53 -- 123,548 Other securities 3,152 10 (14) 3,148 - ---------------------------------------------------------------------------------------------------- Total other securities 126,647 63 (14) 126,696 - ---------------------------------------------------------------------------------------------------- Total securities available-for-sale $2,454,199 $ 4,335 $(51,651) $2,406,883 ==================================================================================================== Held-to-maturity: Mortgage-backed securities: GSE pass-through certificates $ 9,154 $ 537 $ -- $ 9,691 REMICs and CMOs: GSE issuance 5,772,676 25,353 (19,144) 5,778,885 Non-GSE issuance 480,053 1,128 (4,474) 476,707 - ---------------------------------------------------------------------------------------------------- Total mortgage-backed securities 6,261,883 27,018 (23,618) 6,265,283 Obligations of states and political subdivisions and corporate debt securities 41,053 424 -- 41,477 - ---------------------------------------------------------------------------------------------------- Total securities held-to-maturity $6,302,936 $27,442 $(23,618) $6,306,760 ====================================================================================================
At December 31, 2003 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (In Thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: GSE pass-through certificates $ 161,199 $ 5,575 $ (50) $ 166,724 REMICs and CMOs: GSE issuance 2,297,884 610 (70,643) 2,227,851 Non-GSE issuance 109,669 170 (6,099) 103,740 - ---------------------------------------------------------------------------------------------------- Total mortgage-backed securities 2,568,752 6,355 (76,792) 2,498,315 - ---------------------------------------------------------------------------------------------------- Other securities: FNMA and FHLMC preferred stock 140,015 96 (8,750) 131,361 Corporate debt and other securities 23,729 1,598 (11) 25,316 - ---------------------------------------------------------------------------------------------------- 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: GSE pass-through certificates $ 14,345 $ 984 $ -- $ 15,329 REMICs and CMOs: GSE issuance 4,958,633 30,955 (15,272) 4,974,316 Non-GSE issuance 772,728 4,436 (5,143) 772,021 - ---------------------------------------------------------------------------------------------------- Total mortgage-backed securities 5,745,706 36,375 (20,415) 5,761,666 Obligations of states and political subdivisions and corporate debt securities 47,021 430 -- 47,451 - ---------------------------------------------------------------------------------------------------- Total securities held-to-maturity $5,792,727 $36,805 $(20,415) $5,809,117 ====================================================================================================
90 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The tables below set forth the estimated fair values of securities with gross unrealized losses at December 31, 2004 and 2003, segregated between securities that have been in a continuous unrealized loss position for less than twelve months at the respective dates and those that have been in a continuous unrealized loss position for twelve months or longer.
At December 31, 2004 --------------------------------------------------------------------------- Less Than Twelve Months Twelve Months or Longer Total ----------------------- ----------------------- ----------------------- Gross Gross Gross Estimated Unrealized Estimated Unrealized Estimated Unrealized (In Thousands) Fair Value Losses Fair Value Losses Fair Value Losses - ----------------------------------------------------------------------------------------------------------------------- Available-for-sale: Mortgage-backed securities: GSE pass-through certificates $ 3,956 $ (46) $ 1,650 $ (41) $ 5,606 $ (87) REMICs and CMOs: GSE issuance 1,031,174 (6,691) 888,198 (41,561) 1,919,372 (48,252) Non-GSE issuance 4,741 (15) 67,567 (3,283) 72,308 (3,298) Other securities 1,093 (12) 414 (2) 1,507 (14) - ----------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities available-for-sale $1,040,964 $ (6,764) $957,829 $(44,887) $1,998,793 $(51,651) ======================================================================================================================= Held-to-maturity: Mortgage-backed securities: REMICs and CMOs: GSE issuance $2,239,767 $(17,025) $ 93,244 $ (2,119) $2,333,011 $(19,144) Non-GSE issuance 341,904 (4,474) -- -- 341,904 (4,474) - ---------------------------------------------------------------------------------------------------------------------- Total temporarily impaired securities held-to-maturity $2,581,671 $(21,499) $ 93,244 $ (2,119) $2,674,915 $(23,618) =======================================================================================================================
At December 31, 2003 --------------------------------------------------------------------------- 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: GSE pass-through certificates $ 1,437 $ (10) $2,264 $(40) $ 3,701 $ (50) REMICs and CMOs: GSE issuance 2,101,805 (70,643) -- -- 2,101,805 (70,643) Non-GSE issuance 93,059 (6,095) 655 (4) 93,714 (6,099) Other securities: FNMA and FHLMC preferred stock 91,250 (8,750) -- -- 91,250 (8,750) Corporate debt and other securities 593 (7) 550 (4) 1,143 (11) - ----------------------------------------------------------------------------------------------------------------------- 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: GSE issuance $1,523,519 $(15,272) $ -- $ -- $1,523,519 $(15,272) Non-GSE 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) =======================================================================================================================
The number of securities which had an unrealized loss totaled 142 at December 31, 2004 and 120 at December 31, 2003. Of the securities in an unrealized loss position, 91.1% at December 31, 2004 and 87.3% at December 31, 2003, based on estimated fair value, are obligations of GSEs. At December 31, 2004 and 2003, substantially all of the securities in an unrealized loss position had a fixed interest rate and the cause of the temporary impairment is directly related to the change in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience, therefore, 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. 91 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) On September 30, 2004, the FASB issued Staff Position No. EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which delays the effective date for the measurement and recognition guidance contained in Emerging Issues Task Force, or EITF, Issue No. 03-1. EITF Issue No. 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired and was originally effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The delay in the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF Issue No. 03-1 does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. Subsequent to the issuance of Staff Position No. EITF Issue 03-1-1, the FASB announced plans for a full reconsideration of existing authoritative literature concerning other-than-temporary impairment of securities. During the year ended December 31, 2004, we recorded a $16.5 million other-than-temporary impairment write-down on $120.0 million of FHLMC perpetual preferred securities which is included as a component of non-interest income. There were no security write-downs recorded for the years ended December 31, 2003 and 2002. Sales of securities from the available-for-sale portfolio are summarized as follows:
For the Year Ended December 31, -------------------------------- (In Thousands) 2004 2003 2002 - ------------------------------------------------------ Proceeds from sales $170,189 $1,457,010 $449,327 Gross gains 4,651 14,665 10,772 Gross losses -- 7,319 --
The amortized cost and estimated fair value of debt securities at December 31, 2004, by contractual maturity, excluding mortgage-backed securities, are summarized in the following table. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. In addition, issuers of certain securities have the right to call obligations with or without prepayment penalties. As of December 31, 2004, the amortized cost of the callable securities in our portfolio totaled $125.1 million, of which $108.8 million are callable within one year and at various times thereafter.
At December 31, 2004 --------------------- Estimated Amortized Fair (In Thousands) Cost Value - ---------------------------------------------------------------- Available-for-sale: Due in one year or less $ 251 $ 251 Due after one year through five years 2,485 2,483 Due after ten years 416 414 - ---------------------------------------------------------------- Total available-for-sale $ 3,152 $ 3,148 ================================================================ Held-to-maturity: Due after one year through five years $ 9,987 $10,411 Due after ten years 31,066 31,066 - ---------------------------------------------------------------- Total held-to-maturity $41,053 $41,477 ================================================================
The balance of accrued interest receivable for mortgage-backed securities totaled $31.2 million at December 31, 2004 and $30.7 million at December 31, 2003. The balance of accrued interest receivable for other securities totaled $444,000 at December 31, 2004 and $656,000 at December 31, 2003. 92 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (4) Loans Receivable, net Loans receivable, net are summarized as follows:
At December 31, ------------------------- (In Thousands) 2004 2003 - ------------------------------------------------------------------ Mortgage loans: One-to-four family $ 9,054,747 $ 8,971,048 Multi-family 2,558,935 2,230,414 Commercial real estate 944,859 880,296 Construction 117,766 99,046 - ------------------------------------------------------------------ 12,676,307 12,180,804 Net deferred loan origination costs 3,400 2,315 Net unamortized premiums 66,427 65,653 - ------------------------------------------------------------------ Total mortgage loans, net 12,746,134 12,248,772 - ------------------------------------------------------------------ Consumer and other loans: Home equity 466,087 386,846 Commercial 21,819 21,937 Other 19,382 21,363 - ------------------------------------------------------------------ 507,288 430,146 Net deferred loan origination costs 9,180 7,433 Net unamortized premiums 677 636 - ------------------------------------------------------------------ Total consumer and other loans, net 517,145 438,215 - ------------------------------------------------------------------ Total loans 13,263,279 12,686,987 Allowance for loan losses (82,758) (83,121) - ------------------------------------------------------------------ Loans receivable, net $13,180,521 $12,603,866 ==================================================================
Accrued interest receivable on all loans totaled $47.4 million at December 31, 2004 and $46.6 million at December 31, 2003. Included in loans receivable were non-accrual loans totaling $32.0 million at December 31, 2004 and $29.1 million at December 31, 2003. 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 $1.8 million for the year ended December 31, 2004, $1.9 million for the year ended December 31, 2003 and $2.3 million for the year ended December 31, 2002. This compares to actual payments recorded as interest income, with respect to such loans, of $1.0 million for the year ended December 31, 2004, $1.2 million for the year ended December 31, 2003, and $1.6 million for the year ended December 31, 2002. Loans delinquent 90 days or more and still accruing interest totaled $573,000 at December 31, 2004 and $563,000 at December 31, 2003. These loans are delinquent 90 days or more as to their maturity date but not their interest due. The following table summarizes information regarding our impaired mortgage loans:
At December 31, 2004 ----------------------------------- Allowance Recorded for Loan Net (In Thousands) Investment Losses Investment - -------------------------------------------------------------------------- One-to-four family $ 5,703 $ (398) $ 5,305 Multi-family, commercial real estate and construction 12,371 (1,824) 10,547 - -------------------------------------------------------------------------- Total impaired mortgage loans $18,074 $(2,222) $15,852 ==========================================================================
93 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 ==========================================================================
Our average recorded investment in impaired loans was $12.9 million for the year ended December 31, 2004, $15.4 million for the year ended December 31, 2003 and $15.7 million for the year ended December 31, 2002. Interest income recognized on impaired loans, which was not materially different from cash-basis interest income, amounted to $616,000 for the year ended December 31, 2004, $597,000 for the year ended December 31, 2003 and $1.3 million for the year ended December 31, 2002. (5) Allowance for Loan Losses Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31, ----------------------------- (In Thousands) 2004 2003 2002 - ----------------------------------------------------------------------- Balance at beginning of year $83,121 $83,546 $82,285 Provision charged to operations -- -- 2,307 Charge-offs (net of recoveries of $524, $911 and $1,162, respectively) (363) (425) (1,046) - ----------------------------------------------------------------------- Balance at end of year $82,758 $83,121 $83,546 =======================================================================
(6) Mortgage Servicing Rights We service mortgage loans for investors with aggregate unpaid principal balances of $1.67 billion at December 31, 2004 and $1.90 billion at December 31, 2003, 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) 2004 2003 2002 - -------------------------------------------------------------------- Amortized cost at beginning of year $29,552 $ 35,093 $ 39,196 Additions 3,409 7,225 6,090 Amortization (6,772) (12,766) (10,193) - --------------------------------------------------------------------- Amortized cost at end of year 26,189 29,552 35,093 Valuation allowance (9,390) (11,600) (14,682) - -------------------------------------------------------------------- MSR, net $16,799 $ 17,952 $ 20,411 =====================================================================
At December 31, 2004, our MSR, net, had an estimated fair value of $16.8 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.10%, a weighted average constant prepayment rate on mortgages of 15.33% and a weighted average life of 4.8 years. 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. As of December 31, 2004, estimated future MSR amortization through 2009, based on the prepayment assumptions utilized in the December 31, 2004 MSR valuation, is as follows: $5.4 million for 2005, $4.4 million for 2006, $3.4 million for 2007, $2.7 million for 2008 and $2.1 million for 2009. Actual results will vary depending upon the level of repayments on the loans currently serviced. 94 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Mortgage banking income (loss), net, is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2004 2003 2002 - -------------------------------------------------------------------------- Loan servicing fees $ 5,768 $ 7,851 $ 12,068 Net gain on sales of loans 3,509 12,124 6,645 Amortization of MSR (6,772) (12,766) (10,193) Recovery of (provision for) valuation allowance on MSR 2,210 3,082 (10,781) - -------------------------------------------------------------------------- Total mortgage banking income (loss), net $ 4,715 $ 10,291 $ (2,261) ===========================================================================
(7) Deposits Deposits are summarized as follows:
At December 31, --------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------- Weighted Weighted Average Percent Average Percent (Dollars in Thousands) Rate Balance of Total Rate Balance of Total - ------------------------------------------------------------------------------------------------ Core deposits: Savings 0.40% $ 2,929,120 23.78% 0.40% $ 2,959,015 26.45% Money market 0.80 965,288 7.83 0.55 1,232,771 11.02 NOW 0.10 961,497 7.80 0.10 914,423 8.17 Non-interest bearing NOW and demand deposit -- 619,217 5.02 -- 578,987 5.18 --------- ----- --------- ----- Total core deposits 0.37 5,475,122 44.43 0.34 5,685,196 50.82 Certificates of deposit 3.46 6,848,135 55.57 3.55 5,501,398 49.18 - ------------------------------------------------------------------------------------------------ Total deposits 2.09% $12,323,257 100.00% 1.92% $11,186,594 100.00% ================================================================================================
The aggregate amount of certificates of deposit with balances equal to or greater than $100,000 was $1.58 billion at December 31, 2004 and $1.06 billion at December 31, 2003. Certificates of deposit at December 31, 2004 have scheduled maturities as follows:
Weighted Percent Average of Year Rate Balance Total - --------------------------------------------------------------- (In Thousands) 2005 2.90% $2,572,567 37.56% 2006 3.49 2,212,463 32.31 2007 4.19 1,174,993 17.16 2008 3.87 464,825 6.79 2009 4.17 340,127 4.97 2010 and thereafter 4.87 83,160 1.21 - --------------------------------------------------------------- Total certificates of deposit 3.46% $6,848,135 100.00% ===============================================================
Interest expense on deposits is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2004 2003 2002 - -------------------------------------------------------------------- Savings $ 11,920 $ 13,198 $ 29,096 Money market 6,379 9,934 32,512 Interest-bearing NOW 921 1,526 3,176 Certificates of deposit 218,209 200,593 223,216 - -------------------------------------------------------------------- Total interest expense on deposits $237,429 $225,251 $288,000 ====================================================================
95 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (8) Borrowed Funds Borrowed funds are summarized as follows:
At December 31, --------------------------------------------- 2004 2003 --------------------------------------------- Weighted Weighted Average Average (Dollars in Thousands) Amount Rate Amount Rate - ----------------------------------------------------------------------------- Reverse repurchase agreements $7,080,000 3.54% $7,235,000 4.62% FHLB-NY advances 1,934,000 2.81 1,924,000 2.32 Other borrowings, net 455,835 7.21 473,037 7.23 - ----------------------------------------------------------------------------- Total borrowed funds, net $9,469,835 3.57% $9,632,037 4.29% =============================================================================
Reverse Repurchase Agreements At December 31, 2004 and 2003, substantially all of the outstanding reverse repurchase agreements had original contractual maturities between one and ten years and were primarily secured by mortgage-backed securities. Reverse repurchase agreements with the Federal Home Loan Bank of New York, or FHLB-NY, may also be secured by certain qualifying mortgage loans pursuant to a blanket collateral agreement with the FHLB-NY. The following is a summary of information relating to reverse repurchase agreements:
At December 31, ----------------------- (In Thousands) 2004 2003 - ------------------------------------------------------------------------------------------ Amortized cost of collateral (including accrued interest): Mortgage-backed securities $7,480,040 $7,624,752 Mortgage loans 77,123 151,268 Estimated fair value of collateral (including accrued interest): Mortgage-backed securities 7,430,135 7,573,095 Mortgage loans 78,184 155,377
At or For the Year Ended December 31, ------------------------------------- (Dollars in Thousands) 2004 2003 2002 - ----------------------------------------------------------------------------------------- Average balance during the year $6,904,483 $6,642,945 $6,840,342 Maximum balance at any month end during the year 7,085,000 7,235,000 7,285,000 Balance outstanding at end of the year 7,080,000 7,235,000 6,285,000 Weighted average interest rate during the year 3.81% 5.01% 5.47% Weighted average interest rate at end of the year 3.54 4.62 5.39
Reverse repurchase agreements at December 31, 2004 have contractual maturities as follows:
Year Amount - ---------------------- (In Thousands) 2005 $1,300,000 2006 1,400,000 2007 1,750,000 2008 2,430,000 2009 200,000 - ---------------------- Total $7,080,000 - ----------------------
Of the $1.30 billion of reverse repurchase agreements maturing in 2005, $400.0 million are due in less than 30 days, $500.0 million are due in 30 to 90 days and $400.0 million are due after 90 days. At December 31, 2004, $2.18 billion of reverse repurchase agreements which mature after December 31, 2005 are callable in 2005 and at various times thereafter. 96 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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) 2004 2003 2002 - ----------------------------------------------------------------------------------------- Average balance during the year $1,816,197 $2,574,091 $1,853,534 Maximum balance at any month end during the year 3,134,000 3,517,000 2,364,000 Balance outstanding at end of the year 1,934,000 1,924,000 2,064,000 Weighted average interest rate during the year 2.24% 3.30% 5.54% Weighted average interest rate at end of the year 2.81 2.32 4.42
FHLB-NY advances at December 31, 2004 have contractual maturities as follows:
Year Amount - ---------------------- (In Thousands) 2005 $1,830,000 2006 4,000 2007 100,000 - ---------------------- Total $1,934,000 ======================
Of the $1.83 billion of FHLB-NY advances maturing in 2005, $1.58 billion are due in less than 30 days, and $250.0 million are due after 90 days. At December 31, 2004, we had a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $100.0 million, of which $50.0 million was outstanding under the one month line of credit. Both lines of credit are priced at the federal funds rate plus a spread (generally between 10 and 15 basis points) and reprice daily. Other Borrowings, 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 $247.1 million at December 31, 2004 and $246.8 million at December 31, 2003. 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 which began in 2004. The carrying amount of the 7.67% senior unsecured notes, net of deferred costs, was $79.6 million at December 31, 2004 and $99.4 million at December 31, 2003. On October 28, 1999, our finance subsidiary, Astoria Capital Trust I, issued $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, in a private placement, and $3.9 million of common securities (which are the only voting securities of Astoria Capital Trust I), which are 100% owned by Astoria Financial Corporation, and used the proceeds to acquire Junior Subordinated Debentures issued by Astoria Financial Corporation. The Junior Subordinated Debentures total $128.9 million, have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have substantially identical prepayment provisions as the Junior Subordinated Debentures. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities. 97 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) As previously discussed, effective January 1, 2004, we adopted FIN 46(R) which required us to deconsolidate our subsidiary Astoria Capital Trust I. The impact of this deconsolidation on our financial statements was to increase consolidated total assets by $3.9 million and increase consolidated total borrowings by $3.9 million. Additionally, we redesignated our two interest rate swap agreements as fair value hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust I as discussed further in Note 10. We have two interest rate swap agreements, designated as fair value hedges, that have the effect of converting $125.0 million of the Junior Subordinated Debentures from a 9.75% fixed rate instrument into a variable rate, LIBOR-based instrument. The carrying amount of the Junior Subordinated Debentures has been adjusted for changes in estimated fair value to satisfy hedge accounting requirements. See Note 10 for additional information on the interest rate swap agreements. The carrying amount of the Junior Subordinated Debentures, net of deferred costs and including fair value hedge adjustments, was $129.1 million at December 31, 2004 and $126.9 million at December 31, 2003. Other borrowings at December 31, 2004 have contractual maturities as follows:
Year Amount - ------------------------------------ (In Thousands) 2005 $ 20,000 2006 20,000 2007 20,000 2008 20,000 2009 -- 2010 and thereafter 378,866 - ------------------------------------ Total $458,866 ====================================
Interest expense on borrowed funds is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2004 2003 2002 - -------------------------------------------------------------------------- Reverse repurchase agreements $267,527 $337,057 $379,377 FHLB-NY advances 41,016 85,629 103,232 Other borrowings 29,363 29,816 31,229 - -------------------------------------------------------------------------- Total interest expense on borrowed funds $337,906 $452,502 $513,838 ==========================================================================
(9) Stockholders' Equity During the year ended December 31, 2004, we completed our ninth stock repurchase plan, which was approved by our Board of Directors on October 16, 2002. This plan authorized the purchase, at management's discretion, of 15,000,000 shares, or approximately 11% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. On May 19, 2004, our Board of Directors approved our tenth stock repurchase plan authorizing the purchase, at management's discretion, of 12,000,000 shares, or approximately 10% of our common stock then outstanding, over a two year period in open-market or privately negotiated transactions. Stock repurchases under our tenth stock repurchase plan commenced immediately following the completion of the ninth stock repurchase plan on July 9, 2004. Under these plans, during 2004, we repurchased 9,067,500 shares of our common stock at an aggregate cost of $225.1 million, of which 5,155,200 shares of our common stock, at an aggregate cost of $127.6 million, were repurchased pursuant to our tenth stock repurchase plan. 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. The Series B Preferred Stock had a par value of $1.00 per share and a liquidation preference of $25.00 per share. In 1996, we adopted a Stockholders Rights Plan, or the Rights Plan, and declared a dividend of one preferred share purchase right, or Right, for each outstanding share of our common stock. Each Right, initially, will entitle stockholders to buy a one one-hundredth interest in a share of a new series of our preferred stock at an exercise price of $100.00 upon the occurrence of certain events described in the Rights Plan. We have reserved 1,800,000 shares of our Series A Preferred Stock for the Rights Plan. 98 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 common shares are reserved for use by the Plan, should the need arise. To date, all shares required by the Plan have been acquired in open market purchases. We are subject to the laws of the State of Delaware which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over our statutory capital, or if there is no such excess, to our net profits for the current and/or immediately preceding fiscal year. Our ability to pay dividends, service our debt obligations and repurchase our common stock is dependent primarily upon receipt of dividend payments from Astoria Federal. The Office of Thrift Supervision, or OTS, regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years. Astoria Federal may not pay dividends to us if: (1) after paying those dividends, it would fail to meet applicable regulatory capital requirements; (2) the OTS notified Astoria Federal that it was in need of more than normal supervision; or (3) after making such distribution, the institution would become "undercapitalized" (as such term is used in the Federal Deposit Insurance Act). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. (10) Derivative Instruments As further discussed below, we use a variety of derivative instruments in connection with our overall interest rate risk management strategy. We are exposed to credit risk in the event of non-performance by counterparties to derivative instruments. In the event of default by a counterparty, we would be subject to an economic loss that corresponds to the cost to replace the agreement. We control the credit risk associated with our derivative instruments through dealing only with counterparties with the highest credit ratings, establishing counterparty exposure limits and monitoring procedures. Fair Value Hedges We have two interest swap agreements designated and accounted for as fair value hedges aggregating $125.0 million (notional amount) to effectively convert $125.0 million of our Junior Subordinated Debentures from a fixed to a variable rate instrument to protect the fair value of our Junior Subordinated Debentures due to changes in interest rates. These two interest rate swap agreements were entered into in 2002 as fair value hedges of the $125.0 million Capital Securities issued by Astoria Capital Trust I. As a result of our adoption of FIN 46(R) effective January 1, 2004, we redesignated these interest rate swap agreements as fair value hedges of the debt Astoria Financial Corporation issued to Astoria Capital Trust I. Under these agreements, we receive a fixed interest rate of 9.75% and pay a floating interest rate which is tied to the three-month LIBOR plus 400 basis points. The maturity dates, call features and other critical terms of these derivative instruments match the terms of both the Capital Securities and the Junior Subordinated Debentures 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 $1.4 million asset was recorded at December 31, 2004 and a $621,000 liability was recorded at December 31, 2003, which represent the fair value of the interest rate swap agreements as of those dates. A corresponding adjustment was made to the carrying amount of the Junior Subordinated Debentures to recognize the change in their fair value. See Note 8 for additional information regarding our Junior Subordinated Debentures. 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 99 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) loss, net of taxes, in accumulated other comprehensive loss/income totaled $1.5 million at December 31, 2004 and $1.7 million at December 31, 2003. The unrealized loss, net of tax, to be reclassified to our results of operations during 2005 totals $191,000. See Note 8 for additional information regarding our 5.75% senior unsecured notes. 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 had 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) 2004 2003 2002 - ----------------------------------------------------------------- Notional amount $50,000 $300,000 $300,000 Estimated fair value -- -- 95 Non-interest expense -- 95 3,824 Weighted average cap rate 5.50% 5.25% 5.25%
In connection with our mortgage banking activities, we had certain free-standing derivative instruments at December 31, 2004 and 2003. We had commitments to fund loans held-for-sale and commitments to sell loans which are considered derivative instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair values of these derivative instruments are immaterial to our financial condition and results of operations. (11) Commitments and Contingencies Lease Commitments At December 31, 2004, 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 $7.5 million for the year ended December 31, 2004, $7.2 million for the year ended December 31, 2003 and $5.6 million for the year ended December 31, 2002. The minimum rental payments due under the terms of the non-cancelable operating leases as of December 31, 2004, which have not been reduced by minimum sublease rentals of $31.2 million due in the future under non-cancelable subleases, are summarized below:
Year Amount - ------------------------------------ (In Thousands) 2005 $ 6,957 2006 7,096 2007 6,798 2008 6,384 2009 5,165 2010 and thereafter 47,538 - ------------------------------------ $79,938 ====================================
100 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Outstanding Commitments We had outstanding commitments as follows:
At December 31, ------------------- (In Thousands) 2004 2003 - ---------------------------------------------------------------------------- Mortgage loans - commitments to extend credit (1) $553,061 $520,743 Mortgage loans - commitments to purchase 63,223 51,664 Home equity loans - unused lines of credit 328,510 268,555 Consumer and commercial loans - unused lines of credit 68,484 67,085 Commitments to sell loans 56,034 48,568 Commitments to purchase securities -- 99,969 Forward borrowing commitments -- 500,000
(1) Includes commitments to originate loans held-for-sale. 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 in the secondary market. The principal balance of loans sold with recourse amounted to $565.8 million at December 31, 2004 and $640.7 million at December 31, 2003. The carrying amount of our liability for loans sold with recourse totaled $276,000 at December 31, 2004 and $534,000 at December 31, 2003. We estimate the liability for loans sold with recourse based on an analysis of our loss experience related to similar loans sold with recourse. We 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 $34.9 million at December 31, 2004 and $46.3 million at December 31, 2003. Various agency mortgage-backed securities, with an amortized cost of $50.0 million and a fair value of $51.2 million at December 31, 2004, have been pledged as collateral. Guarantees Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The guarantees generally extend for a term of up to one year and are fully collateralized. For each guarantee issued, if the customer defaults on a payment to the third party, we would have to perform under the guarantee. Outstanding standby letters of credit totaled $5.2 million at December 31, 2004 and $4.4 million at December 31, 2003. The fair value of these obligations is immaterial at December 31, 2004 and 2003. Litigation In the ordinary course of our business, we are routinely made defendant in or a party to a number of pending or threatened legal actions or proceedings which, in some cases, seek substantial monetary damages from or other forms of relief against us. In our opinion, after consultation with legal counsel, we believe it unlikely that such actions or proceedings will have a material adverse effect on our financial condition, results of operations or liquidity. 101 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 trial for the suit entitled The Long Island Savings Bank, FSB, et al. vs. The United States commenced on January 18, 2005. The ultimate outcomes of such actions are uncertain and there can be no assurance that we will benefit financially from such litigation. (12) Income Taxes Income tax expense is summarized as follows:
For the Year Ended December 31, ------------------------------- (In Thousands) 2004 2003 2002 - -------------------------------------------------------------------------------- Current Federal $103,276 $93,383 $104,401 State and local 6,688 5,107 6,273 - -------------------------------------------------------------------------------- Total current 109,964 98,490 110,674 - -------------------------------------------------------------------------------- Deferred Federal (1,899) (547) 11,126 State and local (1,963) (1,567) 1,266 - -------------------------------------------------------------------------------- Total deferred (3,862) (2,114) 12,392 - -------------------------------------------------------------------------------- Total income tax expense $106,102 $96,376 $123,066 ================================================================================
Total income tax expense differed from the amounts computed by applying the federal income tax rate to income before income tax expense as a result of the following:
For the Year Ended December 31, ------------------------------- (In Thousands) 2004 2003 2002 - ---------------------------------------------------------------------------------------------- Expected income tax expense at statutory federal rate $113,974 $102,628 $130,023 State and local taxes, net of federal tax benefit 3,071 2,301 4,901 Tax exempt income (principally on bank owned life insurance) (6,791) (7,889) (8,451) Reversal of deferred tax valuation allowance -- (3,396) -- Other, net (4,152) 2,732 (3,407) - ---------------------------------------------------------------------------------------------- Total income tax expense $106,102 $ 96,376 $123,066 ==============================================================================================
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) 2004 2003 - -------------------------------------------------------------------------------- Deferred tax assets: Allowances and tax reserves $ 20,732 $ 21,296 Compensation and benefits 6,417 10,468 Tax credits 3,129 3,129 Net operating loss carryforward -- 4,698 Mark-to-market elected for tax purposes 1,476 1,865 Net unrealized loss on securities available-for-sale 19,594 32,470 Unrealized loss on security impairment write-down 6,895 -- Other 3,478 3,722 - -------------------------------------------------------------------------------- Total gross deferred tax assets 61,721 77,648 - -------------------------------------------------------------------------------- Deferred tax liabilities: Mortgage loans (14,974) (16,535) Premises and equipment (7,016) (6,686) Mortgage servicing rights (1,285) (894) Book premiums in excess of tax -- (6,090) - -------------------------------------------------------------------------------- Total gross deferred tax liabilities (23,275) (30,205) - -------------------------------------------------------------------------------- Net deferred tax assets $ 38,446 $ 47,443 ================================================================================
102 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We believe that our future results of operations and tax planning strategies will enable us to generate sufficient taxable income to enable us to realize our deferred tax assets. At December 31, 2004, we had alternative minimum tax credit carryforwards for federal tax purposes of approximately $3.1 million. Astoria Federal's retained earnings at December 31, 2004 and 2003 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. (13) Earnings Per Common Share The following table is a reconciliation of basic and diluted EPS:
For the Year Ended December 31, ---------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted (In Thousands, Except Per Share Data) EPS EPS (1) EPS EPS (2) EPS EPS (3) - -------------------------------------------------------------------------------------------------------------- Net income $219,537 $219,537 $196,846 $196,846 $248,429 $248,429 Preferred dividends declared -- -- (4,500) (4,500) (6,000) (6,000) - -------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $219,537 $219,537 $192,346 $192,346 $242,429 $242,429 ============================================================================================================== Total weighted average basic common shares outstanding 107,931 107,931 114,575 114,575 125,272 125,272 Effect of dilutive securities: Options -- 1,876 -- 1,367 -- 2,107 - -------------------------------------------------------------------------------------------------------------- Total weighted average diluted common shares outstanding 107,931 109,807 114,575 115,942 125,272 127,379 ============================================================================================================== Net earnings per common share $ 2.03 $ 2.00 $ 1.68 $ 1.66 $ 1.94 $ 1.90 ==============================================================================================================
(1) Options to purchase 1,948,800 shares of common stock at $26.63 per share were outstanding as of December 31, 2004, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares for the year ended December 31, 2004. (2) Options to purchase 1,501,200 shares of common stock at prices between $19.92 per share and $24.40 per share were outstanding as of December 31, 2003, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares for the year ended December 31, 2003. (3) Options to purchase 45,000 shares of common stock at $19.92 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. (14) Comprehensive Income The components of accumulated other comprehensive loss at December 31, 2004 and 2003 and the changes during the year ended December 31, 2004 are as follows:
At Current At December 31, Period December 31, (In Thousands) 2003 Change 2004 - -------------------------------------------------------------------------------------------- Net unrealized loss on securities available-for-sale $(44,761) $17,748 $(27,013) Net unrealized loss on cash flow hedge (1,680) 191 (1,489) Minimum pension liability adjustment (48) (42) (90) - -------------------------------------------------------------------------------------------- Accumulated other comprehensive loss $(46,489) $17,897 $(28,592) ============================================================================================
103 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The components of other comprehensive income, other than net income, are as follows:
Before Tax Tax After Tax (In Thousands) Amount (Expense) Benefit Amount - ------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 2004 Net unrealized gains on securities available-for-sale: Net unrealized holding gains on securities arising during the year $ 18,755 $ (7,468) $ 11,287 Reclassification adjustment for net losses included in net income 11,869 (5,408) 6,461 ------------------------------------------ 30,624 (12,876) 17,748 Reclassification adjustment for losses included in net income from net unrealized loss on cash flow hedge 329 (138) 191 Minimum pension liability adjustment (73) 31 (42) - ------------------------------------------------------------------------------------------------------ Other comprehensive income $ 30,880 $(12,983) $ 17,897 ====================================================================================================== For the Year Ended December 31, 2003 Net unrealized losses on securities available-for-sale: Net unrealized holding losses on securities arising during the year $(91,405) $ 39,111 $(52,294) Reclassification adjustment for net gains included in net income (7,346) 2,414 (4,932) ------------------------------------------ (98,751) 41,525 (57,226) Amortization of net unrealized loss on securities transferred to held-to-maturity 1,337 (562) 775 Reclassification adjustment for 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 ======================================================================================================
104 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (15) Benefit Plans Pension Plans and Other Postretirement Benefits The following tables set forth information regarding our defined benefit pension plans and other postretirement benefit plan.
Other Postretirement Pension Benefits Benefits ------------------------ ------------------------ At or For the Year Ended At or For The Year Ended December 31, December 31, ------------------------ ------------------------ (In Thousands) 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $165,494 $145,136 $ 16,386 $ 15,520 Service cost 3,265 2,700 512 360 Interest cost 9,786 9,570 1,087 995 Actuarial loss 6,866 16,774 2,170 1,064 Benefits paid (8,860) (8,686) (1,477) (1,553) - ---------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 176,551 165,494 18,678 16,386 - ---------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 149,944 128,893 -- -- Actual return on plan assets 12,304 29,128 -- -- Employer contribution 683 609 1,477 1,553 Benefits paid (8,860) (8,686) (1,477) (1,553) - ---------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 154,071 149,944 -- -- - ---------------------------------------------------------------------------------------------------------- Funded status (22,480) (15,550) (18,678) (16,386) Unrecognized net actuarial loss (gain) 42,255 38,585 (356) (2,526) Unrecognized prior service cost 694 855 124 165 Unrecognized transition asset - (35) -- -- - ---------------------------------------------------------------------------------------------------------- Net amount recognized $ 20,469 $ 23,855 $(18,910) $(18,747) ========================================================================================================== Amounts recognized in the consolidated statements of financial condition consist of: Prepaid benefit cost $ 36,796 $ 38,981 $ -- $ -- Accrued benefit liability (16,620) (15,330) (18,910) (18,747) Intangible asset 138 122 -- -- Accumulated other comprehensive loss (pre-tax basis) 155 82 -- -- - ---------------------------------------------------------------------------------------------------------- Net amount recognized $ 20,469 $ 23,855 $(18,910) $(18,747) ==========================================================================================================
The accumulated benefit obligation for all defined benefit pension plans was $158.5 million at December 31, 2004 and $149.5 million at December 31, 2003. The measurement dates for our defined benefit pension plans and other postretirement benefit plan were December 31.
Assumptions used to determine Rate of the benefit obligation: Discount Rate Compensation Increase ------------- --------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Pension Benefit Plans: Astoria Federal Pension Plan 5.75% 6.00% 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 5.75 6.00 N/A N/A
105 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) 2004 2003 2002 2004 2003 2002 - ---------------------------------------------------------------------- ------------------------------- Service cost $ 3,265 $ 2,700 $ 2,142 $ 512 $ 360 $ 305 Interest cost 9,786 9,570 9,263 1,087 995 1,031 Expected return on plan assets (11,648) (9,956) (11,866) -- -- -- Amortization of prior service cost 161 160 161 41 40 41 Recognized net actuarial loss (gain) 2,540 3,368 46 -- (152) (219) Amortization of transition asset (35) (104) (104) -- -- -- - -------------------------------------------------------------------------------------------------------- Net periodic cost (benefit) $ 4,069 $ 5,738 $ (358) $1,640 $1,243 $1,158 ========================================================================================================
Expected Return Rate of Discount Rate on Plan Assets Compensation Increase Assumptions used to determine ------------- --------------- --------------------- the net periodic cost: 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- Pension Benefit Plans: Astoria Federal Pension Plan 6.00% 6.75% 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 6.00 6.75 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, --------------- 2004 2003 - ------------------------------------------------------------ Health care cost trend rate assumed for next year 7.50% 8.00% 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 $ 270 $ (208) Effect on the postretirement benefit obligation 2,173 (1,708)
On May 19, 2004, the FASB issued Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was effective for the first interim or annual period beginning after June 15, 2004. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Act, introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare 106 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) benefit. Staff Position No. 106-2 requires employers who conclude their plans were "actuarially equivalent" at December 8, 2003 and the Medicare Act's effects are a "significant event" to account for the federal subsidy either on a retroactive basis to January 1, 2004 or prospectively from the date of adoption of Staff Position No. 106-2. If the Medicare Act's effects are not a "significant event," they are not accounted for until the plan's next measurement date following the adoption of Staff Position No. 106-2, which for us was December 31, 2004. Upon adoption of Staff Position No. 106-2, we determined our plan to be "actuarially equivalent" and determined the Medicare Act's effects were not a "significant event." The impact of our adoption of Staff Position No. 106-2 was a reduction of $850,000 in the accumulated postretirement benefit obligation at December 31, 2004. There was no impact on other post-retirement benefit expense for the year ended December 31, 2004. Included in the tables of Pension Benefits on pages 105 and 106 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) 2004 2003 - -------------------------------------------------------------------------------- Projected benefit obligation $18,685 $17,884 Accumulated benefit obligation 13,891 12,907
The following table sets forth the asset allocations, by asset category, for the Astoria Federal Pension Plan:
Plan Assets At December 31, ---------------- 2004 2003 - -------------------------------------------------------------------------------- Asset Category: Equity securities (1) 13.39% 12.96% Other (2) 86.61 87.04 - -------------------------------------------------------------------------------- Total 100.00% 100.00% ================================================================================
(1) Equity securities include Astoria Financial Corporation common stock with a fair value of $20.6 million, or 13.4% of total plan assets, at December 31, 2004 and $19.2 million, or 12.8% of total plan assets, at December 31, 2003. (2) Primarily comprised of investments in various insurance company pooled separate accounts and trust company trust funds. The overall strategy of the Astoria Federal Pension Plan Investment Policy is to have a diverse portfolio that reasonably spans established risk/return levels, preserves liquidity and achieves the rate of return specified in the actuarial valuation. The strategy allows for a moderate risk approach in order to achieve greater long-term asset growth. The asset mix within the various insurance company pooled separate accounts and trust company trust funds can vary but should not be more than 80% in equity securities, 50% in debt securities, 25% in liquidity funds, and 15% in Astoria Financial Corporation common stock. The Astoria Federal Pension Plan will not acquire Astoria Financial Corporation common stock to the extent that, after the acquisition, such common stock would represent more than 10% of total plan assets. Within equity securities, the mix is further clarified to have ranges not to exceed 10% in any one company, 30% in any one industry, 50% in funds that mirror the S&P 500, 50% in large-cap equity securities, 20% in mid-cap equity securities, 20% in small-cap equity securities, and 10% in international equities. We expect to contribute $666,000 to our unfunded defined benefit pension plans and $1.5 million to our other postretirement benefit plan to cover expected benefit payments in 2005. 107 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Total benefits expected to be paid under our defined benefit pension plans and other postretirement benefit plan as of December 31, 2004, which reflect expected future service, as appropriate, are as follows:
Pension Other Postretirement Year Benefits Benefits (1) - ------------------------------------------- (In Thousands) 2005 $ 8,991 $1,413 2006 9,190 1,353 2007 9,281 1,319 2008 9,524 1,231 2009 9,983 1,234 2010-2014 54,661 5,994
(1) Excludes estimated Medicare Act subsidy reimbursements totaling $263,000. 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 $13,000 for the calendar year ended December 31, 2004. Matching contributions, if any, may be made at the discretion of Astoria Federal. No such contributions were made for 2004, 2003 and 2002. Participants vest immediately in their own contributions and after a period of five years for Astoria Federal contributions. Employee Stock Ownership Plan Astoria Federal maintains an ESOP for its eligible employees, which is also a defined contribution pension plan. To fund the purchase of the ESOP shares, the ESOP borrowed funds from us. The ESOP loans bear an interest rate of 6.00%, mature on December 31, 2029 and are collateralized by our common stock purchased with the loan proceeds. Astoria Federal makes scheduled discretionary contributions to fund debt service. Astoria Federal's contributions, prior to 2010, may be reduced by dividends paid on unallocated shares and investment earnings realized on such dividends. Dividends paid on unallocated shares, which reduced Astoria Federal's contribution to the ESOP, totaled $4.8 million for the year ended December 31, 2004 and $4.3 million for the year ended December 31, 2003. The ESOP loans had an aggregate outstanding principal balance of $33.8 million at December 31, 2004 and $34.7 million at December 31, 2003. 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 337,935 for the year ended December 31, 2004, 387,657 for the year ended December 31, 2003 and 518,277 for the year ended December 31, 2002. As of December 31, 2004, 6,802,146 shares which had a fair value of $181.3 million remain unallocated. In addition to shares allocated, Astoria Federal makes an annual cash contribution to participant accounts. This cash contribution totaled $1.9 million for the year ended December 31, 2004, $1.6 million for the year ended December 31, 2003 and $1.4 million for the year ended December 31, 2002, 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 $10.6 million for the year ended December 31, 2004, $8.8 million for the year ended December 31, 2003 and $11.7 million for the year ended December 31, 2002, which was equal to the shares allocated by the ESOP multiplied by the average fair value of our common stock during the year of allocation, plus the cash contribution made to participant accounts. (16) Stock 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 option grants was 4,875,000 under the 2003 Employee Option Plan and 108 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 525,000 under the 1999 Directors' Option Plan. Remaining shares available for issuance of future grants under the 1999 Directors Option Plan and the 2003 Employee Option Plan totaled 1,670,400 at December 31, 2004 and 3,667,800 at December 31, 2003. Remaining shares available 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 totaled 780,600 at December 31, 2002. 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. 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. Activity in our option plans is summarized as follows:
For the Year Ended December 31, --------------------------------------------------------------------- 2004 2003 2002 --------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Options Price of Options Price of Options Price - ---------------------------------------------------------------------------------------------------------- Outstanding at beginning of year: 10,345,493 $ 16.83 10,262,826 $ 14.32 10,340,925 $ 11.73 Granted 2,014,800 26.55 1,529,700 24.10 2,143,650 18.02 Forfeited (47,400) (20.07) (8,190) (17.56) (4,200) (16.56) Expired -- -- -- -- (227,703) (4.61) Exercised (1,390,760) (13.62) (1,438,843) (6.60) (1,989,846) (5.96) ---------- ---------- ---------- Outstanding at end of year 10,922,133 19.02 10,345,493 16.83 10,262,826 14.32 ========== ========== ========== Options exercisable at end of year 4,182,633 14.85 4,007,393 13.63 3,676,926 11.77
The following table summarizes information about our stock options outstanding at December 31, 2004:
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 - ------------------------------------------------------------------------------------------------ $ 4.64 to $16.42 2,069,469 4.29 years $12.05 2,069,469 $12.05 16.56 to 16.83 2,819,328 6.40 16.70 1,381,428 16.57 16.96 to 24.17 2,645,736 6.93 18.42 731,736 19.52 24.40 1,438,800 8.96 24.40 -- -- 26.63 1,948,800 9.96 26.63 -- -- ---------- --------- $ 4.64 to $26.63 10,922,133 7.10 19.02 4,182,633 14.85 ========== =========
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, ------------------------------------------------------------------------ 2004 2003 2002 ------------------------------------------------------------------------ Weighted Weighted Weighted Options Average Options Average Options Average Granted Fair Value Granted Fair Value Granted Fair Value - -------------------------------------------------------------------------------------------- Employees 1,948,800 1,463,700 2,077,650 Outside directors 66,000 66,000 66,000 --------- --------- --------- 2,014,800 $6.11 1,529,700 $6.06 2,143,650 $3.90 ========= ===== ========= ===== ========= =====
109 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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, --------------------------------------- 2004 2003 2002 --------------------------------------- Dividend yield 2.50% 2.43% 2.94% Expected stock price volatility 25.17 28.81 26.21 Risk-free interest rate based upon equivalent-term U.S. Treasury rates 3.66 3.16 3.29 Expected option lives 5.97 years 5.96 years 5.97 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 model also contains certain inherent limitations when applied to options which are not immediately exercisable and are not traded on public markets. (17) Regulatory Matters Federal law requires that savings associations, such as Astoria Federal, maintain minimum capital requirements. These capital standards are required to be no less stringent than standards applicable to national banks. At December 31, 2004 and 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, 2004 ----------------------------------------------------------- Capital Actual Excess (Dollars in Thousands) Requirement % Capital % Capital % - ------------------------------------------------------------------------------------ Tangible $345,326 1.50% $1,379,088 5.99% $1,033,762 4.49% Leverage 920,869 4.00 1,379,088 5.99 458,219 1.99 Risk-based 939,958 8.00 1,461,870 12.44 521,912 4.44
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
Astoria Federal's Tier I risked-based capital ratio was 11.74% at December 31, 2004 and 14.65% at December 31, 2003. 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, 2004 and 2003, Astoria Federal was a "well capitalized" institution. (18) Fair Value of Financial Instruments Estimated fair values of certain types of financial instruments are most commonly derived from quoted market prices available in formal trading marketplaces. In many cases, financial instruments we hold are not bought or sold in formal trading marketplaces. Accordingly, in cases where quoted market prices are not available, fair values are 110 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) derived or estimated based on a variety of valuation techniques. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any possible tax ramifications, estimated transaction costs, or any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a certain portion of our financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics, and other such factors. These estimates are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For these reasons and others, the estimated fair value disclosures presented herein do not represent our entire underlying value. As such, readers are cautioned in using this information for purposes of evaluating our financial condition and/or value either alone or in comparison with any other company. The following table summarizes the carrying amounts and estimated fair values of our financial instruments.
At December 31, ----------------------------------------------------- 2004 2003 ----------------------------------------------------- Carrying Estimated Carrying Estimated (In Thousands) Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------- Financial Assets: Repurchase agreements $ 267,578 $ 267,578 $ 65,926 $ 65,926 Securities available-for-sale 2,406,883 2,406,883 2,654,992 2,654,992 Securities held-to-maturity 6,302,936 6,306,760 5,792,727 5,809,117 FHLB-NY stock 163,700 163,700 213,450 213,450 Loans held-for-sale, net 23,802 23,813 23,023 23,517 Loans receivable, net 13,180,521 13,362,582 12,603,866 12,947,778 MSR, net 16,799 16,799 17,952 17,981 Interest rate swaps 1,365 1,365 -- -- Financial Liabilities: Deposits 12,323,257 12,378,720 11,186,594 11,341,683 Borrowed funds, net 9,469,835 9,652,910 9,632,037 10,056,589 Interest rate swaps -- -- 621 621
Methods and assumptions used to estimate fair values are as follows: Repurchase agreements The carrying amounts of repurchase agreements approximate fair values since all mature in one month or less. Securities available-for-sale and held-to-maturity Fair values for securities are based on published or securities dealers' estimated market values. FHLB-NY stock The carrying amount of FHLB-NY stock equals cost. The fair value of FHLB-NY stock approximates the carrying amount. Loans held-for-sale, net 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. 111 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. 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 swaps Fair values for interest rate swaps are based on securities dealers' estimated market values. Deposits The fair values of deposits with no stated maturity, such as savings accounts, NOW accounts, money market accounts and demand deposits, are equal to the amount payable on demand. The fair values of certificates of deposit 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 and (2) commitments to sell residential mortgage loans for which fair values were estimated based on current secondary market prices for commitments with similar terms. Due to the short-term nature of our outstanding commitments, the fair values of these commitments are immaterial to our financial condition. (19) Condensed Parent Company Only Financial Statements The following condensed parent company only financial statements reflect our investments in our wholly-owned consolidated subsidiaries, Astoria Federal and AF Insurance Agency, Inc., using the equity method of accounting: Astoria Financial Corporation - Condensed Statements of Financial Condition
At December 31, ----------------------- (In Thousands) 2004 2003 - -------------------------------------------------------------------- Assets: Cash $ 1 $ -- Repurchase agreements 267,578 65,926 Other securities available-for-sale 133 139 ESOP loans receivable 33,796 34,720 Accrued interest receivable 78 9 Other assets 2,662 1,741 Investment in Astoria Federal 1,548,005 1,796,233 Investment in AF Insurance Agency, Inc. 2,641 1,885 Investment in Astoria Capital Trust I 3,929 3,929 - -------------------------------------------------------------------- Total assets $1,858,823 $1,904,582 ==================================================================== Liabilities and stockholders' equity: Other borrowings $ 455,835 $ 473,037 Other liabilities 6,161 6,118 Amounts due to subsidiaries 27,063 28,896 Stockholders' equity 1,369,764 1,396,531 - -------------------------------------------------------------------- Total liabilities and stockholders' equity $1,858,823 $1,904,582 ====================================================================
112 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) 2004 2003 2002 - -------------------------------------------------------------------------------------------- Interest income: Repurchase agreements and other securities $ 1,139 $ 1,500 $ 2,990 ESOP loans receivable 2,079 2,140 2,226 - -------------------------------------------------------------------------------------------- Total interest income 3,218 3,640 5,216 Interest expense on borrowed funds 29,363 29,816 22,267 - -------------------------------------------------------------------------------------------- Net interest expense 26,145 26,176 17,051 - -------------------------------------------------------------------------------------------- Non-interest income 1,307 (1,074) 1,330 Cash dividends from subsidiaries 522,470 120,000 60,000 - -------------------------------------------------------------------------------------------- Non-interest expense: Compensation and benefits 1,878 1,736 1,521 Other 7,132 2,323 1,721 - -------------------------------------------------------------------------------------------- Total non-interest expense 9,010 4,059 3,242 - -------------------------------------------------------------------------------------------- Income before income taxes and equity in (overdistributed) undistributed earnings of subsidiaries 488,622 88,691 41,037 Income tax benefit 14,028 12,970 7,885 - -------------------------------------------------------------------------------------------- Income before equity in (overdistributed) undistributed earnings of subsidiaries 502,650 101,661 48,922 Equity in (overdistributed) undistributed earnings of subsidiaries (1) (283,113) 95,185 199,507 - -------------------------------------------------------------------------------------------- Net income $ 219,537 $196,846 $248,429 ============================================================================================
(1) The equity in overdistributed earnings of subsidiaries for the year ended December 31, 2004 represents dividends paid to us in excess of our subsidiaries' current year earnings. 113 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) 2004 2003 2002 - ------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 219,537 $ 196,846 $ 248,429 Adjustments to reconcile net income to net cash provided by operating activities: Equity in overdistributed (undistributed) earnings of subsidiaries 283,113 (95,185) (199,507) (Increase) decrease in accrued interest receivable (69) 13 62 Amortization of premiums and deferred costs 1,142 1,070 512 Decrease (increase) in other assets, net of other liabilities and amounts due to subsidiaries 434 (82) 7,654 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 504,157 102,662 57,150 - ------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Principal payments on ESOP loans receivable 924 942 1,514 - ------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 924 942 1,514 - ------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from borrowings with original terms greater than three months -- -- 246,433 Repayments of borrowings with original terms greater than three months (20,000) -- -- Cash paid for cash flow hedging instrument -- -- (3,297) Common stock repurchased (225,052) (195,471) (211,103) Cash dividends paid to stockholders (76,720) (76,370) (74,258) Redemption of preferred stock -- (54,500) -- Cash received for options exercised 18,344 8,793 11,742 - ------------------------------------------------------------------------------------------------------- Net cash used in financing activities (303,428) (317,548) (30,483) - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 201,653 (213,944) 28,181 Cash and cash equivalents at beginning of the year 65,926 279,870 251,689 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of the year $ 267,579 $ 65,926 $ 279,870 =======================================================================================================
114 QUARTERLY RESULTS OF OPERATIONS (Unaudited)
For the Year Ended December 31, 2004 ----------------------------------------- First Second Third Fourth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------- Interest income $261,094 $252,563 $264,080 $268,164 Interest expense 146,581 139,247 142,222 147,285 - ---------------------------------------------------------------------------------------- Net interest income 114,513 113,316 121,858 120,879 Provision for loan losses -- -- -- -- - ---------------------------------------------------------------------------------------- Net interest income after provision for loan losses 114,513 113,316 121,858 120,879 Non-interest income 22,139 27,866 24,036 6,043(1) - ---------------------------------------------------------------------------------------- Total income 136,652 141,182 145,894 126,922 General and administrative expense 57,043 55,360 59,168 53,440 - ---------------------------------------------------------------------------------------- Income before income tax expense 79,609 85,822 86,726 73,482 Income tax expense 26,196 28,321 28,619 22,966 - ---------------------------------------------------------------------------------------- Net income $ 53,413 $ 57,501 $ 58,107 $ 50,516 ======================================================================================== Basic earnings per common share $ 0.48 $ 0.53 $ 0.54 $ 0.48 Diluted earnings per common share $ 0.47 $ 0.52 $ 0.53 $ 0.48
(1) Includes a $16.5 million charge for an other-than-temporary securities impairment write-down.
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 $ 0.46 $ 0.43 $ 0.35 $ 0.43 Diluted earnings per common share $ 0.46 $ 0.43 $ 0.35 $ 0.42
115 ASTORIA FINANCIAL CORPORATION AND SUBSIDIARIES INDEX OF EXHIBITS
Exhibit No. Identification of Exhibit - ----------- ------------------------- 3.1 Certificate of Incorporation of Astoria Financial Corporation, as amended effective as of June 3, 1998. (1) 3.2 Bylaws of Astoria Financial Corporation, as amended May 19, 2004. (2) 4.1 Astoria Financial Corporation Specimen Stock Certificate. (3) 4.2 Federal Stock Charter of Astoria Federal Savings and Loan Association. (4) 4.3 Bylaws of Astoria Federal Savings and Loan Association, as amended effective November 17, 2004. (*) 4.4 Bylaws of Astoria Federal Savings and Loan Association, as amended effective upon the retirement of Donald D. Wenk from the Board of Directors of Astoria Federal Savings and Loan Association, on or about May 18, 2005. (*) 4.5 Amended and Restated Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock. (5) 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. (6) 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. (7) 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. (8) 4.9 Form of Rights Certificate. (6) 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)
116
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)
117
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 10.43 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. (3) 10.9 The Long Island Bancorp, Inc., Non-Employee Director Retirement Benefit Plan, as amended. (12) 10.10 Astoria Financial Corporation Death Benefit Plan for Outside Directors. (3) 10.11 Deferred Compensation Plan for Directors of Astoria Financial Corporation. (3) 10.12 Astoria Financial Corporation 1993 Incentive Stock Option Plan, as amended. (13) 10.13 1996 Stock Option Plan for Officers and Employees of Astoria Financial Corporation, as amended. (13) 10.14 1996 Stock Option Plan for Outside Directors of Astoria Financial Corporation, as amended. (13) 10.15 1999 Stock Option Plan for Officers and Employees of Astoria Financial Corporation. (14) 10.16 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation. (14) 10.17 Amendment to Section 4.5 of the 1999 Stock Option Plan for Outside Directors of Astoria Financial Corporation. (4) 10.18 2003 Stock Option Plan for Officers and Employees of Astoria Financial Corporation. (15) 10.19 Astoria Federal Savings and Loan Association Annual Incentive Plan for Select Executives. (12) 10.20 Astoria Financial Corporation Executive Officer Annual Incentive Plan, as amended. (16) 10.21 Astoria Financial Corporation Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (17)
118
Exhibit No. Identification of Exhibit - ----------- ------------------------- 10.22 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with George L. Engelke, Jr., dated as of January 1, 2000. (17) 10.23 Astoria Financial Corporation Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (17) 10.24 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Gerard C. Keegan, dated as of January 1, 2000. (17) 10.25 Employment Termination and Release Agreement by and among John J. Conefry, Jr., Astoria Federal Savings and Loan Association and Astoria Financial Corporation. (4) 10.26 Astoria Financial Corporation Amended and Restated Employment Agreement with Arnold K. Greenberg dated as of January 1, 2000. (17) 10.27 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Arnold K. Greenberg, dated as of January 1, 2000. (17) 10.28 Astoria Financial Corporation Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (3) 10.29 Astoria Federal Savings and Loan Association Employment Agreement with Gary T. McCann, dated as of December 1, 2003. (3) 10.30 Astoria Financial Corporation Amended and Restated Employment Agreement with Monte N. Redman dated as of January 1, 2000. (17) 10.31 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Monte N. Redman, dated as of January 1, 2000. (17) 10.32 Astoria Financial Corporation Amended and Restated Employment Agreement with Alan P. Eggleston dated as of January 1, 2000. (17) 10.33 Astoria Federal Savings and Loan Association Amended and Restated Employment Agreement with Alan P. Eggleston, dated as of January 1, 2000. (17) 10.34 Change of Control Severance Agreement, dated as of January 1, 2000, by and among Astoria Federal Savings and Loan Association, Astoria Financial Corporation and Josie Callari. (17) 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 Robert J. DeStefano. (17)
119
Exhibit No. Identification of Exhibit - ----------- ------------------------- 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 Frank E. Fusco. (17) 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 Robert T. Volk. (17) 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 Ira M. Yourman. (17) 10.39 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) 10.40 Retirement Medical and Dental Benefit Policy for Senior Officers. (13) 10.41 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. (18) 10.42 Option Conversion Certificates of Robert J. Conway, Leo J. Waters and Donald D. Wenk. (12) 10.43 Trust Agreement, dated as of January 31, 1995 between Astoria Financial Corporation and State Street Bank and Trust Company. (3) 12.1 Statement regarding computation of ratios. (*) 21.1 Subsidiaries of Astoria Financial Corporation. (*) 23.1 Consent of Independent Registered Public Accounting Firm. (*) 31.1 Certifications of Chief Executive Officer. (*) 31.2 Certifications of Chief Financial Officer. (*) 32.1 Written Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*) 32.2 Written Statement of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. (*)
120
Exhibit No. Identification of Exhibit - ----------- ------------------------- 99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2005, which will be filed with the SEC within 120 days from December 31, 2004, is incorporated herein by reference.
- ---------- * Filed herewith. Copies of exhibits will be provided to shareholders upon written request to Astoria Financial Corporation, Investor Relations Department, One Astoria Federal Plaza, Lake Success, New York 11042 at a charge of $0.10 per page. Copies are also available at no charge through the SEC website at www.sec.gov/edgar/searchedgar/webusers.htm. (1) Incorporated by reference to Astoria Financial Corporation's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998, filed with the Securities and Exchange Commission on September 10, 1998 (File Number 000-22228). (2) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated May 19, 2004, filed with the Securities and Exchange Commission on May 19, 2004 (File Number 001-11967). (3) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 12, 2004 (File Number 001-11967). (4) Incorporated by reference to Astoria Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the Securities and Exchange Commission on March 26, 2001 (File Number 000-22228). (5) Incorporated by reference to Astoria Financial Corporation's Current Report on Form 8-K, dated February 9, 2005, filed with the Securities and Exchange Commission on February 10, 2005 (File Number 001-11967). (6) 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. (7) 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). (8) 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). (9) Incorporated by reference to Form S-4 Registration Statement, filed with the Securities and Exchange Commission on February 18, 2000. 121 (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 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). (13) 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). (14) Incorporated by reference to Astoria Financial Corporation's Form 14-A Definitive Proxy Statement filed on April 8, 1999 (File Number 000-22228). (15) Incorporated by reference to Astoria Financial Corporation's Form 14-A Definitive Proxy Statement filed on April 8, 2003 (File Number 001-11967). (16) Incorporated by reference to Astoria Financial Corporation's Form 14-A Definitive Proxy Statement filed on April 16, 2004 (File Number 001-11967). (17) 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). (18) 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. 122 EX-4 2 ex4-3.txt EXHIBIT 4.3 Exhibit 4.3 BYLAWS OF ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION Amended and Restated Effective as of January 31, 1995 As Amended Effective July 17, 1996 As Amended Effective September 30, 1997 As Amended Effective September 30, 1998 As Amended Effective July 21, 1999 As Amended Effective April 24, 2000 As Amended Effective November 17, 2004 BYLAWS OF ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION ARTICLE I. HOME OFFICE The home office of Astoria Federal Savings and Loan ("ASSOCIATION") is 37-16 30th Avenue, Long Island City, New York 11103. ARTICLE II. SHAREHOLDERS Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the administrative office of the ASSOCIATION located at One Astoria Federal Plaza, Lake Success, New York or at such other place in the State in which the principal place of business of the ASSOCIATION is located as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the ASSOCIATION for the election of directors and for the transaction of any other business of the ASSOCIATION shall be held annually within 120 days after the end of the ASSOCIATION's fiscal year. Section 3. Special Meetings. For a period of five years from the date of the completion of the conversion of the ASSOCIATION from mutual to stock form, special meetings of the shareholders relating to a change in control of the ASSOCIATION or to an amendment of the Charter of the ASSOCIATION may be called only by the board of directors. Thereafter, special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision ("OTS"), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president or the secretary upon the written request of the holders of not less than one-tenth of all the outstanding capital stock of the ASSOCIATION entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered at the home office of the ASSOCIATION addressed to the chairman of the board, the president or the secretary. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the most current edition of Robert's Rules of Order unless otherwise prescribed by regulations of the OTS or these bylaws. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the directors calling the meeting, to each -3- shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the ASSOCIATION as of the record date prescribed in Section 6 of this Article II, with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the ASSOCIATION shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the ASSOCIATION and shall be subject to inspection by any shareholder at any time during usual business hours, for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection by any shareholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in Section 552.6(d) of the OTS's Regulations as now or hereafter in effect. Section 8. Quorum. A majority of the outstanding shares of the ASSOCIATION entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. -4- Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the ASSOCIATION to the contrary, at any meeting of the shareholders of the ASSOCIATION any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee, shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the ASSOCIATION, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the ASSOCIATION, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 12. Cumulative Voting. Shareholders shall not be entitled to cumulate their votes for election of directors. Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the -5- chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the OTS, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the ASSOCIATION. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the ASSOCIATION at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the ASSOCIATION. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the ASSOCIATION at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting, but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. -6- Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter. ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the ASSOCIATION shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings. Section 2. Number and Term. The board of directors shall consist of twelve members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, within the ASSOCIATION's normal lending territory, for the holding of additional regular meetings without other notice than such resolution. Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the ASSOCIATION unless the ASSOCIATION is a wholly owned subsidiary of a holding company. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the ASSOCIATION's normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone, or by means of similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 12 of this Article. Section 6. Notice. Written notice of any special meeting shall be given to each director at least two days prior thereto when delivered personally or by telegram, or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid -7- if mailed, or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the OTS or by these bylaws. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the ASSOCIATION addressed to the chairman of the board or president. Unless otherwise specified such resignation shall take effect upon receipt by the chairman of the board or president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. Section 11. Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Section 13. Presumption of Assent. A director of the ASSOCIATION who is present at a meeting of the board of directors at which action on any ASSOCIATION matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the -8- minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the ASSOCIATION within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the Charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. Section 15. Age Limitation of Directors. No person 75 or above years of age shall be eligible for election, reelection, appointment, or reappointment to the board of directors of the ASSOCIATION. No director shall serve as such beyond the regular meeting of the ASSOCIATION which immediately precedes the director becoming 75 years of age. This age limitation does not apply to an advisory director. ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the Charter or bylaws of the ASSOCIATION, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease or other disposition of all or substantially all of the property and assets of the ASSOCIATION otherwise than in the usual and regular course of its business; a voluntary dissolution of the ASSOCIATION; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. -9- Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the ASSOCIATION. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the ASSOCIATION and may prescribe the duties, constitution and procedures thereof. ARTICLE V. OFFICERS Section 1. Positions. The officers of the ASSOCIATION shall be a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall -10- be the chief executive officer, unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the ASSOCIATION. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the ASSOCIATION may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the ASSOCIATION shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contractual rights. The board of directors may authorize the ASSOCIATION to enter into an employment contract with any officer in accordance with regulations of the OTS; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the ASSOCIATION will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. To the extent permitted by regulations of the OTS, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the ASSOCIATION to enter into any contract or execute and deliver any instrument in the name of and on behalf of the ASSOCIATION. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the ASSOCIATION and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. -11- Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the ASSOCIATION shall be signed by one or more officers, employees or agents of the ASSOCIATION in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the ASSOCIATION not otherwise employed shall be deposited from time to time to the credit of the ASSOCIATION in any duly authorized depositories as the board of directors may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Certificates representing shares of capital stock of the ASSOCIATION shall be in such form as shall be determined by the board of directors and approved by the OTS. Such certificates shall be signed by the chief executive officer or by any other officer of the ASSOCIATION authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the ASSOCIATION itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the ASSOCIATION. All certificates surrendered to the ASSOCIATION for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the ASSOCIATION as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the ASSOCIATION shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the ASSOCIATION. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the ASSOCIATION shall be deemed by the ASSOCIATION to be the owner for all purposes. ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT The fiscal year of the ASSOCIATION shall end on December 31 of each year. The ASSOCIATION shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. The appointment of such accountants shall be subject to annual ratification by the shareholders. ARTICLE IX. DIVIDENDS -12- Subject to the terms of the ASSOCIATION's Charter and the regulations and orders of the OTS, the board of directors may, from time to time, declare, and the ASSOCIATION may pay, dividends on its outstanding shares of capital stock. ARTICLE X. CORPORATE SEAL The board of directors shall provide an ASSOCIATION seal, which shall be two concentric circles between which shall be the name of the ASSOCIATION. The year of incorporation or an emblem may appear in the center. ARTICLE XI. AMENDMENTS These bylaws may be amended in a manner consistent with regulations of the OTS at any time by a majority vote of the full board of directors, or by a majority vote of the votes cast by the shareholders of the ASSOCIATION at any legal meeting. EX-4 3 ex4-4.txt EXHIBIT 4.4 Exhibit 4.4 BYLAWS OF ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION Amended and Restated Effective as of January 31, 1995 As Amended Effective July 17, 1996 As Amended Effective September 30, 1997 As Amended Effective September 30, 1998 As Amended Effective July 21, 1999 As Amended Effective April 24, 2000 As Amended Effective November 17, 2004 As Amended Effective on or about May 18, 2005 BYLAWS OF ASTORIA FEDERAL SAVINGS AND LOAN ASSOCIATION ARTICLE I. HOME OFFICE The home office of Astoria Federal Savings and Loan ("ASSOCIATION") is 37-16 30th Avenue, Long Island City, New York 11103. ARTICLE II. SHAREHOLDERS Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the administrative office of the ASSOCIATION located at One Astoria Federal Plaza, Lake Success, New York or at such other place in the State in which the principal place of business of the ASSOCIATION is located as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the ASSOCIATION for the election of directors and for the transaction of any other business of the ASSOCIATION shall be held annually within 120 days after the end of the ASSOCIATION's fiscal year. Section 3. Special Meetings. For a period of five years from the date of the completion of the conversion of the ASSOCIATION from mutual to stock form, special meetings of the shareholders relating to a change in control of the ASSOCIATION or to an amendment of the Charter of the ASSOCIATION may be called only by the board of directors. Thereafter, special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision ("OTS"), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president or the secretary upon the written request of the holders of not less than one-tenth of all the outstanding capital stock of the ASSOCIATION entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered at the home office of the ASSOCIATION addressed to the chairman of the board, the president or the secretary. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the most current edition of Robert's Rules of Order unless otherwise prescribed by regulations of the OTS or these bylaws. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the directors calling the meeting, to each -3- shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the ASSOCIATION as of the record date prescribed in Section 6 of this Article II, with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the ASSOCIATION shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the ASSOCIATION and shall be subject to inspection by any shareholder at any time during usual business hours, for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection by any shareholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in Section 552.6(d) of the OTS's Regulations as now or hereafter in effect. Section 8. Quorum. A majority of the outstanding shares of the ASSOCIATION entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. -4- Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the ASSOCIATION to the contrary, at any meeting of the shareholders of the ASSOCIATION any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee, shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the ASSOCIATION, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the ASSOCIATION, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 12. Cumulative Voting. Shareholders shall not be entitled to cumulate their votes for election of directors. Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the -5- chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the OTS, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the ASSOCIATION. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the ASSOCIATION at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the ASSOCIATION. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the ASSOCIATION at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting, but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. -6- Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter. ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the ASSOCIATION shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings. Section 2. Number and Term. The board of directors shall consist of eleven members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, within the ASSOCIATION's normal lending territory, for the holding of additional regular meetings without other notice than such resolution. Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the ASSOCIATION unless the ASSOCIATION is a wholly owned subsidiary of a holding company. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the ASSOCIATION's normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone, or by means of similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 12 of this Article. Section 6. Notice. Written notice of any special meeting shall be given to each director at least two days prior thereto when delivered personally or by telegram, or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid -7- if mailed, or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the OTS or by these bylaws. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the ASSOCIATION addressed to the chairman of the board or president. Unless otherwise specified such resignation shall take effect upon receipt by the chairman of the board or president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. Section 11. Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Section 13. Presumption of Assent. A director of the ASSOCIATION who is present at a meeting of the board of directors at which action on any ASSOCIATION matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the -8- minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the ASSOCIATION within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the Charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. Section 15. Age Limitation of Directors. No person 75 or above years of age shall be eligible for election, reelection, appointment, or reappointment to the board of directors of the ASSOCIATION. No director shall serve as such beyond the regular meeting of the ASSOCIATION which immediately precedes the director becoming 75 years of age. This age limitation does not apply to an advisory director. ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the Charter or bylaws of the ASSOCIATION, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease or other disposition of all or substantially all of the property and assets of the ASSOCIATION otherwise than in the usual and regular course of its business; a voluntary dissolution of the ASSOCIATION; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. -9- Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the ASSOCIATION. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the ASSOCIATION and may prescribe the duties, constitution and procedures thereof. ARTICLE V. OFFICERS Section 1. Positions. The officers of the ASSOCIATION shall be a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall -10- be the chief executive officer, unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the ASSOCIATION. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the ASSOCIATION may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the ASSOCIATION shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contractual rights. The board of directors may authorize the ASSOCIATION to enter into an employment contract with any officer in accordance with regulations of the OTS; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the ASSOCIATION will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. To the extent permitted by regulations of the OTS, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the ASSOCIATION to enter into any contract or execute and deliver any instrument in the name of and on behalf of the ASSOCIATION. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the ASSOCIATION and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. -11- Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the ASSOCIATION shall be signed by one or more officers, employees or agents of the ASSOCIATION in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the ASSOCIATION not otherwise employed shall be deposited from time to time to the credit of the ASSOCIATION in any duly authorized depositories as the board of directors may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Certificates representing shares of capital stock of the ASSOCIATION shall be in such form as shall be determined by the board of directors and approved by the OTS. Such certificates shall be signed by the chief executive officer or by any other officer of the ASSOCIATION authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the ASSOCIATION itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the ASSOCIATION. All certificates surrendered to the ASSOCIATION for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the ASSOCIATION as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the ASSOCIATION shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the ASSOCIATION. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the ASSOCIATION shall be deemed by the ASSOCIATION to be the owner for all purposes. ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT The fiscal year of the ASSOCIATION shall end on December 31 of each year. The ASSOCIATION shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. The appointment of such accountants shall be subject to annual ratification by the shareholders. ARTICLE IX. DIVIDENDS -12- Subject to the terms of the ASSOCIATION's Charter and the regulations and orders of the OTS, the board of directors may, from time to time, declare, and the ASSOCIATION may pay, dividends on its outstanding shares of capital stock. ARTICLE X. CORPORATE SEAL The board of directors shall provide an ASSOCIATION seal, which shall be two concentric circles between which shall be the name of the ASSOCIATION. The year of incorporation or an emblem may appear in the center. ARTICLE XI. AMENDMENTS These bylaws may be amended in a manner consistent with regulations of the OTS at any time by a majority vote of the full board of directors, or by a majority vote of the votes cast by the shareholders of the ASSOCIATION at any legal meeting. EX-12 4 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, 2004 was as follows:
For the Year Ended December 31, 2004 ------------------------------------ (In Thousands) Income before income tax expense ........ $325,639 Income tax expense ...................... 106,102 -------- Net income .............................. $219,537 ======== Fixed charges: Interest on borrowed funds .............. $337,906 Interest on deposits .................... 237,429 One-third of rent expense ............... 2,507 -------- Total fixed charges .................. $577,842 ======== Earnings (for ratio calculation) ........ $903,481 ======== Ratio of earnings to fixed charges ...... 1.56x
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, 2004 was as follows:
For the Year Ended December 31, 2004 ------------------------------------ (In Thousands) Income before income tax expense ........ $325,639 Income tax expense ...................... 106,102 -------- Net income .............................. $219,537 ======== Fixed charges: Interest on borrowed funds .............. $337,906 One-third of rent expense ............... 2,507 -------- Total fixed charges .................. $340,413 ======== Earnings (for ratio calculation) ........ $666,052 ======== Ratio of earnings to fixed charges ...... 1.96x
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 5 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 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, and three of which have no assets or operations but may be used to acquire interests in real estate in the future. The fifth such subsidiary serves as a holding company for one of the other four. Astoria Federal has three additional subsidiaries which are inactive, two of which Astoria Federal intends to dissolve. Subsidiary of Star Preferred Holding Corporation Astoria Preferred Funding Corporation Delaware
EX-23 6 ex23-1.txt EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Astoria Financial Corporation: We consent to the incorporation by reference in the Registration Statements (Nos. 33-86248, 33-86250, 33-98500, 333-36807, 333-64895, 333-113745 and 333-113785) 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 reports dated March 3, 2005, with respect to (i) the consolidated statements of financial condition of Astoria Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and (ii) management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 Annual Report on Form 10-K of Astoria Financial Corporation. /s/ KPMG LLP New York, New York March 9, 2005 EX-31 7 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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 9, 2005 /s/ George L. Engelke, Jr. - ----------------------------------------------- George L. Engelke, Jr. Chairman, President and Chief Executive Officer Astoria Financial Corporation EX-31 8 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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 9, 2005 /s/ Monte N. Redman - ---------------------------------------------------- Monte N. Redman Executive Vice President and Chief Financial Officer Astoria Financial Corporation EX-32 9 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, 2004 (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 9, 2005 /s/ George L. Engelke, Jr. - ------------- ---------------------------------------- Dated George L. Engelke, Jr. EX-32 10 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, 2004 (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 9, 2005 /s/ Monte N. Redman - ------------- ---------------------------------------- Dated Monte N. Redman -----END PRIVACY-ENHANCED MESSAGE-----