10-K 1 c52484_10-k.htm


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, 2007

 

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


 

Commission File Number 001-11967

 

ASTORIA FINANCIAL CORPORATION


(Exact name of registrant as specified in its charter)


 

 

 

 

 

Delaware

 

 

 

11-3170868


 

 

 


(State or other jurisdiction of incorporation or organization)

 

 

 

(I.R.S. Employer Identification Number)

 

 

 

 

 

One Astoria Federal Plaza, Lake Success, New York

 

11042

 

(516) 327-3000


 


 


(Address of principal executive offices)

 

(Zip code)

 

(Registrant’s telephone number, including area code)

 

 

 

 

 

          Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

 

 

Name of each exchange on which registered


 

 

 


Common Stock, par value $.01 per share

 

 

 

New York Stock Exchange

          Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES x NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES o NO x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

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

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2007, 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 $2.34 billion.

The number of shares of the registrant’s Common Stock outstanding as of February 15, 2008 was 96,049,314 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 21, 2008 and any adjournment thereof, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2007, are incorporated by reference into Part III.



ASTORIA FINANCIAL CORPORATION
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 


 

 

 

 

 

Part I

 

 

 

 

 

 

 

 

Item 1.

Business

2

 

Item 1A.

Risk Factors

30

 

Item 1B.

Unresolved Staff Comments

34

 

Item 2.

Properties

34

 

Item 3.

Legal Proceedings

34

 

Item 4.

Submission of Matters to a Vote of Security Holders

35

 

 

 

 

 

 

 

Part II

 

 

 

 

 

 

 

 

Item 5.

Market for Astoria Financial Corporation’s Common
Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities

36

 

Item 6.

Selected Financial Data

39

 

Item 7.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

41

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

75

 

Item 8.

Financial Statements and Supplementary Data

77

 

Item 9.

Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

77

 

Item 9A.

Controls and Procedures

78

 

Item 9B.

Other Information

78

 

 

 

 

 

 

 

Part III

 

 

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

78

 

Item 11.

Executive Compensation

79

 

Item 12.

Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters

79

 

Item 13.

Certain Relationships and Related Transactions, and
Director Independence

80

 

Item 14.

Principal Accounting Fees and Services

80

 

 

 

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

80

 

 

 

 

 

 

 

SIGNATURES

81

 



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:

 

 

 

 

the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;

 

 

 

 

there may be increases in competitive pressure among financial institutions or from non-financial institutions;

 

 

 

 

changes in the interest rate environment may reduce interest margins or affect the value of our investments;

 

 

 

 

changes in deposit flows, loan demand or real estate values may adversely affect our business;

 

 

 

 

changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;

 

 

 

 

general economic conditions, either nationally or locally in some or all areas in which we do business, or conditions in the real estate or securities markets or the banking industry may be less favorable than we currently anticipate;

 

 

 

 

legislative or regulatory changes may adversely affect our business;

 

 

 

 

technological changes may be more difficult or expensive than we anticipate;

 

 

 

 

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

 

 

 

 

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

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

1


PART I

As used in this Form 10-K, “we,” “us” and “our” refer to Astoria Financial Corporation and its consolidated subsidiaries, principally Astoria Federal Savings and Loan Association.

ITEM 1.     BUSINESS

General

We are a Delaware corporation organized in 1993 as the unitary savings and loan association holding company of Astoria Federal Savings and Loan Association and its consolidated subsidiaries, or Astoria Federal. We are headquartered in Lake Success, New York and our principal business is the operation of our wholly-owned subsidiary, Astoria Federal. Astoria Federal’s primary business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowings, primarily in one-to-four family mortgage loans, multi-family mortgage loans, commercial real estate loans and mortgage-backed securities. To a lesser degree, Astoria Federal also invests in construction loans and consumer and other loans, U.S. government, government agency and government-sponsored enterprise, or GSE, securities and other investments permitted by federal banking 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 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 and income tax expense. Non-interest income includes customer service fees; other loan fees; net gain on sales of securities; mortgage banking income, net; income from bank owned life insurance, or BOLI; and other non-interest income. General and administrative expense consists of compensation and benefits expense; occupancy, equipment and systems expense; federal deposit insurance premiums; advertising expense; and other operating expenses. Our earnings are significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.

In addition to Astoria Federal, Astoria Financial Corporation has two other subsidiaries, AF Insurance Agency, Inc. and Astoria Capital Trust I. AF Insurance Agency, Inc. is a licensed life insurance agency and property and casualty insurance broker. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. makes insurance products available primarily to the customers of Astoria Federal. AF Insurance Agency, Inc. is a wholly-owned subsidiary which is consolidated with Astoria Financial Corporation for financial reporting purposes. Our other subsidiary, Astoria Capital Trust I, is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with Financial Accounting Standards Board, or FASB, revised interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” or FIN 46(R). Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million aggregate liquidation amount of 9.75% Capital Securities due November 1, 2029, or Capital Securities, and $3.9 million of common securities (which are the only voting securities of Astoria Capital Trust I), which are 100% owned by Astoria Financial Corporation, and using the proceeds to acquire Junior Subordinated Debentures issued by Astoria Financial Corporation. Astoria Financial Corporation has fully and unconditionally guaranteed the Capital Securities along with all obligations of Astoria Capital Trust I under the trust agreement relating to the Capital Securities.

2


Available Information

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

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 loans and consumer and other loans. At December 31, 2007, our net loan portfolio totaled $16.08 billion, or 74.0% of total assets.

We originate mortgage loans either directly through our banking and loan production offices in New York or indirectly through brokers and our third party loan origination program. Mortgage loan originations and purchases totaled $4.23 billion for the year ended December 31, 2007 and $3.43 billion for the year ended December 31, 2006. Mortgage loan originations include originations of loans held-for-sale totaling $203.7 million for the year ended December 31, 2007 and $232.2 million for the year ended December 31, 2006. Our retail loan origination program accounted for $1.01 billion of originations during 2007 and $1.29 billion of originations during 2006. We also have an extensive broker network covering twenty-two states and the District of Columbia. Our broker loan origination program consists of relationships with mortgage brokers and accounted for $2.81 billion of originations during 2007 and $1.76 billion of originations during 2006. Our third party loan origination program includes relationships with other financial institutions and mortgage bankers covering twenty-nine states and the District of Columbia and accounted for purchases of $407.3 million during 2007 and $385.6 million during 2006. Mortgage loans purchased through our third party loan origination program are subject to the same underwriting standards as our retail and broker originations. Our various loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, our broker and third party loan origination programs provide geographic diversification, reducing our exposure to concentrations of credit risk. At December 31, 2007, $5.58 billion, or 35.6% of our total mortgage loan portfolio was secured by properties located in New York and $10.10 billion, or 64.4%, of our total mortgage loan portfolio was secured by properties located in 41 other states and the District of Columbia. Excluding New York, we have a concentration of greater than 5.0% of our total mortgage loan portfolio in seven states: 10.2% in California, 9.9% in New Jersey, 8.7% in Connecticut, 8.0% in Illinois, 6.2% in Virginia, 5.4% in Maryland and 5.1% in Massachusetts. See the “Loan Portfolio Composition” table on page 8 and the “Loan Maturity, Repricing and Activity” tables on pages 8 and 9.

We outsource the servicing of our mortgage loan portfolio, including our portfolio of mortgage loans serviced for other investors to an unrelated third party under a sub-servicing agreement.

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, although we discontinued originating such loans in January 2008. 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, 2007, $11.63 billion, or 72.5%, of our total loan portfolio consisted of one-to-four family mortgage loans, of which $11.23 billion, or 96.6%, were adjustable rate mortgage, or ARM, loans. Our ARM loan portfolio consists primarily of interest-only hybrid and hybrid ARM loans. We do not originate negative amortization loans, payment option loans or other loans with short-term interest-only periods. We offer interest-only hybrid 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. However, effective January 2008, we no longer offer interest-only hybrid ARM loans with an initial fixed rate period of three years. Our interest-only ARM loans require the borrower to pay interest only during the first ten years of the loan term. After the tenth anniversary of the loan, principal and interest payments are required to amortize the loan over the remaining loan term. Our portfolio of one-to-four family interest-only ARM loans totaled $7.64 billion, or 65.7% of our one-to-four family mortgage loans, at December 31, 2007. We also offer hybrid ARM loans which initially have a fixed rate for three, five, seven or ten years and convert into one year ARM loans at the end of the initial fixed rate period. The three, five and seven year hybrid ARM loans have terms of up to forty years and the ten year hybrid ARM loans have terms of up to thirty years. Our hybrid ARM loans require the borrower to make principal and interest payments during the entire loan term.

Within our one-to-four family mortgage loan portfolio of interest-only hybrid ARM loans, hybrid ARM loans and fixed rate loans, we have reduced documentation loan products. Reduced documentation loans are comprised of stated income, full asset, or SIFA, loans; stated income, stated asset, or SISA, loans; and Super Streamline loans. SIFA and SISA loans require a prospective borrower to complete a standard mortgage loan application while the Super Streamline product requires the completion of an abbreviated application and is, in effect, considered a “no documentation” loan. At December 31, 2007 our portfolio of one-to-four family reduced documentation loans totaled $2.89 billion, or 24.9% of our one-to-four family mortgage loans, and was comprised primarily of SIFA loans. During the 2007 second quarter, we discontinued originating SISA and Super Streamline loans and during the 2007 fourth quarter, we discontinued originating SIFA loans.

All ARM loans we offer have annual and lifetime interest rate ceilings and floors. ARM loans may be offered with an initial interest rate which is less than the fully indexed rate for the loan at the time of origination. We determine the initial discounted rate in accordance with market and competitive factors. We underwrite ARM loans using the initial rate, which may be a discounted rate. To recognize the credit risks associated with interest-only hybrid ARM loans, during the 2006 second quarter, we began underwriting our interest-only hybrid ARM loans based on a fully amortizing thirty year loan. Additionally, effective in 2007, in accordance with federal banking regulatory guidelines, we began underwriting our interest-only hybrid ARM loans at the higher of the fully indexed rate or the initial note 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. Prior to the fourth quarter of 2007, for mortgage loans which had a loan-to-value ratio of greater than 80%, we required the mortgagor to obtain private mortgage insurance. In addition, we offered a variety of proprietary products which allowed the borrower to obtain financing of up to 90% loan-to-value without private mortgage insurance, through a combination of a first mortgage loan with an 80% loan-to-value and a home equity line of credit for the additional 10%. This type of financing does not comprise a significant portion of our lending portfolio. During the fourth quarter of 2007, we revised our policy on originations of owner-occupied, one-to-four family loans to discontinue

4


lending amounts in excess of 80% of the appraised value of the property securing the loan, except in the case of loans originated under our affordable housing program, which is consistent with our program for compliance with the Community Reinvestment Act, or CRA, and in the case of loans originated for sale. See “Regulation and Supervision – Community Reinvestment” for a further discussion of the CRA.

ARM loans pose credit risks somewhat greater than the risks posed by fixed rate loans primarily because, as interest rates rise, the underlying payments of the borrower increase when the loan is beyond its initial fixed rate period, increasing the potential for default. Interest-only ARM loans have an additional potential risk element when the loan payments adjust after the tenth anniversary of the loan to include principal payments resulting in a further increase in the underlying payments. We continue to prudently manage the greater risk posed by ARM and interest-only ARM loans through the application of sound underwriting practices and strong risk management systems.

Our reduced documentation loans also have additional elements of risk since not all of the information provided by the borrower is verified and in the case of the Super Streamline product, the information provided by the borrower is limited. However, each of these products requires the receipt of an appraisal of the real estate used as collateral for the mortgage loan and a credit report on the prospective borrower. The loans are priced according to our internal risk assessment of the loan giving consideration to the loan-to-value ratio, the potential borrower’s credit scores and various other credit criteria. SIFA loans require the verification of a potential borrower’s asset information on the loan application, but not the income information provided. SIFA loans comprised approximately 13% of our one-to-four family loan originations in 2007 and had an average loan-to-value ratio at origination of 66%. The SISA and Super Streamline loans represented only 1% of our 2007 originations.

Generally, we originate fifteen year and thirty year fixed rate one-to-four family mortgage loans for sale to various GSEs or other investors with servicing either retained or released. The sale of such loans is generally arranged through a master commitment either on a mandatory delivery or best efforts basis. Loans serviced for others totaled $1.27 billion at December 31, 2007.

One-to-four family loan originations and purchases totaled $3.82 billion in 2007 and $2.73 billion in 2006. One-to-four family loan originations include originations of loans held-for-sale totaling $203.7 million in 2007 and $232.2 million in 2006.

Multi-Family and Commercial Real Estate Lending

While we are primarily a one-to-four family mortgage lender, we also originate multi-family and commercial real estate loans. At December 31, 2007, $2.95 billion, or 18.4%, of our total loan portfolio consisted of multi-family mortgage loans and $1.03 billion, or 6.4%, of our total loan portfolio consisted of commercial real estate loans. During 2007, we originated $410.4 million of multi-family, commercial real estate and mixed use loans compared to $664.4 million in 2006. Mixed use loans are secured by properties which are intended for both residential and business use and are classified as multi-family or commercial real estate based on the greater number of residential versus commercial units.

The multi-family and commercial real estate loans in our portfolio consist of both fixed rate and adjustable rate loans which were originated at prevailing market rates. Multi-family and commercial real estate loans are generally five to fifteen year term balloon loans amortized over fifteen to thirty years. We also originate interest-only multi-family and commercial real estate loans to qualified borrowers. Such loans are underwritten on the basis of a fully amortizing loan. Multi-family and commercial real estate interest-only loans differ from one-to-four family interest-only loans in that the interest-only period for multi-family and commercial real estate loans generally ranges from one to five years and such loans typically provide for balloon payments at maturity. Our portfolio of multi-family and commercial real estate interest-only loans totaled $639.7 million, or 16.1% of our multi-family and commercial real estate loans, at December 31, 2007, and was comprised primarily of multi-family loans. In making multi-family and commercial real estate 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

5


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 loan on purchases or 75% of the appraised value on refinances.

Our policy generally has been to originate multi-family and commercial real estate loans in the New York metropolitan area, which includes New York, New Jersey and Connecticut, although we have also originated loans in various other states, including Florida and Pennsylvania. Originations in states other than New York, New Jersey and Connecticut represented 12.0% of our total originations in 2007. We do not believe that current market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending and, therefore, are currently only originating such loans in the New York metropolitan area.

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, 2007, our single largest multi-family credit had an outstanding balance of $16.3 million and was current and secured by a 276-unit apartment complex in Staten Island, New York. At December 31, 2007, the average balance of loans in our multi-family portfolio was approximately $900,000.

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, 2007, our single largest commercial real estate credit had an outstanding principal balance of $7.5 million and was current and secured by a one-story retail building with 10 retail units in Ozone Park, New York. At December 31, 2007, 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 may be affected to a greater degree by adverse conditions in the economy. As such, these loans require more ongoing evaluation and monitoring. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation.

Construction Loans

At December 31, 2007, $77.7 million, or 0.5%, of our total loan portfolio consisted of construction loans. We offer construction loans for all types of residential properties and certain commercial real estate properties. Generally, construction loan terms run between one and two years and are interest-only, adjustable rate loans indexed to the prime rate. We generally offer construction loans up to a maximum of $10.0 million. As of December 31, 2007, our average construction loan commitment was approximately $3.3 million and the average outstanding balance of loans in our construction loan portfolio was approximately $1.9 million.

Construction lending involves additional credit risk to the lender as compared with other types of mortgage lending. This additional credit risk is attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Construction loans are funded monthly, based on the work completed, and are generally monitored by a professional construction engineer and our commercial real estate lending department. To a lesser extent, qualified bank appraisers and certified home inspectors are utilized to monitor less complex projects. We are not pursuing these types of loans in the current real estate market.

6


Consumer and Other Loans

At December 31, 2007, $356.8 million, or 2.2%, of our total loan portfolio consisted of consumer and other loans which were primarily home equity lines of credit. Our home equity lines of credit are originated on one-to-four family owner-occupied properties. Prior to the fourth quarter of 2007, these lines of credit were generally limited to aggregate outstanding indebtedness secured by up to 90% of the appraised value of the property. During the fourth quarter of 2007, we revised our policy on originations of home equity lines of credit to limit aggregate outstanding indebtedness to 75% of the appraised value of the property and only for loans where we hold the first lien mortgage on 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.

We also offer overdraft protection, lines of credit, commercial loans, passbook loans and student loans. Consumer and other loans, with the exception of home equity and commercial lines of credit, are offered primarily on a fixed rate, short-term basis. The underwriting standards we employ for consumer and other loans include a determination of the borrower’s payment history on other debts and an assessment of the borrower’s ability to make payments on the proposed loan and other indebtedness. In addition to the creditworthiness of the borrower, the underwriting process also includes a review of the value of the collateral, if any, in relation to the proposed loan amount. Our consumer and other loans tend to have higher interest rates, shorter maturities and are considered to entail a greater risk of default than one-to-four family mortgage loans.

Included in consumer and other loans were $20.5 million of commercial business loans at December 31, 2007. These loans are underwritten based upon the cash flow and earnings of the borrower and the value of the collateral securing such loans, if any.

Loan Approval Procedures and Authority

Except for individual loans in excess of $15.0 million or when the overall lending relationship exceeds $60.0 million (unless the Board of Directors has set a higher limit with respect to a particular borrower), mortgage loan approval authority has been delegated by the Board of Directors to our underwriters and Loan Committee, which consists of certain members of executive management and other Astoria Federal officers. For loans between $10.0 million and $15.0 million, the approval of two non-officer directors is also required.

For mortgage loans secured by one-to-four family properties, upon receipt of a completed application from a prospective borrower, we generally order a credit report, verify income and other information and, if necessary, obtain additional financial or credit related information. As previously discussed, reduced documentation loans have varied verification and documentation requirements. 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 multi-family and commercial real estate 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.

7


Loan Portfolio Composition

The following table sets forth the composition of our net loans receivable portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 


 

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 


(Dollars in Thousands)

 

Amount

 

Percent
of
Total

 

Amount

 

Percent
of
Total

 

Amount

 

Percent
of
Total

 

Amount

 

Percent
of
Total

 

Amount

 

Percent
of
Total

 


Mortgage loans (gross):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family

 

$

11,628,270

 

 

72.51

%

$

10,214,146

 

 

68.67

%

$

9,757,920

 

 

68.24

%

$

9,054,747

 

 

68.68

%

$

8,971,048

 

 

71.13

%

Multi-family

 

 

2,945,546

 

 

18.36

 

 

2,987,531

 

 

20.09

 

 

2,826,807

 

 

19.77

 

 

2,558,935

 

 

19.41

 

 

2,230,414

 

 

17.69

 

Commercial real estate

 

 

1,031,812

 

 

6.43

 

 

1,100,218

 

 

7.40

 

 

1,075,914

 

 

7.52

 

 

944,859

 

 

7.17

 

 

880,296

 

 

6.98

 

Construction

 

 

77,723

 

 

0.48

 

 

140,182

 

 

0.94

 

 

137,012

 

 

0.96

 

 

117,766

 

 

0.89

 

 

99,046

 

 

0.79

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans

 

 

15,683,351

 

 

97.78

 

 

14,442,077

 

 

97.10

 

 

13,797,653

 

 

96.49

 

 

12,676,307

 

 

96.15

 

 

12,180,804

 

 

96.59

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other loans (gross):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

320,884

 

 

1.99

 

 

392,141

 

 

2.64

 

 

460,064

 

 

3.22

 

 

466,087

 

 

3.53

 

 

386,846

 

 

3.07

 

Commercial

 

 

20,494

 

 

0.13

 

 

22,262

 

 

0.15

 

 

24,644

 

 

0.17

 

 

21,819

 

 

0.17

 

 

21,937

 

 

0.17

 

Other

 

 

15,443

 

 

0.10

 

 

16,387

 

 

0.11

 

 

17,796

 

 

0.12

 

 

19,382

 

 

0.15

 

 

21,363

 

 

0.17

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total consumer and other loans

 

 

356,821

 

 

2.22

 

 

430,790

 

 

2.90

 

 

502,504

 

 

3.51

 

 

507,288

 

 

3.85

 

 

430,146

 

 

3.41

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (gross)

 

 

16,040,172

 

 

100.00

%

 

14,872,867

 

 

100.00

%

 

14,300,157

 

 

100.00

%

 

13,183,595

 

 

100.00

%

 

12,610,950

 

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unamortized premiums and deferred loan costs

 

 

114,842

 

 

 

 

 

98,824

 

 

 

 

 

92,136

 

 

 

 

 

79,684

 

 

 

 

 

76,037

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

16,155,014

 

 

 

 

 

14,971,691

 

 

 

 

 

14,392,293

 

 

 

 

 

13,263,279

 

 

 

 

 

12,686,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(78,946

)

 

 

 

 

(79,942

)

 

 

 

 

(81,159

)

 

 

 

 

(82,758

)

 

 

 

 

(83,121

)

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

16,076,068

 

 

 

 

$

14,891,749

 

 

 

 

$

14,311,134

 

 

 

 

$

13,180,521

 

 

 

 

$

12,603,866

 

 

 

 


Loan Maturity, Repricing and Activity

The following table shows the contractual maturities of our loans receivable at December 31, 2007 and does not reflect the effect of prepayments or scheduled principal amortization.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2007

 

 

 


(In Thousands)

 

One-to-
Four
Family

 

Multi-
Family

 

Commercial
Real Estate

 

Construction

 

Consumer
and
Other

 

Total Loans
Receivable

 


Amount due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

 

$

5,552

 

$

5,446

 

$

4,788

 

$

69,947

 

$

18,238

 

$

103,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over one to three years

 

 

16,530

 

 

17,987

 

 

7,608

 

 

7,776

 

 

13,351

 

 

63,252

 

Over three to five years

 

 

54,371

 

 

49,317

 

 

40,057

 

 

 

 

6,486

 

 

150,231

 

Over five to ten years

 

 

260,569

 

 

1,733,620

 

 

661,257

 

 

 

 

4,330

 

 

2,659,776

 

Over ten to twenty years

 

 

310,862

 

 

943,721

 

 

291,649

 

 

 

 

3,353

 

 

1,549,585

 

Over twenty years

 

 

10,980,386

 

 

195,455

 

 

26,453

 

 

 

 

311,063

 

 

11,513,357

 


Total due after one year

 

 

11,622,718

 

 

2,940,100

 

 

1,027,024

 

 

7,776

 

 

338,583

 

 

15,936,201

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount due

 

$

11,628,270

 

$

2,945,546

 

$

1,031,812

 

$

77,723

 

$

356,821

 

$

16,040,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unamortized premiums and deferred loan costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

114,842

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78,946

)


Loans receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

16,076,068

 


8


The following table sets forth at December 31, 2007, the dollar amount of our loans receivable contractually maturing after December 31, 2008, and whether such loans have fixed interest rates or adjustable interest rates. Our interest-only hybrid and hybrid ARM loans are classified as adjustable rate loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturing After December 31, 2008

 

 

 



(In Thousands)

 

Fixed

 

Adjustable

 

Total

 









Mortgage loans:

 

 

 

 

 

 

 

 

 

 

One-to-four family

 

$

389,887

 

$

11,232,831

 

$

11,622,718

 

Multi-family

 

 

372,994

 

 

2,567,106

 

 

2,940,100

 

Commercial real estate

 

 

102,100

 

 

924,924

 

 

1,027,024

 

Construction

 

 

 

 

7,776

 

 

7,776

 

Consumer and other loans

 

 

12,431

 

 

326,152

 

 

338,583

 












Total

 

$

877,412

 

$

15,058,789

 

$

15,936,201

 












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)

 

2007

 

2006

 

2005

 









Mortgage loans (gross) (1):

 

 

 

 

 

 

 

 

 

 

At beginning of year

 

$

14,457,975

 

$

13,820,428

 

$

12,698,725

 

Mortgage loans originated:

 

 

 

 

 

 

 

 

 

 

One-to-four family

 

 

3,412,315

 

 

2,346,056

 

 

2,380,388

 

Multi-family

 

 

363,648

 

 

524,645

 

 

683,643

 

Commercial real estate

 

 

46,777

 

 

139,723

 

 

269,269

 

Construction

 

 

1,993

 

 

36,975

 

 

114,507

 












Total mortgage loans originated

 

 

3,824,733

 

 

3,047,399

 

 

3,447,807

 












Purchases of mortgage loans (2)

 

 

407,316

 

 

385,567

 

 

874,529

 

Principal repayments

 

 

(2,786,822

)

 

(2,579,143

)

 

(2,820,437

)

Sales of mortgage loans

 

 

(224,428

)

 

(248,767

)

 

(361,579

)

Advances on construction loans in excess of (less than) originations

 

 

23,558

 

 

34,611

 

 

(15,285

)

Transfer of loans to real estate owned

 

 

(10,749

)

 

(897

)

 

(2,107

)

Net loans charged off

 

 

(2,908

)

 

(1,223

)

 

(1,225

)












At end of year

 

$

15,688,675

 

$

14,457,975

 

$

13,820,428

 












 

 

 

 

 

 

 

 

 

 

 

Consumer and other loans (gross) (3):

 

 

 

 

 

 

 

 

 

 

At beginning of year

 

$

431,466

 

$

503,511

 

$

508,691

 

Consumer and other loans originated

 

 

153,715

 

 

216,373

 

 

295,495

 

Principal repayments

 

 

(225,536

)

 

(286,670

)

 

(297,843

)

Sales of consumer and other loans

 

 

(1,243

)

 

(1,754

)

 

(2,458

)

Net loans (charged off) recovered

 

 

(588

)

 

6

 

 

(374

)












At end of year

 

$

357,814

 

$

431,466

 

$

503,511

 













 

 

(1)

Includes loans classified as held-for-sale totaling $5.3 million, $15.9 million and $22.8 million at December 31, 2007, 2006 and 2005, respectively.

 

 

(2)

Purchases of mortgage loans represent third party loan originations and are secured by one-to-four family properties.

 

 

(3)

Includes loans classified as held-for-sale totaling $993,000, $676,000 and $1.0 million at December 31, 2007, 2006 and 2005, 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 and the maintenance of sound credit standards for new loan originations have resulted in our maintaining a low level of non-performing assets relative to the size of our loan portfolio. Through a variety of strategies, including, but not limited to, aggressive

9


collection efforts and marketing of non-performing loans and foreclosed properties, we have been proactive in addressing problem and non-performing assets which, in turn, has helped maintain the strength of our financial condition.

The underlying credit quality of our loan portfolio is dependent primarily on each borrower’s ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral securing the loan, if any. A borrower’s ability to pay typically is dependent, in the case of one-to-four family mortgage loans and consumer loans, primarily on employment and other sources of income, and in the case of multi-family and commercial real estate loans, on the cash flow generated by the property, which in turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrower’s ability to pay. Collateral values, particularly real estate values, are also impacted by a variety of factors including general economic conditions, demographics, maintenance and collection or foreclosure delays.

Non-performing Assets

Non-performing assets include non-accrual loans, mortgage loans delinquent 90 days or more and still accruing interest and real estate owned, or REO. Total non-performing assets increased $55.4 million to $115.4 million at December 31, 2007, from $60.0 million at December 31, 2006. Non-performing loans, the most significant component of non-performing assets, increased $46.9 million to $106.3 million at December 31, 2007, from $59.4 million at December 31, 2006. The increases in non-performing assets and non-performing loans were primarily due to an increase of $48.3 million in non-performing one-to-four family mortgage loans, of which $32.5 million were reduced documentation loans. The increase in non-performing loans and assets occurred primarily during the second half of 2007. We believe the increase is primarily due to the overall increase in our loan portfolio and the continued decline of the real estate and housing markets, as well as the overall economic environment. As a geographically diversified lender, we are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry nationally. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. Despite the increase in non-performing loans at December 31, 2007, our non-performing loans continue to remain at low levels in relation to the size of our loan portfolio. The ratio of non-performing loans to total loans increased to 0.66% at December 31, 2007, from 0.40% at December 31, 2006. Our ratio of non-performing assets to total assets increased to 0.53% at December 31, 2007, from 0.28% at December 31, 2006. The allowance for loan losses as a percentage of total non-performing loans decreased to 74.25% at December 31, 2007, from 134.55% at December 31, 2006. For a further discussion of our non-performing assets and non-performing loans and the allowance for loan losses, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or “MD&A.”

During the year ended December 31, 2007, we sold $10.4 million of non-performing mortgage loans, primarily multi-family and commercial real estate loans. For further discussion of the sale of these loans, including the impact the sale may have had on our non-performing loans, non-performing assets and related ratios at December 31, 2007, see “Asset Quality” in Item 7, “MD&A.”

We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. At December 31, 2007, $38.3 million of mortgage loans classified as non-performing had missed only two payments, compared to $17.3 million at December 31, 2006. 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. Such loans totaled $474,000 at December 31, 2007 and $488,000 at December 31, 2006. 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

10


that any loss will be incurred on the loan, we have treated these loans as current and have continued to accrue interest.

REO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried in other assets, net of allowances for losses, at the lower of cost or fair value less estimated selling costs. We maintain an allowance for losses representing decreases in value which are charged to income along with any additional expenses incurred on the property. Fair value is estimated through current appraisals, a drive-by inspection of the property or a market analysis of comparable homes in the area. Write-downs required at the time of acquisition are charged to the allowance for loan losses. The net carrying value of our REO totaled $9.1 million, net of an allowance for losses of $493,000, at December 31, 2007 and $627,000 at December 31, 2006 and consisted of one-to-four family properties. There was no allowance for losses on REO at December 31, 2006.

Classified Assets

Our Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to our Board of Directors quarterly. Our Asset Classification Committee establishes policy relating to the internal classification of loans and also provides input to the Asset Review Department in its review of our assets.

Federal regulations and our policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as special mention, substandard, doubtful or loss. An asset classified as special mention has potential weaknesses, which, if uncorrected, may result in the deterioration of the repayment prospects or in our credit position at some future date. An asset classified 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 71 for additional information on our classified assets.

If a loan is individually classified, an updated estimate of collateral value is obtained through an appraisal, where practical. 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, an estimated 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, by either a licensed appraiser or real estate broker for one-to-four family properties. For multi-family and commercial real estate properties, our internal Asset Review personnel estimate the collateral value based on an internal cash flow analysis, coupled with, in most cases, a drive-by inspection of the property. In circumstances for which we have determined that repayment of the loan will be based solely on the collateral and the unpaid balance of the loan is greater than the estimated fair value of such collateral, a specific valuation allowance is established for the difference between the carrying value and the fair value less estimated selling costs.

Impaired Loans

A loan is normally deemed impaired when it is probable we will be unable to collect both principal and interest due according to the contractual terms of the loan agreement. A valuation allowance is established when the current estimated 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, 2007, net of their related allowance for loan losses of $6.3 million, totaled $48.8 million. Interest income recognized on impaired loans amounted to $2.4 million for the year ended December 31, 2007. For further detail on

11


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-Allowance for Loan Losses” in Item 7, “MD&A.”

In addition to the requirements of U.S. generally accepted accounting principles, or GAAP, related to loss contingencies, a federally chartered savings association’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision, or OTS. The OTS, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies. While we believe that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ substantially from the conditions used in making the initial determinations. In addition, there can be no assurance that the OTS or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not request that we alter our allowance for loan losses, thereby affecting our financial condition and earnings.

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, 2007, our securities portfolio totaled $4.37 billion, or 20.1% of total assets.

Federally chartered savings associations have authority to invest in various types of assets, including U.S. Treasury obligations; securities of government agencies and GSEs; mortgage-backed securities, including collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs; certain certificates of deposit of insured banks and federally chartered savings associations; certain bankers acceptances; and, subject to certain limits, corporate securities, commercial paper and mutual funds. Our investment policy also permits us to invest in certain derivative financial instruments. We do not use derivatives for trading purposes. See Note 1 and Note 10 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” for further discussion of such derivative financial instruments.

Securities

Our securities portfolio is comprised primarily of mortgage-backed securities. At December 31, 2007, our mortgage-backed securities totaled $4.28 billion, or 97.9% of total securities, of which $4.23 billion, or 96.6% of total securities, were REMIC and CMO securities, substantially all of which had fixed rates. These securities provide liquidity, collateral for borrowings and minimal credit risk while providing appropriate returns and are an attractive alternative to other investments due to the wide variety of maturity and repayment options available. Of the REMIC and CMO securities portfolio, $3.96 billion, or 93.7%, are guaranteed by Fannie Mae, or FNMA, Freddie Mac, or FHLMC, or Ginnie Mae, or GNMA, as issuer. The balance of this portfolio is comprised of privately issued securities, substantially all of which have a credit rating of AAA. In addition to our REMIC and CMO securities, at December 31,

12


2007, we had $55.3 million, or 1.3% of total securities, in mortgage-backed pass-through certificates guaranteed by either FNMA, FHLMC or GNMA.

Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and more easily used to collateralize our borrowings. In general, our mortgage-backed securities are weighted at no more than 20% for OTS risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized one-to-four family mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, they, along with whole loans, remain subject to the risk of a fluctuating interest rate environment. Changes in interest rates affect both the prepayment rate and estimated fair value of mortgage-backed securities and mortgage loans.

In addition to mortgage-backed securities, at December 31, 2007, we had $89.7 million of other securities, consisting primarily of FHLMC preferred stock, some of which, by their terms, may be called by the issuer, typically after the passage of a fixed period of time. At December 31, 2007, the amortized cost of callable securities totaled $83.5 million. Securities called during the year ended December 31, 2007 totaled $20.0 million.

At December 31, 2007, our securities available-for-sale totaled $1.31 billion and our securities held-to-maturity totaled $3.06 billion. For a further discussion of our securities portfolio, see the tables on pages 14, 15 and 16, 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.”

Repurchase Agreements

We invest in various money market instruments, including repurchase agreements (securities purchased under agreements to resell) and overnight and term federal funds, although at December 31, 2007 and 2006 we had no investments in federal funds sold. Money market instruments are used to invest our available funds resulting from cash flow and to help satisfy liquidity needs. For a further discussion of our repurchase agreements, see Item 7, “MD&A” and Note 1 and Note 2 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

13


Securities Portfolio

The following table sets forth the composition of our available-for-sale and held-to-maturity securities portfolios at their respective carrying values in dollar amounts and in percentages of the portfolios at the dates indicated. Our available-for-sale securities portfolio is carried at estimated fair value and our held-to-maturity securities portfolio is carried at amortized cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 



 

 

2007

 

2006

 

2005

 

 

 







(Dollars in Thousands)

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 















Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REMICs and CMOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE issuance

 

$

1,138,139

 

86.67

%

 

$

1,315,254

 

84.29

%

 

$

1,567,312

 

85.12

%

 

Non-GSE issuance

 

 

38,381

 

2.92

 

 

 

47,905

 

3.07

 

 

 

57,938

 

3.15

 

 

GSE pass-through certificates

 

 

53,202

 

4.05

 

 

 

65,956

 

4.23

 

 

 

93,124

 

5.06

 

 

FHLMC preferred and FNMA common stock

 

 

83,034

 

6.32

 

 

 

130,217

 

8.35

 

 

 

120,495

 

6.54

 

 

Other securities

 

 

550

 

0.04

 

 

 

993

 

0.06

 

 

 

2,482

 

0.13

 

 





















Total securities available-for-sale

 

$

1,313,306

 

100.00

%

 

$

1,560,325

 

100.00

%

 

$

1,841,351

 

100.00

%

 





















Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REMICs and CMOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE issuance

 

$

2,822,089

 

92.30

%

 

$

3,474,662

 

91.94

%

 

$

4,346,631

 

91.88

%

 

Non-GSE issuance

 

 

227,278

 

7.43

 

 

 

283,017

 

7.49

 

 

 

354,395

 

7.49

 

 

GSE pass-through certificates

 

 

2,108

 

0.07

 

 

 

3,484

 

0.09

 

 

 

5,737

 

0.12

 

 

Obligations of states and political subdivisions and corporate debt securities

 

 

6,069

 

0.20

 

 

 

18,193

 

0.48

 

 

 

24,190

 

0.51

 

 





















Total securities held-to-maturity

 

$

3,057,544

 

100.00

%

 

$

3,779,356

 

100.00

%

 

$

4,730,953

 

100.00

%

 





















14


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, securities available-for-sale and securities held-to-maturity at December 31, 2007 and does not reflect the effect of prepayments or scheduled principal amortization on our REMICs, CMOs and pass-through certificates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within
One Year

 

One to
Five Years

 

Five to
Ten Years

 

Over
Ten Years

 

Total Securities

 

 

 


 


 


 


 



(Dollars in Thousands)

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Estimated
Fair
Value

 

Weighted
Average
Yield

 

























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

24,218

 

4.40

%

 

$

 

%

 

$

 

%

 

$

 

%

 

$

24,218

 

$

24,218

 

4.40

%

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB-NY stock (1)(2)

 

$

 

%

 

$

 

%

 

$

 

%

 

$

201,490

 

8.40

%

 

$

201,490

 

$

201,490

 

8.40

%

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REMICs and CMOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE issuance

 

$

14

 

6.55

%

 

$

 

%

 

$

 

%

 

$

1,184,615

 

3.96

%

 

$

1,184,629

 

$

1,138,139

 

3.96

%

 

Non-GSE issuance

 

 

 

 

 

 

 

 

 

 

120

 

5.68

 

 

 

40,606

 

3.71

 

 

 

40,726

 

 

38,381

 

3.71

 

 

GSE pass-through certificates

 

 

 

 

 

 

439

 

7.90

 

 

 

13,045

 

6.97

 

 

 

38,508

 

7.07

 

 

 

51,992

 

 

53,202

 

7.05

 

 

FHLMC preferred and FNMA common stock (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83,011

 

7.01

 

 

 

83,011

 

 

83,034

 

7.01

 

 

Other securities

 

 

25

 

5.25

 

 

 

525

 

4.51

 

 

 

 

 

 

 

 

 

 

 

550

 

 

550

 

4.54

 

 




































Total securities available-for-sale

 

$

39

 

5.72

%

 

$

964

 

6.05

%

 

$

13,165

 

6.96

%

 

$

1,346,740

 

4.23

%

 

$

1,360,908

 

$

1,313,306

 

4.26

%

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REMICs and CMOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE issuance

 

$

 

%

 

$

 

%

 

$

169,434

 

4.65

%

 

$

2,652,655

 

4.49

%

 

$

2,822,089

 

$

2,784,400

 

4.50

%

 

Non-GSE issuance

 

 

 

 

 

 

 

 

 

 

24

 

9.14

 

 

 

227,254

 

4.40

 

 

 

227,278

 

 

220,353

 

4.40

 

 

GSE pass-through certificates

 

 

33

 

8.46

 

 

 

93

 

9.51

 

 

 

1,884

 

7.22

 

 

 

98

 

9.54

 

 

 

2,108

 

 

2,192

 

7.45

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

 

915

 

6.50

 

 

 

5,154

 

6.50

 

 

 

6,069

 

 

6,069

 

6.50

 

 




































Total securities held-to-maturity

 

$

33

 

8.46

%

 

$

93

 

9.51

%

 

$

172,257

 

4.69

%

 

$

2,885,161

 

4.49

%

 

$

3,057,544

 

$

3,013,014

 

4.50

%

 





































 

 

(1)

As equity securities have no maturities, they are classified in the over ten years category.

 

 

(2)

The carrying amount of FHLB-NY stock equals cost. The weighted average yield represents the 2007 fourth quarter dividend rate declared by the FHLB-NY in January 2008.

15


The following table sets forth the aggregate amortized cost and estimated fair value of our securities, substantially all of which are mortgage-backed securities, where the aggregate amortized cost of securities from a single issuer exceeds ten percent of our stockholders’ equity at December 31, 2007.

 

 

 

 

 

 

 

 

(In Thousands)

 

Amortized
Cost

 

Estimated
Fair Value

 


 

FHLMC

 

$

2,573,985

 

$

2,532,661

 

FNMA

 

 

1,441,045

 

 

1,401,762

 

FHLB-NY stock

 

 

201,490

 

 

201,490

 

Sources of Funds

General

Our primary source of funds is the cash flow provided by our investing activities, including principal and interest payments on loans and securities. Our other sources of funds are provided by operating activities (primarily net income) and financing activities, including deposits and borrowings.

Deposits

We offer a variety of deposit accounts with a range of interest rates and terms. We presently offer passbook and statement savings accounts, money market accounts, NOW and demand deposit accounts, Liquid certificates of deposit, or Liquid CDs, and certificates of deposit, which include all time deposits other than Liquid CDs. Liquid CDs have maturities of three months, require the maintenance of a minimum balance and allow depositors the ability to make periodic deposits to and withdrawals from their account. We consider Liquid CDs as part of our core deposits, along with savings accounts, money market accounts and NOW and demand deposit accounts, due to their depositor flexibility. At December 31, 2007, our deposits totaled $13.05 billion. Of the total deposit balance, $1.56 billion, or 11.9%, represent Individual Retirement Accounts. We held no brokered deposits at December 31, 2007.

The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, pricing of deposits and competition. Our deposits are primarily obtained from areas surrounding our banking offices. We rely primarily on our sales and marketing efforts, including print advertising, competitive rates, quality service, our PEAK Process, new products and long-standing customer relationships to attract and retain these deposits. When we determine the levels of our deposit rates, consideration is given to local competition, yields of U.S. Treasury securities and the rates charged for other sources of funds. We continue to experience intense competition for deposits. However, we continue to maintain a strong level of core deposits, which has contributed to our low cost of funds. Core deposits represented 39.5% of total deposits at December 31, 2007.

For a further discussion of our deposits, see the following tables, 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)

 

2007

 

2006

 

2005

 


Opening balance

 

$

13,224,024

 

$

12,810,455

 

$

12,323,257

 

Net (withdrawals) deposits

 

 

(630,625

)

 

28,799

 

 

205,799

 

Interest credited

 

 

456,039

 

 

384,770

 

 

281,399

 












Ending balance

 

$

13,049,438

 

$

13,224,024

 

$

12,810,455

 












Net (decrease) increase

 

$

(174,586

)

$

413,569

 

$

487,198

 












Percentage (decrease) increase

 

 

(1.32

)%

 

3.23

%

 

3.95

%












16


The following table sets forth the maturity periods of our certificates of deposit and Liquid CDs in amounts of $100,000 or more at December 31, 2007.

 

 

 

 

 

(In Thousands)

 

Amount

 


Within three months

 

$

1,379,561

 

Three to six months

 

 

731,479

 

Six to twelve months

 

 

686,856

 

Over twelve months

 

 

442,236

 





 

Total

 

$

3,240,132

 





 

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,

 

 



 

 

2007

 

2006

 

2005

 

 


(Dollars in Thousands)

 

Average
Balance

 

Percent
of Total

 

Weighted
Average
Nominal
Rate

 

Average
Balance

 

Percent
of Total

 

Weighted
Average
Nominal
Rate

 

Average
Balance

 

Percent
of Total

 

Weighted
Average
Nominal
Rate

 


Savings

 

$

2,014,253

 

 

15.22

%

 

0.40

%

$

2,325,346

 

 

17.90

%

 

0.40

%

$

2,742,417

 

 

21.74

%

 

0.40

%

Money market

 

 

379,634

 

 

2.87

 

 

0.99

 

 

536,549

 

 

4.13

 

 

0.98

 

 

804,855

 

 

6.38

 

 

0.93

 

NOW

 

 

863,679

 

 

6.53

 

 

0.11

 

 

885,456

 

 

6.81

 

 

0.10

 

 

936,848

 

 

7.43

 

 

0.10

 

Non-interest bearing NOW and demand deposit

 

 

601,784

 

 

4.55

 

 

 

 

614,675

 

 

4.73

 

 

 

 

632,571

 

 

5.01

 

 

 

Liquid CDs

 

 

1,549,774

 

 

11.71

 

 

4.62

 

 

1,092,533

 

 

8.41

 

 

4.52

 

 

350,923

 

 

2.78

 

 

3.01

 






























Total

 

 

5,409,124

 

 

40.88

 

 

1.56

 

 

5,454,559

 

 

41.98

 

 

1.19

 

 

5,467,614

 

 

43.34

 

 

0.55

 






























Certificates of deposit (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

 

 

2,064,884

 

 

15.60

 

 

4.72

 

 

1,624,868

 

 

12.50

 

 

4.28

 

 

809,136

 

 

6.41

 

 

2.35

 

One to three years

 

 

2,621,207

 

 

19.81

 

 

4.70

 

 

2,633,517

 

 

20.26

 

 

3.83

 

 

3,191,691

 

 

25.32

 

 

2.98

 

Three to five years

 

 

1,905,804

 

 

14.40

 

 

4.23

 

 

2,466,044

 

 

18.98

 

 

4.22

 

 

2,760,364

 

 

21.88

 

 

4.32

 

Over five years

 

 

14,306

 

 

0.11

 

 

4.19

 

 

22,043

 

 

0.17

 

 

4.18

 

 

54,856

 

 

0.43

 

 

4.53

 

Jumbo

 

 

1,217,566

 

 

9.20

 

 

4.90

 

 

793,368

 

 

6.11

 

 

4.63

 

 

330,617

 

 

2.62

 

 

3.25

 






























Total

 

 

7,823,767

 

 

59.12

 

 

4.62

 

 

7,539,840

 

 

58.02

 

 

4.14

 

 

7,146,664

 

 

56.66

 

 

3.45

 






























Total deposits

 

$

13,232,891

 

 

100.00

%

 

3.37

%

$

12,994,399

 

 

100.00

%

 

2.90

%

$

12,614,278

 

 

100.00

%

 

2.19

%






























(1) Terms indicated are original, not term remaining to maturity.

The following table presents, by rate categories, the remaining periods to maturity of our certificates of deposit and Liquid CDs outstanding at December 31, 2007 and the balances of our certificates of deposit and Liquid CDs outstanding at December 31, 2007, 2006 and 2005.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period to maturity from December 31, 2007

 

At December 31,

 

 

 


 


(In Thousands)

 

Within
one year

 

One to two
years

 

Two to three
years

 

Over three
years

 

2007

 

2006

 

2005

 


 


Certificates of deposit and Liquid CDs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.99% or less

 

$

112,640

 

$

2,788

 

$

 

$

 

$

115,428

 

$

145,721

 

$

1,608,132

 

3.00% to 3.99%

 

 

682,488

 

 

113,865

 

 

23,397

 

 

9,478

 

 

829,228

 

 

1,612,583

 

 

4,076,948

 

4.00% to 4.99%

 

 

3,535,229

 

 

488,155

 

 

173,842

 

 

235,661

 

 

4,432,887

 

 

4,301,542

 

 

1,810,857

 

5.00% and over

 

 

3,118,438

 

 

402,524

 

 

251,452

 

 

195,587

 

 

3,968,001

 

 

3,102,119

 

 

585,032

 
























Total

 

$

7,448,795

 

$

1,007,332

 

$

448,691

 

$

440,726

 

$

9,345,544

 

$

9,161,965

 

$

8,080,969

 
























Borrowings

Borrowings are used as a complement to deposit generation as a funding source for asset growth and are an integral part of our interest rate risk management strategy. We enter into reverse repurchase agreements (securities sold under agreements to repurchase) with nationally recognized primary securities dealers and the FHLB-NY. Reverse repurchase agreements are accounted for as borrowings and are secured by the securities sold under the agreements. We also obtain advances from the FHLB-NY which are generally secured by a blanket lien against, among other things, our one-to-four family mortgage loan portfolio and our investment in FHLB-NY stock. The maximum amount that the FHLB-NY will advance, for purposes other than for meeting withdrawals, fluctuates from time to time in accordance with the policies of the FHLB-NY. See “Regulation and Supervision - Federal Home Loan Bank System.” Occasionally, we will

17


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, 2007, borrowings totaled $7.18 billion.

In addition, at December 31, 2007, we had a 12-month commitment for overnight and one month lines of credit with the FHLB-NY totaling $300.0 million, of which $113.0 million was outstanding under the overnight line of credit, which is included in total borrowings. The lines of credit expire on July 31, 2008 and are renewable annually. Both lines of credit are priced at the federal funds rate plus a spread 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, 2007, we had $1.13 billion of borrowings which are callable within one year and at various times thereafter, of which $1.00 billion have contractual remaining maturities of over five years. We also have $2.10 billion of borrowings which are callable in 2009 and at various times thereafter, of which $300.0 million are due in 2010, $850.0 million are due in 2012 and $950.0 million are due in 2017.

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, 2007, 2006 and 2005, see Item 7, “MD&A” and Note 8 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”

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 and telephone and internet banking capabilities. We consider our strong retail banking network, together with our reputation for financial strength and customer service, as well as our competitive pricing, 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 of New York. Astoria Federal ranked fourth in deposit market share, with an 8.4% market share, in the Long Island market, which includes the counties of Queens, Kings (Brooklyn), Nassau and Suffolk, based on the annual Federal Deposit Insurance Corporation, or FDIC, “Summary of Deposits - Market Share Report” dated June 30, 2007.

Astoria Federal originates mortgage loans through its banking and loan production offices in New York, through an extensive broker network covering twenty-two states and the District of Columbia and through a third party loan origination program covering twenty-nine states and the District of Columbia. Our various loan origination programs provide efficient and diverse delivery channels for deployment of our cash flows. Additionally, our broker and third party loan origination programs provide geographic diversification, reducing our exposure to concentrations of credit risk. During 2007, we reduced the number of states in which we originate and purchase one-to-four family loans due to the advanced economic declines in those markets.

The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Additionally, over the past several years, various large out-of-state financial institutions have entered the New York metropolitan area market. All are our competitors to varying degrees. Our competition for loans, both locally and nationally, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. However, turmoil in the marketplace has resulted in a number of mortgage companies exiting the market and, therefore, dislocations in the secondary residential mortgage market. These dislocations have led to fewer participants, and thus, less competition in mortgage originations, stricter underwriting standards and wider pricing spreads. We have experienced continued intense competition for deposits. Our most direct competition for deposits comes from commercial banks, savings banks, savings

18


and loan associations and credit unions. We also face competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. During the second half of 2007, we faced a greater intensity of competition from certain larger financial institutions that have attempted to sustain their liquidity by offering retail deposits with rates above the market.

Subsidiary Activities

We have two direct wholly-owned subsidiaries, Astoria Federal and AF Insurance Agency, Inc., which are reported on a consolidated basis. AF Insurance Agency, Inc. is a licensed life insurance agency and property and casualty insurance broker. Through contractual agreements with various third party marketing organizations, AF Insurance Agency, Inc. makes insurance products available primarily to the customers of Astoria Federal.

We have one other direct subsidiary, Astoria Capital Trust I, which is not consolidated with Astoria Financial Corporation for financial reporting purposes in accordance with FIN 46(R). Astoria Capital Trust I was formed in 1999 for the purpose of issuing $125.0 million of Capital Securities and $3.9 million of common securities and using the proceeds to acquire $128.9 million of Junior Subordinated Debentures issued by us. The Junior Subordinated Debentures have an interest rate of 9.75%, mature on November 1, 2029 and are the sole assets of Astoria Capital Trust I. The Junior Subordinated Debentures are prepayable, in whole or in part, at our option on or after November 1, 2009 at declining premiums to November 1, 2019, after which the Junior Subordinated Debentures are prepayable at par value. The Capital Securities have the same prepayment provisions as the Junior Subordinated Debentures. See Note 1 and Note 8 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of Astoria Capital Trust I, the Capital Securities and the Junior Subordinated Debentures.

At December 31, 2007, the following were wholly-owned subsidiaries of Astoria Federal and are reported on a consolidated basis.

AF Agency, Inc. was formed in 1990 and makes tax-deferred annuities and a variety of mutual funds available to the customers of Astoria Federal through an unaffiliated third party vendor. Astoria Federal is reimbursed for expenses and administrative services it provides to AF Agency, Inc. Fees generated by AF Agency, Inc. totaled $9.0 million for the year ended December 31, 2007, which represented 11.9% of non-interest income.

Astoria Federal Savings and Loan Association Revocable Grantor Trust was formed in November 2000 in connection with the establishment of a BOLI program by Astoria Federal. Premiums paid to purchase BOLI in 2000 and 2002 totaled $350.0 million. The carrying amount of our investment in BOLI was $398.3 million, or 1.8% of total assets, at December 31, 2007. See Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of BOLI.

Astoria Federal Mortgage Corp. is an operating subsidiary through which Astoria Federal engages in lending activities outside the State of New York.

Fidata Service Corp., or Fidata, was incorporated in the State of New York in November 1982. Fidata qualifies as a Connecticut passive investment company, or PIC, and for alternative tax treatment under Article 9A of the New York State Tax Law. Fidata maintains offices in Norwalk, Connecticut and invests in loans secured by real property which qualify as intangible investments permitted to be held by a Connecticut PIC. Fidata mortgage loans totaled $6.84 billion at December 31, 2007.

Suffco Service Corporation, or Suffco, serves as document custodian for the loans of Astoria Federal and Fidata and certain loans being serviced for FNMA and other investors.

Marcus I Inc. was incorporated in the State of New York in April 2006 and was formed to serve as assignee of certain commercial loans in default. Marcus I Inc. had no assets or operations during 2007.

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Astoria Federal has nine 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 seven of which are inactive and have no assets. The ninth such subsidiary serves as a holding company for one of the other eight.

Personnel

As of December 31, 2007, we had 1,494 full-time employees and 241 part-time employees, or 1,615 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 Deposit Insurance Fund, or DIF. We and Astoria Federal must file reports with the OTS concerning our activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. The OTS periodically performs safety and soundness examinations of Astoria Federal and us and tests our compliance with various regulatory requirements. The FDIC reserves the right to do so as well. The OTS has primary enforcement responsibility over federally chartered savings associations and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the Director, the FDIC has authority to take such action under certain circumstances.

This regulation and supervision establishes a comprehensive framework to regulate and control the activities in which we can engage and is intended primarily for the protection of the DIF 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

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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.

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

On December 14, 2006, the OTS published guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” or the CRE Guidance, to address concentrations of commercial real estate loans in savings associations. The CRE Guidance reinforces and enhances the OTS’s existing regulations and guidelines for real estate lending and loan portfolio management, but does not establish specific commercial real estate lending limits.

On June 29, 2007, the OTS and other federal bank regulatory agencies issued a final Statement on Subprime Mortgage Lending, or the Statement, to address the growing concerns facing the subprime mortgage market, particularly with respect to rapidly rising subprime default rates that may indicate borrowers do not have the ability to repay adjustable rate subprime loans originated by financial institutions. In particular, the agencies expressed concern in the Statement that current underwriting practices do not take into account that many subprime borrowers are not prepared for “payment shock” and that the current subprime lending practices compound risk for financial institutions. The Statement describes the prudent safety and soundness and consumer protection standards that financial institutions should follow to ensure borrowers obtain loans that they can afford to repay. These standards include a fully indexed, fully amortized qualification for borrowers and cautions on risk-layering features, including an expectation that stated income and reduced documentation should be accepted only if there are documented mitigating factors that clearly minimize the need for verification of a borrower’s repayment capacity. Consumer protection standards include clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for borrowers to refinance prior to the expiration of the initial fixed interest rate period without penalty. The Statement also reinforces the April 17, 2007 Interagency Statement on Working with Mortgage Borrowers, in which the federal bank regulatory agencies encouraged institutions to work constructively with residential borrowers who are financially unable or reasonably expected to be unable to meet their contractual payment obligations on their home loans.

We have evaluated the Guidance, the CRE Guidance and the Statement to determine our compliance and, as necessary, modified our risk management practices, underwriting guidelines and consumer protection standards. See “Lending Activities – One-to-Four Family Mortgage Lending and Multi-Family and Commercial Real Estate Lending” for a discussion of our loan product offerings and related underwriting standards and “Asset Quality” in Item 7, “MD&A” for information regarding our interest-only and reduced documentation loan portfolio composition.

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

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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, 2007, Astoria Federal exceeded each of its capital requirements with a tangible capital ratio of 6.58%, leverage capital ratio of 6.58% and total risk-based capital ratio of 12.04%.

The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk, or IRR, concentration of risk and the risks of non-traditional activities. The OTS regulations do not include a specific IRR component of the risk-based capital requirement. However, the OTS monitors the IRR of individual institutions through a variety of means, including an analysis of the change in net portfolio value, or NPV. NPV is defined as the net present value of the expected future cash flows of an entity’s assets and liabilities and, therefore, hypothetically represents the value of an institution’s net worth. The OTS has also used this NPV analysis as part of its evaluation of certain applications or notices submitted by thrift institutions. In addition, OTS Thrift Bulletin 13a provides guidance on the management of IRR and the responsibility of boards of directors in that area. The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the OTS regarding NPV analysis. The OTS has not imposed any such requirements on Astoria Federal.

Prompt Corrective Regulatory Action

FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” the severity of which depends upon 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,” and the plan must be guaranteed by any parent holding company. 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, 2007, Astoria Federal was considered “well capitalized” by the OTS, with a total risk-based capital ratio of 12.04%, Tier 1 risk-based capital ratio of 11.41% and leverage ratio of 6.58%.

Insurance of Deposit Accounts

The FDIC merged the Savings Association Insurance Fund and the Bank Insurance Fund to create the DIF on March 31, 2006. Astoria Federal is a member of the DIF and pays its deposit insurance assessments to the DIF.

Effective January 1, 2007, the FDIC established a new risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under this new assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories, based on the institution’s most recent supervisory ratings and capital ratios. Base assessment rates range from two to four basis points for Risk Category I institutions and are seven basis points for Risk Category II institutions, twenty-five basis points for Risk Category III institutions and forty basis points for Risk Category IV institutions. For institutions within Risk Category I, assessment rates generally depend upon a combination of CAMELS (capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk) component ratings and financial ratios, or for large institutions with long-term debt issuer ratings, such as Astoria Federal, assessment rates depend on a combination of long-term debt issuer ratings and CAMELS component ratings. The FDIC has the flexibility to adjust rates, without further notice-and-comment rulemaking, provided that no such adjustment can be greater than

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three basis points from one quarter to the next, that adjustments cannot result in rates more than three basis points above or below the base rates and that rates cannot be negative. Effective January 1, 2007, the FDIC set the assessment rates at three basis points above the base rates. Therefore, assessment rates currently range from five to forty-three basis points of deposits. As of September 30, 2007, Astoria Federal had an assessment rate of 5.16 basis points. From 1997 through 2006, under the previous risk-based assessment system, Astoria Federal had an assessment rate of 0 basis points.

The deposit insurance assessment rates are in addition to the 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. The FICO payments will continue until the FICO bonds mature in 2017 through 2019. Our total expense for the assessment for the FICO payments was $1.6 million in 2007 and $1.7 million in 2006. The FDIC also established 1.25% of estimated insured deposits as the designated reserve ratio of the DIF. The FDIC is authorized to change the assessment rates as necessary, subject to the previously discussed limitations, to maintain the required reserve ratio of 1.25%.

The FDIC also approved a One-Time Assessment Credit to institutions that were in existence on December 31, 1996 and paid deposit insurance assessments prior to that date, or are a successor to such an institution. Astoria Federal received a $14.0 million One-Time Assessment Credit which was used to offset 100% of the 2007 deposit insurance assessment, excluding the FICO payments. The remaining credit can be used to offset up to 90% of the deposit insurance assessments in future years. We estimate that our remaining credit will offset 90% of our 2008 deposit insurance assessment as well as a portion of our 2009 deposit insurance assessment.

Loans to One Borrower

Under the HOLA, savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution’s unimpaired capital and surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are secured by readily-marketable collateral. Astoria Federal is in compliance with applicable loans to one borrower limitations. At December 31, 2007, Astoria Federal’s largest aggregate amount of loans to one borrower totaled $100.0 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 Test

The HOLA requires savings associations to meet a Qualified Thrift Lender, or 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, 2007, Astoria Federal maintained in excess of 92% of its portfolio assets in qualified thrift investments and had more than 65% of its portfolio assets in qualified thrift investments for each of the 12 months in the year ended December 31, 2007. 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.

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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 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. During 2007, we were required to file applications with the OTS for proposed capital distributions.

Our ability to pay dividends, service our debt obligations and repurchase our common stock is dependent primarily upon receipt of dividend payments from Astoria Federal. Astoria Federal may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified Astoria Federal that it was in need of more than normal supervision. Under the Federal Deposit Insurance Act, or FDIA, an insured depository institution such as Astoria Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the FDIA). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice.

Liquidity

Astoria Federal maintains sufficient liquidity to ensure its safe and sound operation, in accordance with OTS regulations.

Assessments

The OTS charges assessments to recover the costs of examining savings associations and their affiliates. These assessments are based on three components: the size of the association, on which the basic assessment is based; the association’s supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite 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. We also pay semi-annual assessments for the holding company. We paid a total of $2.9 million in assessments for each of the years ended December 31, 2007 and 2006.

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. All of Astoria Federal’s branches are located in New York.

Community Reinvestment

Under the CRA, as implemented by OTS regulations, a federally chartered savings association has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income areas. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s

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discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a federally chartered savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The assessment focuses on three tests: (1) a lending test, to evaluate the institution’s record of making loans, including community development loans, in its designated assessment areas; (2) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and areas and small businesses; and (3) a service test, to evaluate the institution’s delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The CRA also requires all institutions to make public disclosure of their CRA ratings. Astoria Federal has been rated as “outstanding” over its last six CRA examinations. Regulations require that we publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreements in place at this time.

Transactions with Related Parties

Astoria Federal is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, or FRA, Regulation W issued by the Federal Reserve Board, or FRB, as well as additional limitations as adopted by the Director of the OTS. OTS regulations regarding transactions with affiliates conform to Regulation W. These provisions, among other things, prohibit, limit or place restrictions upon a savings institution extending credit to, or entering into certain transactions with, its affiliates (which for Astoria Federal would include us and our non-federally chartered savings association subsidiaries, if any), principal stockholders, directors and executive officers. In addition, the OTS regulations include additional restrictions on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding transactions with affiliates.

Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, 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

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and Supervision - Federally Chartered Savings Association Regulation - Prompt Corrective Regulatory Action.”

Insurance Activities

Astoria Federal is generally permitted to engage in certain insurance activities through its subsidiaries. However, Astoria Federal is subject to regulations prohibiting depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. The regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers.

Privacy Protection

Astoria Federal is subject to OTS regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act, or Gramm-Leach. These regulations require Astoria Federal to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information,” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Astoria Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, Astoria Federal is required to provide its customers with the ability to “opt-out” of having Astoria Federal share their nonpublic personal information with unaffiliated third parties.

Astoria Federal is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

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:

 

 

 

 

Establishment of anti-money laundering programs.

 

 

 

 

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.

 

 

 

 

Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering.

 

 

 

 

Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.

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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 the FHLB-NY Class B stock. The Class B stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The Class B stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase requirements. The minimum stock investment requirement in the FHLB-NY Class B stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For Astoria Federal, the membership stock purchase requirement is 0.2% of the Mortgage-Related Assets, as defined by the FHLB-NY, which consists principally of residential mortgage loans and mortgage-backed securities including CMOs and REMICs, held by Astoria Federal. The activity-based stock purchase requirement for Astoria Federal is equal to the sum of: (1) 4.5% of outstanding borrowings from the FHLB-NY; (2) 4.5% of the outstanding principal balance of Acquired Member Assets, as defined by the FHLB-NY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for Astoria Federal is zero; and (4) a specified percentage ranging from 0 to 5% of the carrying value on the FHLB-NY’s balance sheet of derivative contracts between the FHLB-NY and its members, which for Astoria Federal is also zero. The FHLB-NY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLB-NY capital plan.

Astoria Federal was in compliance with the FHLB-NY minimum stock investment requirements with an investment in FHLB-NY stock at December 31, 2007 of $201.5 million. Dividends from the FHLB-NY to Astoria Federal amounted to $11.6 million for the year ended December 31, 2007, $7.8 million for the year ended December 31, 2006 and $6.0 million for the year ended December 31, 2005.

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 $9.3 million and $43.9 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 $43.9 million. The first $9.3 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Astoria Federal is in compliance with the foregoing requirements. Since required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce Astoria Federal’s interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve “discount window,” but FRB regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.

Holding Company Regulation

We are a unitary savings and loan association holding company within the meaning of the HOLA. As such, we are registered with the OTS and are subject to the OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over us and our savings association subsidiary. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association.

Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan association holding companies that are “grandfathered,” i.e., unitary savings and loan association holding companies in existence or with applications filed with the OTS on or before May

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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 DIF, the convenience and needs of the community and competitive factors.

Federal Securities Laws

We are subject to the periodic reporting, proxy solicitation, tender offer, insider trading restrictions and other requirements under the Exchange Act.

Delaware Corporation Law

We are incorporated under the laws of the State of Delaware. Thus, we are subject to regulation by the State of Delaware and the rights of our shareholders are governed by the Delaware General Corporation Law.

Federal Taxation

General

We report our income on a calendar year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations.

Corporate Alternative Minimum Tax

In addition to the regular income tax, corporations (including savings and loan associations) generally are subject to an alternative minimum tax, or AMT, in an amount equal to 20% of alternative minimum taxable income to the extent the AMT exceeds the corporation’s regular tax. The AMT is available as a credit against future regular income tax. We do not expect to be subject to the AMT for federal tax purposes.

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 loan 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 tax bad debt reserve as of December 31, 1987), to the extent thereof, and then from its supplemental tax-basis reserve for losses on loans, and an amount based on the amount distributed will be included in Astoria

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Federal’s taxable income. Nondividend distributions include distributions in excess of Astoria Federal’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of Astoria Federal’s current or accumulated earnings and profits will not constitute nondividend distributions and, therefore, will not be included in Astoria Federal’s taxable income.

The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate.

Dividends Received Deduction and Other Matters

We may exclude from our income 100% of dividends received from Astoria Federal as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which we will not file a consolidated tax return, except that if we own more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted.

State and Local Taxation

The following is a general discussion of taxation in New York State and New York City, which are the two principal tax jurisdictions affecting our operations.

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 7.1%. 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. We were subject to the alternative minimum tax for New York State for the year ended December 31, 2007. In addition, New York State imposes a tax surcharge of 17.0% of the New York State Franchise Tax, calculated using an annual franchise tax rate of 9.0% (which represents the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to us, Astoria Federal and certain of Astoria Federal’s subsidiaries. Certain other subsidiaries are subject to a general business corporation tax in lieu of the tax on banking corporations or are subject to taxes of other jurisdictions. The rules regarding the determination of net income allocated to New York State and alternative minimum taxes differ for these subsidiaries.

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 loan 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-

29


qualifying loans must be computed under the experience method which is based on its actual loan loss experience.

Under the experience method, the amount of a reasonable addition, in general, equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (2) the balance of the bad debt reserve at the close of the base year (assuming that the loans outstanding have not declined since then). The “base year” for these purposes is the last taxable year beginning before the NYS Percentage of Taxable Income Method bad debt deduction was taken. Any deduction for the addition to the reserve for non-qualifying loans reduces the addition to the reserve for qualifying real property loans calculated under the NYS Percentage of Taxable Income Method. Each year Astoria Federal reviews the most favorable way to calculate the deduction attributable to an addition to the bad debt reserve. The experience method was used for the year ended December 31, 2007.

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 is derived from outside of the New York City jurisdiction which has the effect of significantly reducing the New York City taxable income of Astoria Federal. We were subject to the alternative minimum tax for New York City (which is similar to the New York State alternative minimum tax) for the year ended December 31, 2007.

 

 

ITEM 1A.

RISK FACTORS

The following is a summary of risk factors relevant to our operations which should be carefully reviewed. These risk factors do not necessarily appear in the order of importance.

Changes in interest rates may reduce our net income.

Our earnings depend largely on the relationship between the yield on our interest-earning assets, primarily our mortgage loans and mortgage-backed securities, and the cost of our deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence market interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of non-performing assets. Fluctuations in market interest rates affect customer demand for our products and services. We are subject to interest rate risk to the degree that our interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than our interest-earning assets.

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

30


assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition.

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

The flat-to-inverted yield curve which existed throughout 2006 and the first half of 2007 limited profitable growth opportunities and continued to put pressure on our net interest rate spread and net interest margin. The Federal Open Market Committee, or FOMC, reduced the discount rate and federal funds rate by 100 basis points during the second half of 2007 and by 125 basis points in January 2008 which resulted in a decrease in short-term interest rates and a more positively sloped yield curve.

Interest rates do and will continue to fluctuate, and we cannot predict future FRB actions or other factors that will cause rates to change. Accordingly, no assurance can be given that our net interest margin and net interest income will not remain under pressure.

Changes in interest rates may reduce our stockholders’ equity.

At December 31, 2007, $1.31 billion of our securities were classified as available-for-sale. The estimated fair value of our available-for-sale securities portfolio may increase or decrease depending on changes in interest rates. In general, as interest rates rise, the estimated fair value of our fixed rate securities portfolio will decrease. Our securities portfolio is comprised primarily of fixed rate securities. We increase or decrease stockholders’ equity by the amount of the change in the unrealized gain or loss (difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax benefit, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. If these securities are never sold, the decrease will be recovered over the life of the securities.

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

Our retail banking and a significant portion of our lending business (approximately 41% of our one-to-four family and 92% of our multi-family and commercial real estate mortgage loan portfolios at December 31, 2007) are concentrated in the New York metropolitan area, which includes New York, New Jersey and Connecticut. As a result of this geographic concentration, our results of operations largely depend upon economic conditions in this area, although they also depend on economic conditions in other areas.

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

The second half of 2007 was highlighted by significant disruption and volatility in the financial and capital marketplaces. This turbulence has been attributable to a variety of factors, including the fallout associated

31


with the subprime mortgage market. One aspect of this fallout has been significant deterioration in the activity of the secondary residential mortgage market. The disruptions have been exacerbated by the continued decline of the real estate and housing market along with significant mortgage loan related losses incurred by many lending institutions. The turmoil in the mortgage market has impacted the global markets as well as the domestic markets and led to a significant credit and liquidity crisis during the second half of 2007. In addition, the significant decline in economic growth, both nationally and globally, during the fourth quarter of 2007 has led to a national economy bordering on recession. As a geographically diversified lender, we are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry nationally. During the second half of 2007, we have experienced an increase in non-performing loans and net loan charge-offs. No assurance can be given that these conditions will improve or will not worsen or that such conditions will not result in a further increase in delinquencies, causing a decrease in our interest income, or continue to have an adverse impact on our loan loss experience, causing an increase in our allowance for loan losses.

Strong competition within our market areas could hurt our profits and slow growth.

The New York metropolitan area has a high density of financial institutions, a number of which are significantly larger and have greater financial resources than we have. Additionally over the past several years, various large out-of-state financial institutions have entered the New York metropolitan area market. All are our competitors to varying degrees.

We face intense competition both in making loans and attracting deposits. Our competition for loans, both locally and nationally, comes principally from mortgage banking companies, commercial banks, savings banks and savings and loan associations. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We also face competition for deposits from money market mutual funds and other corporate and government securities funds as well as from other financial intermediaries such as brokerage firms and insurance companies. During the second half of 2007, we faced a greater intensity of competition from certain larger financial institutions that have attempted to sustain their liquidity by offering retail deposits with rates above the market. Price competition for loans and deposits could result in earning less on our loans and paying more on our deposits, which would reduce our net interest income. Competition also makes it more difficult to grow our loan and deposit balances. Our profitability depends upon our continued ability to compete successfully in our market areas.

Multi-family and commercial real estate lending may expose us to increased lending risks.

While we are primarily a one-to-four family mortgage lender, we also originate multi-family and commercial real estate loans. At December 31, 2007, $2.95 billion, or 18%, of our total loan portfolio consisted of multi-family loans and $1.03 billion, or 6%, of our total loan portfolio consisted of commercial real estate loans. Multi-family and commercial real estate loans generally involve a greater degree of credit risk than one-to-four family loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation.

We have originated multi-family and commercial real estate loans in areas other than the New York metropolitan area. Originations in states other than New York, New Jersey and Connecticut represented 12% of our total originations of multi-family and commercial real estate loans in 2007. At December 31, 2007, loans in states other than New York, New Jersey and Connecticut comprised 8% of the total multi-family and commercial real estate loan portfolio. We could be subject to additional risks with respect to multi-family and commercial real estate lending in areas other than the New York metropolitan area since we have less experience in these areas with this type of lending and less direct oversight of the local market and the borrowers’ operations.

32


While we continue to originate multi-family and commercial real estate loans, we do not believe that recent market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending and, therefore, are currently only originating multi-family and commercial real estate loans in the New York metropolitan area. The market for multi-family and commercial real estate loans does and will continue to change. Changes in market conditions may result in our election to pursue the originations of such loans in the future, including our resumption of originations outside of the New York metropolitan area.

Astoria Federal’s ability to pay dividends or lend funds to us is subject to regulatory limitations which, to the extent we need but are not able to access such funds, may prevent us from making future dividend payments or principal and interest payments due on our debt obligations.

We are a unitary savings and loan association holding company regulated by the OTS and almost all of our operating assets are owned by Astoria Federal. We rely primarily on dividends from Astoria Federal to pay cash dividends to our stockholders, to engage in share repurchase programs and to pay principal and interest on our debt obligations. The OTS regulates all capital distributions by Astoria Federal directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan association holding company, Astoria Federal must file a notice with the OTS at least 30 days prior to each capital distribution. However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, then Astoria Federal must file an application to receive the approval of the OTS for a proposed capital distribution. During 2007, we were required to file applications with the OTS for proposed capital distributions and we anticipate that in 2008 we will continue to be required to file such applications for proposed capital distributions.

In addition, Astoria Federal may not pay dividends to us if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or the OTS notified Astoria Federal that it was in need of more than normal supervision. Under the prompt corrective action provisions of the FDIA, an insured depository institution such as Astoria Federal is prohibited from making a capital distribution, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the FDIA). Payment of dividends by Astoria Federal also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe or unsound banking practice.

Based on Astoria Federal’s current financial condition, we do not expect the regulatory limitations will have any impact on our ability to obtain dividends from Astoria Federal. However, there can be no assurance that Astoria Federal will be able to pay dividends at past levels, or at all, in the future.

In addition to regulatory restrictions on the payment of dividends, Astoria Federal is subject to certain restrictions imposed by federal law on any extensions of credit it makes to its affiliates and on investments in stock or other securities of its affiliates. We are considered an affiliate of Astoria Federal. These restrictions prevent affiliates of Astoria Federal, including us, from borrowing from Astoria Federal, unless various types of collateral secure the loans. Federal law limits the aggregate amount of loans to and investments in any single affiliate to 10% of Astoria Federal’s capital stock and surplus and also limits the aggregate amount of loans to and investments in all affiliates to 20% of Astoria Federal’s capital stock and surplus.

If we do not receive sufficient cash dividends or are unable to borrow from Astoria Federal, then we may not have sufficient funds to pay dividends, repurchase our common stock or service our debt obligations.

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

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

33


regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, we must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.

Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.

Financial institutions have been the subject of significant legislative and regulatory changes and may be the subject of further significant legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the cost and burden of compliance, over time, have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for Astoria Federal, as well as for our borrowers, particularly as implemented through the Federal Reserve System, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on Astoria Federal or our borrowers, and therefore on our results of operations.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

 

ITEM 2.

PROPERTIES

We operate 86 full-service banking offices, of which 50 are owned and 36 are leased. We own our principal executive office and the office for our mortgage operations, both located in Lake Success, New York. We also lease office facilities for our wholly-owned subsidiaries Fidata in Norwalk, Connecticut, and Suffco in Farmingdale, New York. We believe such facilities are suitable and adequate for our operational needs.

We are obligated under a lease commitment through 2017 for our previous mortgage operating facility in Mineola, New York. At December 31, 2007, approximately two-thirds of this facility was 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 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.

Goodwill Litigation

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

In one of the actions, entitled The Long Island Savings Bank, FSB et al vs. The United States, the U.S. Court of Federal Claims, or the Court of Federal Claims, rendered a decision on September 15, 2005 awarding us $435.8 million in damages from the U.S. government. No portion of the $435.8 million

34


award was recognized in our consolidated financial statements. On December 14, 2005, the U.S. Government filed an appeal of such award and, on February 1, 2007, the United States Court of Appeals for the Federal Circuit, or Court of Appeals, reversed such award. On April 2, 2007, we filed a petition for rehearing or rehearing en banc. Acting en banc, the Court of Appeals returned the case to the original panel of judges for revision. The panel, on September 13, 2007, withdrew and vacated its earlier opinion and issued a new decision. This decision also reversed the award of $435.8 million in damages awarded to us by the Court of Federal Claims. We again filed with the Court of Appeals a petition for rehearing or rehearing en banc. On December 28, 2007, the Court of Appeals denied our petition. We are currently reviewing our options with respect to any further legal action that may be taken in this matter.

The other action is entitled Astoria Federal Savings and Loan Association vs. United States. The trial in this action took place during 2007 before the Court of Federal Claims. The Court of Federal Claims, by decision filed on January 8, 2008, awarded to us $16.0 million in damages from the U.S. Government. No portion of the $16.0 million award was recognized in our consolidated financial statements. We are currently reviewing the decision and anticipate that the U.S. Government may file an appeal, given its actions in similar cases.

The ultimate outcomes of the two actions pending against the United States and the timing of such outcomes are uncertain and there can be no assurance that we will benefit financially from such litigation. Legal expense related to these two actions has been recognized as it has been incurred.

McAnaney Litigation

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

Astoria Federal previously moved to dismiss the amended complaint, which motion was granted in part and denied in part, dismissing claims based on violations of RESPA and FDCA. The District Court further determined that class certification would be considered prior to considering summary judgment. The District Court, on September 19, 2006, granted the plaintiff’s motion for class certification. Astoria Federal has denied the claims set forth in the complaint. Both we and the plaintiffs subsequently filed motions for summary judgment with the District Court. The District Court, on September 12, 2007, granted our motion for summary judgment on the basis that all named plaintiffs’ Truth in Lending claims are time barred. All other aspects of plaintiffs’ and defendant’s motions for summary judgment were dismissed without prejudice. The District Court found the named plaintiffs to be inadequate class representatives and provided plaintiffs’ counsel an opportunity to submit a motion for the substitution or intervention of new named plaintiffs. Plaintiffs’ counsel filed a motion with the District Court for partial reconsideration of its decision. The District Court, by order dated January 25, 2008, granted plaintiffs’ motion for partial reconsideration and again determined that all named plaintiffs’ Truth-in Lending claims are time barred. The District Court has given plaintiffs’ counsel until February 29, 2008 to move for substitution or intervention of new named plaintiffs. We currently do not believe this action will likely have a material adverse impact on our financial condition or results of operations. However, no assurance can be given at this time that this litigation will be resolved amicably, that this litigation will not be costly to defend, that this litigation will not have an impact on our financial condition or results of operations or that, ultimately, any such impact will not be material.

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the quarter ended December 31, 2007 to a vote of our security holders through the solicitation of proxies or otherwise.

35


PART II

 

 

ITEM 5.

MARKET FOR ASTORIA FINANCIAL CORPORATION’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange, or NYSE, under the symbol “AF.” The table below shows the high and low sale prices reported on the NYSE for our common stock during the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 

 

 


 

 

 

High

 

Low

 

High

 

Low

 


First Quarter

 

$

30.56

 

$

26.31

 

$

31.95

 

$

27.25

 

Second Quarter

 

 

27.93

 

 

24.35

 

 

31.88

 

 

29.06

 

Third Quarter

 

 

27.80

 

 

22.47

 

 

31.75

 

 

28.85

 

Fourth Quarter

 

 

27.97

 

 

22.50

 

 

31.49

 

 

28.22

 

As of February 15, 2008, we had 3,452 shareholders of record. As of December 31, 2007, there were 95,728,562 shares of common stock outstanding.

The following schedule summarizes the cash dividends paid per common share for 2007 and 2006.

 

 

 

 

 

 

 

 

 

 

2007

 

2006

 


 

First Quarter

 

$

0.26

 

$

0.24

 

Second Quarter

 

 

0.26

 

 

0.24

 

Third Quarter

 

 

0.26

 

 

0.24

 

Fourth Quarter

 

 

0.26

 

 

0.24

 

On January 23, 2008, our Board of Directors declared a quarterly cash dividend of $0.26 per common share, payable on March 3, 2008, to common stockholders of record as of the close of business on February 15, 2008. Our Board of Directors intends to review the payment of dividends quarterly and plans to continue to maintain a regular quarterly dividend in the future, dependent upon our earnings, financial condition and other factors.

We are subject to the laws of the State of Delaware which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over our statutory capital, or if there is no such excess, to our net profits for the current and/or immediately preceding fiscal year. We are also subject to certain financial covenants and other limitations pursuant to the terms of various debt instruments that have been issued by us, which could have an impact on our ability to pay dividends in certain circumstances. See Item 7, “MD&A - Liquidity and Capital Resources” for further discussion of such financial covenants and other limitations. Our payment of dividends is dependent, in large part, upon receipt of dividends from Astoria Federal. Astoria Federal is subject to certain restrictions which may limit its ability to pay us dividends. See Item 1, “Business - Regulation and Supervision” and Note 9 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for an explanation of the impact of regulatory capital requirements on Astoria Federal’s ability to pay dividends. See Item 1, “Business - Federal Taxation” and Note 12 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for an explanation of the tax impact of the unlikely event that Astoria Federal (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes; (2) redeems its stock; or (3) liquidates.

36


Stock Performance Graph

The following graph shows a comparison of cumulative total shareholder return on Astoria Financial Corporation common stock, or AFC Common Stock, during the five fiscal years ended December 31, 2007, with the cumulative total returns of both a broad market index, the Standard & Poor’s, or S&P, 500 Stock Index, and a peer group index, the Financials Sector of the S&P 400 Mid-cap Index. The comparison assumes $100 was invested on December 31, 2002 in AFC Common Stock and in each of the S&P indices and assumes that all of the dividends were reinvested.

(LINE GRAPH)

AFC Common Stock, Market and Peer Group Indices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFC Common Stock

 

S&P 500 Stock Index

 

S&P Midcap 400 Financials Index

 

 

 


 


 


 

December 31, 2002

 

 

$

100.00

 

 

 

$

100.00

 

 

 

$

100.00

 

 

December 31, 2003

 

 

 

140.99

 

 

 

 

128.68

 

 

 

 

134.43

 

 

December 31, 2004

 

 

 

155.42

 

 

 

 

142.69

 

 

 

 

161.15

 

 

December 31, 2005

 

 

 

176.53

 

 

 

 

149.70

 

 

 

 

177.31

 

 

December 31, 2006

 

 

 

186.91

 

 

 

 

173.34

 

 

 

 

205.44

 

 

December 31, 2007

 

 

 

149.96

 

 

 

 

182.86

 

 

 

 

179.29

 

 

37


The following table sets forth the repurchases of our common stock by month during the three months ended December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total
Number of
Shares

Purchased

 

Average
Price Paid

per Share

 

Total Number
of Shares
Purchased as Part
of Publicly

Announced Plans

 

Maximum
Number of Shares
that May Yet Be
Purchased Under the

Plans

 










 

October 1, 2007 through October 31, 2007

 

165,000

 

 

 

$

26.47

 

 

165,000

 

 

9,202,300

 

 

November 1, 2007 through November 30, 2007

 

210,000

 

 

 

$

24.40

 

 

210,000

 

 

8,992,300

 

 

December 1, 2007 through December 31, 2007

 

130,000

 

 

 

$

24.57

 

 

130,000

 

 

8,862,300

 

 
















 

Total

 

505,000

 

 

 

$

25.12

 

 

505,000

 

 

 

 

 
















 

All of the shares repurchased during the three months ended December 31, 2007 were repurchased under our twelfth stock repurchase plan, approved by our Board of Directors on April 18, 2007, which authorized the purchase of 10,000,000 shares, or approximately 10% of our common stock outstanding, in open-market or privately negotiated transactions.

On May 18, 2007, 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 May 18, 2007 certification date.

38



 

 

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)

 

2007

 

2006

 

2005

 

2004

 

2003

 












 

Selected Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

21,719,368

 

$

21,554,519

 

$

22,380,271

 

$

23,415,869

 

$

22,461,594

 

Federal funds sold and repurchase agreements

 

 

24,218

 

 

71,694

 

 

182,803

 

 

267,578

 

 

65,926

 

Securities available-for-sale

 

 

1,313,306

 

 

1,560,325

 

 

1,841,351

 

 

2,406,883

 

 

2,654,992

 

Securities held-to-maturity

 

 

3,057,544

 

 

3,779,356

 

 

4,730,953

 

 

6,302,936

 

 

5,792,727

 

Loans receivable, net

 

 

16,076,068

 

 

14,891,749

 

 

14,311,134

 

 

13,180,521

 

 

12,603,866

 

Deposits

 

 

13,049,438

 

 

13,224,024

 

 

12,810,455

 

 

12,323,257

 

 

11,186,594

 

Borrowings, net

 

 

7,184,658

 

 

6,836,002

 

 

7,937,526

 

 

9,469,835

 

 

9,632,037

 

Stockholders’ equity

 

 

1,211,344

 

 

1,215,754

 

 

1,350,227

 

 

1,369,764

 

 

1,396,531

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

 

 


 

(In Thousands, Except Per Share Data)

 

2007

 

2006

 

2005

 

2004

 

2003

 












 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

1,105,322

 

$

1,086,814

 

$

1,082,987

 

$

1,045,901

 

$

1,057,291

 

Interest expense

 

 

771,794

 

 

696,429

 

 

604,207

 

 

575,335

 

 

677,753

 

















 

Net interest income

 

 

333,528

 

 

390,385

 

 

478,780

 

 

470,566

 

 

379,538

 

Provision for loan losses

 

 

2,500

 

 

 

 

 

 

 

 

 

















 

Net interest income after provision for loan losses

 

 

331,028

 

 

390,385

 

 

478,780

 

 

470,566

 

 

379,538

 

Non-interest income

 

 

75,790

 

 

91,350

 

 

102,199

 

 

80,084

 

 

119,561

 

General and administrative expense

 

 

231,273

 

 

221,803

 

 

228,734

 

 

225,011

 

 

205,877

 

















 

Income before income tax expense

 

 

175,545

 

 

259,932

 

 

352,245

 

 

325,639

 

 

293,222

 

Income tax expense

 

 

50,723

 

 

85,035

 

 

118,442

 

 

106,102

 

 

96,376

 

















 

Net income

 

 

124,822

 

 

174,897

 

 

233,803

 

 

219,537

 

 

196,846

 

Preferred dividends declared

 

 

 

 

 

 

 

 

 

 

4,500

 

















 

Net income available to common shareholders

 

$

124,822

 

$

174,897

 

$

233,803

 

$

219,537

 

$

192,346

 

















 

Basic earnings per common share

 

$

1.38

 

$

1.85

 

$

2.30

 

$

2.03

 

$

1.68

 

Diluted earnings per common share

 

$

1.36

 

$

1.80

 

$

2.26

 

$

2.00

 

$

1.66

 

39



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the Year Ended December 31,

 

 

 


 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Ratios and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.58

%

 

0.80

%

 

1.02

%

 

0.97

%

 

0.87

%

Return on average stockholders’ equity

 

 

10.39

 

 

13.73

 

 

17.06

 

 

15.81

 

 

13.26

 

Return on average tangible stockholders’ equity (1)

 

 

12.28

 

 

16.06

 

 

19.72

 

 

18.25

 

 

15.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average stockholders’ equity to average assets

 

 

5.57

 

 

5.83

 

 

5.99

 

 

6.12

 

 

6.54

 

Average tangible stockholders’ equity to average tangible assets (1)(2)

 

 

4.75

 

 

5.02

 

 

5.22

 

 

5.35

 

 

5.78

 

Stockholders’ equity to total assets

 

 

5.58

 

 

5.64

 

 

6.03

 

 

5.85

 

 

6.22

 

Tangible stockholders’ equity to tangible assets (tangible capital ratio) (1)(2)

 

 

4.77

 

 

4.82

 

 

5.25

 

 

5.10

 

 

5.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest rate spread (3)

 

 

1.50

 

 

1.76

 

 

2.11

 

 

2.09

 

 

1.72

 

Net interest margin (4)

 

 

1.62

 

 

1.87

 

 

2.19

 

 

2.17

 

 

1.78

 

Average interest-earning assets to average interest-bearing liabilities

 

 

1.03

 x

 

1.03

 x

 

1.03

 x

 

1.03

 x

 

1.02

 x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense to average assets

 

 

1.07

%

 

1.01

%

 

1.00

%

 

0.99

%

 

0.91

%

Efficiency ratio (5)

 

 

56.50

 

 

46.04

 

 

39.37

 

 

40.86

 

 

41.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

1.04

 

$

0.96

 

$

0.80

 

$

0.67

 

$

0.57

 

Dividend payout ratio

 

 

76.47

%

 

53.33

%

 

35.40

%

 

33.50

%

 

34.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans (6)

 

 

0.66

 

 

0.40

 

 

0.45

 

 

0.25

 

 

0.23

 

Non-performing loans to total assets (6)

 

 

0.49

 

 

0.28

 

 

0.29

 

 

0.14

 

 

0.13

 

Non-performing assets to total assets (6)(7)

 

 

0.53

 

 

0.28

 

 

0.30

 

 

0.14

 

 

0.14

 

Allowance for loan losses to non-performing
loans (6)

 

 

74.25

 

 

134.55

 

 

124.81

 

 

254.02

 

 

280.10

 

Allowance for loan losses to non-accrual loans

 

 

74.58

 

 

135.66

 

 

125.15

 

 

258.57

 

 

285.51

 

Allowance for loan losses to total loans

 

 

0.49

 

 

0.53

 

 

0.56

 

 

0.62

 

 

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of deposit accounts

 

 

888,838

 

 

928,647

 

 

953,998

 

 

975,155

 

 

963,120

 

Mortgage loans serviced for others (in thousands)

 

$

1,272,220

 

$

1,363,591

 

$

1,502,852

 

$

1,670,062

 

$

1,895,102

 

Full service banking offices

 

 

86

 

 

86

 

 

86

 

 

86

 

 

86

 

Regional lending offices

 

 

3

 

 

3

 

 

3

 

 

4

 

 

3

 

Full time equivalent employees

 

 

1,615

 

 

1,626

 

 

1,658

 

 

1,862

 

 

1,971

 


 

 

(1)

Tangible stockholders’ equity represents stockholders’ equity less goodwill.

 

 

(2)

Tangible assets represent assets less goodwill.

 

 

(3)

Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

 

 

(4)

Net interest margin represents net interest income divided by average interest-earning assets.

 

 

(5)

Efficiency ratio represents general and administrative expense divided by the sum of net interest income plus non-interest income.

 

 

(6)

Non-performing loans consist of all non-accrual loans and all mortgage loans delinquent 90 days or more as to their maturity date but not their interest due and exclude loans which have been restructured and are accruing and performing in accordance with the restructured terms. Restructured accruing loans totaled $1.2 million, $1.5 million, $1.6 million, $2.8 million and $3.9 million at December 31, 2007, 2006, 2005, 2004 and 2003, respectively.

 

 

(7)

Non-performing assets consist of all non-performing loans and real estate owned.

40



 

 

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 the premier Long Island community bank, our goals are 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 strong asset quality and controlling operating expenses. Additionally, we continue to provide returns to shareholders through dividends and stock repurchases. We have been successful in achieving these goals over the past several years.

The second half of 2007 was highlighted by significant disruption and volatility in the financial and capital marketplaces. This turbulence has been attributable to a variety of factors, in particular the fallout associated with the subprime mortgage market. One aspect of this fallout has been significant deterioration in the activity of the secondary residential mortgage market. The disruptions have been exacerbated by the continued decline of the real estate and housing market along with significant mortgage loan related losses incurred by many lending institutions. Subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that we have ever actively pursued. Additionally, we continue to adhere to prudent underwriting standards. However, as a geographically diversified lender, we are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry nationally. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio.

Although these market conditions have generally had a negative impact on a majority of mortgage industry participants, they have also provided positive opportunities for prime portfolio lenders like us. The dislocations in the secondary residential mortgage market have led to fewer participants, and thus less competition in mortgage originations, stricter underwriting standards and wider pricing spreads. We expect these conditions will enable us to continue to grow our one-to-four family mortgage loan portfolio while enhancing our credit quality standards.

The turmoil in the mortgage market has impacted the global markets as well as the domestic markets and led to a significant credit and liquidity crisis during the second half of 2007. In addition, the significant decline in economic growth, both nationally and globally, during the fourth quarter of 2007 has led to a national economy bordering on recession. In response to these concerns, the FOMC reduced the discount rate and federal funds rate by 100 basis points during the second half of 2007 and by 125 basis points in January 2008. These decreases in short-term interest rates have resulted in a more positively sloped yield curve and should result in the eventual expansion of our net interest margin and improved opportunities for earnings growth. The flat-to-inverted yield curve which existed throughout 2006 and into the first half of 2007 limited profitable growth opportunities.

Our total loan portfolio increased during the year ended December 31, 2007. This increase was primarily due to an increase in one-to-four family mortgage loans as a result of strong loan originations and purchases reflecting our competitive pricing and the previously discussed dislocations in the secondary residential mortgage market.

Total deposits decreased during the year ended December 31, 2007. This decrease was primarily due to a decrease in savings, money market and NOW and demand deposits, partially offset by an increase in certificates of deposit. During the second half of 2007, as short-term market interest rates declined, retail deposit pricing remained at higher levels as certain larger financial institutions attempted to sustain their liquidity by offering deposit products with rates above the market. We have chosen to maintain our

41


deposit pricing discipline, which has resulted in net deposit outflows, and instead have taken advantage of lower cost borrowings for funding some of our loan growth during the second half of 2007.

Our securities portfolio decreased during the year ended December 31, 2007, which is consistent with our strategy of reducing the portfolio through normal cash flow, as we remain focused on originations of mortgage loans and growth in our loan portfolio. Our borrowings portfolio increased during 2007, primarily as a result of our use of lower cost borrowings to fund some of our loan growth during the second half of the year.

Net income, the net interest margin and the net interest rate spread for 2007 decreased compared to the prior year. The decrease in net income was primarily due to decreases in net interest income and non-interest income, coupled with an increase in non-interest expense. The decrease in net interest income, as well as the decreases in the net interest margin and the net interest rate spread, were primarily the result of an increase in interest expense due to the cost of interest-bearing liabilities rising more rapidly than the yield on interest-earning assets. The interest rate environment, characterized by a flat-to-inverted yield curve during 2006 and into the first half of 2007, coupled with a very competitive environment for deposits, resulted in significant increases in the costs of our certificates of deposits, Liquid CDs and borrowings. The decrease in non-interest income for the year ended December 31, 2007 was primarily due to an other-than-temporary impairment write-down charge to reduce the carrying amount of our investment in two issues of FHLMC perpetual preferred securities and a decrease in mortgage banking income, net, partially offset by an increase in other non-interest income and a net gain on the sale of securities. The increase in non-interest expense was primarily due to increases in compensation and benefits expense and other expense, partially offset by a decrease in advertising expense. In addition, based on our evaluation of the previously discussed issues regarding the real estate and housing markets, as well as the overall economic environment, and in recognition of the increases in non-performing loans and net loan charge-offs during the second half of 2007, we determined that a provision for loan losses was warranted for the year ended December 31, 2007.

The decreases in short-term interest rates during the second half of 2007 and in January 2008 have produced a more positively sloped yield curve and a more favorable interest rate environment for us going forward. We anticipate the yield curve will remain positively sloped and steepen further in 2008 which should result in improved opportunities for earnings growth and an expansion of our net interest margin. Our focus going forward will be to continue to capitalize on residential mortgage market opportunities that result in improved loan volumes and mortgage spreads. Loan growth may be tempered somewhat as we have reduced the number of states in which we will originate and purchase residential mortgage loans due to the advanced economic declines in those markets. Deposit growth will remain a focus; however, if above market pricing continues, we expect to fund some of our loan growth with lower cost borrowings. We expect to continue to maintain tangible capital levels between 4.50% and 4.75%.

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 are reviewed quarterly with the Audit Committee of our Board of Directors.

42


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 probable inherent losses 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. 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.

Loan reviews are completed quarterly for all loans individually classified by the Asset Classification Committee. Individual loan reviews are generally completed annually for multi-family, commercial real estate and construction loans in excess of $2.5 million, commercial business loans in excess of $200,000, one-to-four family loans in excess of $1.0 million and debt restructurings. In addition, we generally review annually at least fifty percent of the outstanding balances of multi-family, commercial real estate and construction loans to single borrowers with concentrations in excess of $2.5 million.

The primary considerations in establishing specific valuation allowances are the current estimated value of a loan’s underlying collateral and the loan’s payment history. We update our estimates of collateral value when loans are individually classified by our Asset Classification Committee as either substandard or doubtful, as well as for special mention and watch list loans in excess of $2.5 million and certain other loans when the Asset Classification Committee believes repayment of such loans may be dependent on the value of the underlying collateral. Updated estimates of collateral value are obtained through appraisals, where practical. 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, an estimate of 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, by either a licensed appraiser or real estate broker for one-to-four family properties. For multi-family and commercial real estate properties, our internal Asset Review personnel estimate collateral value based on an internal cash flow analysis, coupled with, in most cases, a drive-by inspection of the property. Other current and anticipated economic conditions on which our specific valuation allowances rely are the impact that national and/or local economic and business conditions may have on borrowers, the impact that local real estate markets may have on collateral values, the level and direction of interest rates and their combined effect on real estate values and the ability of borrowers to service debt. For multi-family and commercial real estate loans, additional factors specific to a borrower or the underlying collateral are considered. These factors include, but are not limited to, the composition of tenancy, occupancy levels for the property, cash flow estimates and the existence of personal guarantees. We also review all regulatory notices, bulletins and memoranda with the purpose of identifying upcoming changes in regulatory conditions which may impact our calculation of specific valuation allowances. The OTS periodically reviews our reserve methodology during regulatory examinations and any comments regarding changes to reserves or loan classifications are considered by management in determining valuation allowances.

Pursuant to our policy, loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessment 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.

43


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 loans. The determination of the adequacy of the general valuation allowances takes into consideration a variety of factors. We segment our loan portfolio into like categories by composition and size and perform analyses against each category. These include historical loss experience and delinquency levels and trends. We analyze our historical loan loss experience by category (loan type) over 3, 5, 10, 12 and 16-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 range of allowance percentages is used as an integral part of our judgment in developing estimated loss percentages to apply to the portfolio. We also consider the size, composition, risk profile, delinquency levels and cure rates of our portfolio, as well as our credit administration and asset management philosophies and procedures. We monitor property value trends in our market areas by reference to various industry and market reports, economic releases and surveys, and our general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such trends may have on the level of our general valuation allowances. In determining our allowance coverage percentages for non-performing loans, we consider our historical loss experience with respect to the ultimate disposition of the underlying collateral. In addition, we evaluate and consider the impact that existing and projected economic and market conditions may have on the portfolio, as well as known and inherent risks in the portfolio.

We also evaluate and consider the allowance ratios and coverage percentages set forth in both peer group and regulatory agency data and any comments from the OTS resulting from their review of our general valuation allowance methodology during regulatory examinations. Our focus, however, is primarily on our historical loss experience and the impact of current economic conditions. After evaluating these variables, we determine appropriate allowance coverage percentages for each of our portfolio segments and the appropriate level of our allowance for loan losses. Our allowance coverage percentages are used to estimate the amount of probable losses inherent in our loan portfolio in determining our general valuation allowances. Our evaluation of general valuation allowances is inherently subjective because, even though it is based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. Therefore, we annually review the actual performance and charge-off history of our portfolio and compare that to our previously determined allowance coverage percentages and specific valuation allowances. In doing so, we evaluate the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to our assumptions and analyses.

Our loss experience during the first nine months of 2007 was relatively consistent with our experience over the past several years, in that losses were primarily attributable to a small number of loans. During the fourth quarter of 2007, the continued decline in the housing and real estate markets, as well as the overall economic environment, contributed to an increase in our non-performing loans and net loan charge-offs. However, our 2007 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 any material changes in our allowance coverage percentages were required. However, based on our evaluation of the current real estate and housing markets, as well as the overall economic environment, and in recognition of the increases in non-performing loans and net loan charge-offs during the second half of 2007, we determined that a provision for loan losses of $2.5 million was warranted for the year ended December 31, 2007. The balance of our allowance for loan losses was $78.9 million at December 31, 2007 and $79.9 million at December 31, 2006 and represents management’s best estimate of the probable inherent losses in our loan portfolio at the respective dates.

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

44


For additional information regarding our allowance for loan losses, see “Provision for Loan Losses” and “Asset Quality.”

Valuation of MSR

The initial asset recognized for originated MSR is measured at fair value. The fair value of MSR is estimated by reference to current market prices of similar loans sold servicing released. MSR are amortized in proportion to and over the period of estimated net servicing income. MSR are assessed for impairment based on fair value at each reporting date. MSR impairment, if any, is recognized in a valuation allowance through charges to earnings. Increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance.

We assess impairment of our MSR based on the estimated fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. We stratify our MSR by underlying loan type (primarily fixed and adjustable) and interest rate. The estimated fair values of each MSR stratum are obtained through independent third party valuations through an analysis of future cash flows, incorporating numerous market based assumptions including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements. Individual allowances for each stratum are then adjusted in subsequent periods to reflect changes in the measurement of impairment. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions.

At December 31, 2007, our MSR, net, had an estimated fair value of $12.9 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.52%, a weighted average constant prepayment rate on mortgages of 13.45% and a weighted average life of 5.1 years. At December 31, 2006, our MSR, net, had an estimated fair value of $16.0 million and were valued based on expected future cash flows considering a weighted average discount rate of 9.02%, a weighted average constant prepayment rate on mortgages of 13.23% and a weighted average life of 5.3 years.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. In general, 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, 2007, the estimated fair value of our MSR would have been $3.6 million greater. Assuming a decrease in interest rates of 100 basis points at December 31, 2007, the estimated fair value of our MSR would have been $5.3 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. 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.

At December 31, 2007, the carrying value of our goodwill totaled $185.2 million. On September 30, 2007, we performed our annual goodwill impairment test and determined the fair value of our reporting unit to be in excess of its carrying amount by $1.35 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

45


the fair value of our reporting unit below its carrying amount. No events have occurred and no circumstances have changed since our annual impairment test date that would more likely than not reduce the fair value of our reporting unit below its carrying amount. The identification of additional reporting units or the use of other valuation techniques could result in materially different evaluations of impairment.

Securities Impairment

Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Debt securities which we have the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The fair values for substantially all of our securities are obtained from an independent nationally recognized pricing service. We use third party brokers to obtain prices for a small portion of the portfolio that we are not able to price using our third party pricing service.

Our investment portfolio is comprised primarily of fixed rate mortgage-backed securities guaranteed by a GSE as issuer. GSE issuance mortgage-backed securities comprised 92% of our securities portfolio at December 31, 2007. Non-GSE issuance mortgage-backed securities at December 31, 2007 comprised 6% of our securities portfolio and had an amortized cost of $268.0 million, 15% of which are classified as available-for-sale and 85% of which are classified as held-to-maturity. Based on the disclosure documents for our non-GSE issuance securities, none were backed by pools consisting primarily of subprime mortgage loans. Our non-GSE issuance securities have either a AAA credit rating or an insurance wrap and they perform similarly to our GSE issuance securities. While the recent mortgage market conditions reflecting credit quality concerns might significantly impact lower grade securities, the impact on our non-GSE securities has not been significant. Based on the high quality of our investment portfolio, we do not believe that current market conditions will significantly impact the pricing of our portfolio or our ability to obtain reliable prices.

The fair value of our investment portfolio is primarily impacted by changes in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, the fair value of fixed rate securities will increase. We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income. At December 31, 2007, we had 205 securities with an estimated fair value totaling $4.02 billion which had an unrealized loss totaling $94.4 million, substantially all of which have been in a continuous unrealized loss position for more than twelve months. Substantially all of these securities are guaranteed by a GSE as issuer. At December 31, 2007, the impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, the estimated remaining life and high credit quality of the investments and our ability and intent to hold these investments until there is a full recovery of the unrealized loss, which may be until maturity.

During the 2007 fourth quarter, we recorded a $20.5 million other-than-temporary impairment write-down charge to reduce the carrying amount of our investment in two issues of FHLMC perpetual preferred securities to the securities’ market value of $83.0 million at December 31, 2007. 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/loss. 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 the significant decline in the market value of these securities caused by the FHLMC’s recently announced negative financial results, capital raising activity and the unlikelihood of any near-term market value recovery.

46


Liquidity and Capital Resources

Our primary source of funds is cash provided by principal and interest payments on loans and securities. The most significant liquidity challenge we face is the variability in cash flows as a result of changes in mortgage refinance activity. As mortgage interest rates increase, customers’ refinance activities tend to decelerate causing the cash flow from both our mortgage loan portfolio and our mortgage-backed securities portfolio to decrease. When mortgage rates decrease, the opposite tends to occur. Principal payments on loans and securities totaled $3.98 billion for the year ended December 31, 2007 and $4.12 billion for the year ended December 31, 2006. The net decrease in loan and securities repayments was the result of a decrease in securities repayments for the year ended December 31, 2007, compared to the year ended December 31, 2006, partially offset by an increase in loan repayments.

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 $207.8 million for the year ended December 31, 2007 and $216.7 million for the year ended December 31, 2006. Deposits decreased $174.6 million during the year ended December 31, 2007 and increased $413.6 million during the year ended December 31, 2006. The net decrease in deposits during the year ended December 31, 2007 was due to decreases in savings, money market and NOW and demand deposit accounts, partially offset by an increase in certificates of deposit. During the second half of 2007, as short-term market interest rates declined, certain retail deposit pricing remained at above market levels. We have maintained our deposit pricing discipline, which has resulted in net deposit outflows, and instead have taken advantage of lower cost borrowings for funding some of our loan growth during the second half of 2007. The net increase in deposits during the year ended December 31, 2006 was primarily attributable to increases in Liquid CDs and certificates of deposit as a result of the success of our marketing efforts and competitive pricing strategies which focused on attracting these types of deposits.

Net borrowings increased $348.7 million during the year ended December 31, 2007 and decreased $1.10 billion during the year ended December 31, 2006. The increase in net borrowings during the year ended December 31, 2007 is a result of our use of lower cost borrowings to fund some of our loan growth in the second half of 2007. The decrease in net borrowings during the year ended December 31, 2006 reflects our strategy of reducing the securities and borrowings portfolios through normal cash flow in response to the flat-to-inverted U.S. Treasury yield curve during that time.

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, 2007 totaled $4.23 billion, of which $3.82 billion were originations and $407.3 million were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2006, totaling $3.43 billion, of which $3.05 billion were originations and $385.6 million were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $203.7 million during the year ended December 31, 2007 and $232.2 million during the year ended December 31, 2006. The increase in mortgage loan originations is the result of an increase in one-to-four family loan originations, primarily attributable to mortgage refinance opportunities, our competitive pricing and the dislocations in the secondary residential mortgage market, partially offset by a decrease in multi-family and commercial real estate loan originations. Although we remain focused on the origination of one-to-four family, multi-family and commercial real estate loans, we do not believe that current market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending and, therefore, are currently only originating multi-family and commercial real estate loans in the New York metropolitan area which includes New York, New Jersey and Connecticut.

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 $118.2 million at December 31, 2007, compared to $205.7 million at December 31, 2006. At December 31, 2007, we have $2.68 billion in borrowings with a weighted average rate of 4.87% maturing over the next twelve months. We have the flexibility to either repay or rollover these borrowings as they mature.

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The previously discussed disruption in the credit markets has not impacted our ability to engage in ordinary course borrowings. In addition, we have $7.45 billion in certificates of deposit and Liquid CDs with a weighted average rate of 4.68% maturing over the next twelve months.

The following table details borrowing, certificate of deposit and Liquid CD maturities and their weighted average rates at December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

Certificates of Deposit
and Liquid CDs

 

 

 


 


 

(Dollars in Millions)

 

Amount

 

Weighted
Average
Rate

 

Amount

 

Weighted
Average
Rate

 






 




 

Contractual Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

$

2,683

(1)

4.87

%

 

$

7,449

 

4.68

%

 

2009

 

 

600

 

4.19

 

 

 

1,007

 

4.69

 

 

2010

 

 

600

(2)

4.44

 

 

 

449

 

4.90

 

 

2011

 

 

125

(3)

4.89

 

 

 

241

 

4.98

 

 

2012

 

 

1,100

(4)

4.70

 

 

 

187

 

4.94

 

 

2013 and thereafter

 

 

2,079

(5)

4.56

 

 

 

13

 

4.27

 

 














 

Total

 

$

7,187

 

4.66

%

 

$

9,346

 

4.70

%

 














 


 

 

(1)

Includes $583.0 million of overnight and other short-term borrowings with a weighted average rate of 4.38%.

 

 

(2)

Includes $300.0 million of borrowings, with a weighted average rate of 3.88%, which are callable by the counterparty in 2009 and at various times thereafter.

 

(3)

Callable by the counterparty in 2008 and at various times thereafter.

 

(4)

Includes $850.0 million of borrowings, with a weighted average rate of 4.39%, which are callable by the counterparty in 2009 and at various times thereafter.

 

 

(5)

Includes $1.00 billion of borrowings, with a weighted average rate of 4.21%, which are callable by the counterparty in 2008 and at various times thereafter and $950.0 million of borrowings, with a weighted average rate of 4.23%, which are callable by the counterparty in 2009 and at various times thereafter.

Additional sources of liquidity at the holding company level have included issuances of securities into the capital markets, including private issuances of trust preferred securities and senior debt. Holding company debt obligations, 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 shares of our common stock or to stock that has been issued pursuant to our dividend reinvestment plan or our equity incentive plans. The Junior Subordinated Debentures were issued to Astoria Capital Trust I as part of the transaction in which Astoria Capital Trust I privately issued trust preferred securities.

We have $20.0 million of 7.67% senior unsecured notes, which were issued in a private placement and mature in 2008. 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 and reverse repurchase agreements, in excess of 90% of our consolidated stockholders’ equity. The terms also require that we maintain a consolidated capital to assets ratio of not less than 4.0%; a non-performing asset ratio, net of our allowance for loan losses, of less than 3.5% of assets; and a consolidated interest coverage ratio of at least 3.0 to 1.0. 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, 2007, we were in compliance with each of these covenants, and we do not anticipate these covenants will have a material effect on our operations.

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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 these notes restrict our ability to sell, transfer or pledge as collateral the shares of Astoria Federal or any other significant subsidiary or of all, or substantially all, of the assets of Astoria Federal or any other significant subsidiary, other than in connection with a sale or transfer involving Astoria Financial Corporation.

Our ability to continue to access the capital markets for additional financing at favorable terms may be limited by, among other things, market demand, interest rates, our capital levels, Astoria Federal’s ability to pay dividends to Astoria Financial Corporation, our credit profile and ratings and our business model. We do not believe that the previously discussed disruption in the credit markets will materially impact our ability to access the capital markets. 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 2007, Astoria Federal paid dividends to Astoria Financial Corporation totaling $161.0 million.

Astoria Financial Corporation’s primary uses of funds include payment of dividends, payment of principal and interest on its debt obligations and repurchases of common stock. Astoria Financial Corporation paid principal and interest on its debt obligations totaling $49.6 million in 2007. Our payment of dividends and repurchases of our common stock, totaled $175.3 million in 2007. Our ability to pay dividends, service our debt obligations and repurchase common stock is dependent primarily upon receipt of capital distributions from Astoria Federal. Since Astoria Federal is a federally chartered savings association, there are limits on its ability to make distributions to Astoria Financial Corporation. During 2007, we were required to file applications with the OTS for proposed capital distributions and we anticipate that in 2008 we will continue to be required to file such applications for proposed capital distributions. 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 $95.2 million during the year ended December 31, 2007 and $92.1 million during the year ended December 31, 2006. On January 23, 2008, we declared a quarterly cash dividend of $0.26 per share on shares of our common stock, payable on March 3, 2008, to stockholders of record as of the close of business on February 15, 2008.

During the year ended December 31, 2007, we completed our eleventh stock repurchase plan, which was approved by our Board of Directors on December 21, 2005 and authorized the purchase, at management’s discretion, of 10,000,000 shares, or approximately 10% of our common stock outstanding, through December 31, 2007 in open-market or privately negotiated transactions. On April 18, 2007, our Board of Directors approved our twelfth stock repurchase plan authorizing the purchase of 10,000,000 shares, or approximately 10% of our common stock outstanding, in open-market or privately negotiated transactions. Stock repurchases under our twelfth stock repurchase plan commenced immediately following the completion of the eleventh stock repurchase plan on July 30, 2007. Under these plans, during the year ended December 31, 2007, we repurchased 3,005,000 shares of our common stock, at an aggregate cost of $80.1 million, of which 1,137,700 shares were acquired pursuant to our twelfth 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.”

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

At December 31, 2007, Astoria Federal’s capital levels exceeded all of its regulatory capital requirements with a tangible capital ratio of 6.58%, leverage capital ratio of 6.58% and total risk-based capital ratio of 12.04%. The minimum regulatory requirements are a tangible capital ratio of 1.50%, leverage capital ratio of 4.00% and total risk-based capital ratio of 8.00%. As of December 31, 2007, Astoria Federal continues to be a well capitalized institution.

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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 and lease commitments 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.

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 $19.7 million at December 31, 2007 and represent obligations to sell loans either servicing retained or servicing released on a mandatory delivery or best efforts basis. We enter into commitments to sell loans as an economic hedge against our pipeline of fixed rate loans which we originate primarily for sale into the secondary market. The fair values of our mortgage banking derivative instruments are immaterial to our financial condition and results of operations.

The following table details our contractual obligations at December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 


 

(In Thousands)

 

Total

 

Less than
One Year

 

One to
Three Years

 

Three to
Five Years

 

More than
Five Years

 












 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings with original terms greater than three months

 

$

6,603,866

 

$

2,100,000

 

$

1,200,000

 

$

1,225,000

 

$

2,078,866

 

Minimum rental payments due under non-cancelable operating leases

 

 

75,316

 

 

7,890

 

 

13,221

 

 

11,548

 

 

42,657

 

Commitments to originate and purchase loans (1)

 

 

423,541

 

 

423,541

 

 

 

 

 

 

 

Commitments to fund unused lines of credit (2)

 

 

397,046

 

 

397,046

 

 

 

 

 

 

 

















 

Total

 

$

7,499,769

 

$

2,928,477

 

$

1,213,221

 

$

1,236,548

 

$

2,121,523

 

















 


 

 

(1)

Commitments to originate and purchase loans include commitments to originate loans held-for-sale of $21.3 million.

 

 

(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 $407.7 million at December 31, 2007. We estimate the liability for loans sold with recourse based on an analysis of our loss experience related to similar loans sold with recourse. The carrying amount of this liability was immaterial at December 31, 2007. We also have a collateralized repurchase obligation due to the sale of certain long-term fixed rate municipal revenue bonds to an investment trust fund for proceeds that approximated par value. The trust fund has a put option that requires us to repurchase the securities for specified amounts prior to maturity under certain specified circumstances, as defined in the agreement. The outstanding option balance on the agreement totaled $10.7 million at December 31, 2007.

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

50


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 $1.5 million at December 31, 2007.

See Note 11 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding our commitments and contingent liabilities.

Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2007 and 2006

Financial Condition

Total assets increased $164.8 million to $21.72 billion at December 31, 2007, from $21.55 billion at December 31, 2006. The increase in total assets primarily reflects an increase in loans receivable, partially offset by a decrease in securities.

Our total loan portfolio increased $1.19 billion to $16.16 billion at December 31, 2007, from $14.97 billion at December 31, 2006. This increase was primarily a result of an increase in our mortgage loan portfolio. Mortgage loans, net, increased $1.26 billion to $15.79 billion at December 31, 2007, from $14.53 billion at December 31, 2006. This increase was primarily due to an increase in our one-to-four family mortgage loan portfolio, partially offset by decreases in our multi-family, commercial real estate and construction mortgage loan portfolios. Gross mortgage loans originated and purchased during the year ended December 31, 2007 totaled $4.23 billion, of which $3.82 billion were originations and $407.3 million were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2006 totaling $3.43 billion, of which $3.05 billion were originations and $385.6 million were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $203.7 million during the year ended December 31, 2007 and $232.2 million during the year ended December 31, 2006. The increase in mortgage loan originations is the result of an increase in one-to-four family loan originations, partially offset by a decrease in multi-family and commercial real estate loan originations. Mortgage loan repayments increased to $2.79 billion for the year ended December 31, 2007, from $2.58 billion for the year ended December 31, 2006.

Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans increased $1.42 billion to $11.63 billion at December 31, 2007, from $10.21 billion at December 31, 2006, and represented 72.5% of our total loan portfolio at December 31, 2007. One-to-four family loan originations and purchases totaled $3.82 billion for the year ended December 31, 2007 and $2.73 billion for the year ended December 31, 2006. The increase in one-to-four family loan originations is primarily attributable to mortgage refinance opportunities, our competitive pricing and the dislocations in the secondary residential mortgage market.

Our multi-family mortgage loan portfolio decreased $42.0 million to $2.95 billion at December 31, 2007, from $2.99 billion at December 31, 2006. Our commercial real estate loan portfolio decreased $68.4 million to $1.03 billion at December 31, 2007, from $1.10 billion at December 31, 2006. Multi-family and commercial real estate loan originations totaled $410.4 million for the year ended December 31, 2007 and $664.4 million for the year ended December 31, 2006. As previously discussed, we do not believe that current market pricing for multi-family and commercial real estate loans supports aggressively pursuing such loans given the additional risks associated with this type of lending. At December 31, 2007, 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%.

Our construction loan portfolio decreased $62.5 million to $77.7 million at December 31, 2007, from $140.2 million at December 31, 2006. This decrease is primarily the result of our decision to not pursue these types of loans in the current real estate market. Our consumer and other loan portfolio decreased $74.0 million to $356.8 million at December 31, 2007, from $430.8 million at December 31, 2006. This

51


decrease is primarily the result of a decline in consumer demand for home equity lines of credit resulting from higher interest rates due to the increases in the prime rate during the first half of 2006.

Securities decreased $968.8 million to $4.37 billion at December 31, 2007, from $5.34 billion at December 31, 2006. This decrease, which reflects our previously discussed strategy of reducing the securities portfolio, was primarily the result of principal payments received. At December 31, 2007, our securities portfolio is comprised primarily of fixed rate REMIC and CMO securities. The amortized cost of our fixed rate REMICs and CMOs totaled $4.27 billion at December 31, 2007 and had a weighted average current coupon of 4.27%, a weighted average collateral coupon of 5.73% and a weighted average life of 3.1 years.

Deposits decreased $174.6 million to $13.05 billion at December 31, 2007, from $13.22 billion at December 31, 2006, primarily due to decreases in savings, money market and NOW and demand deposit accounts, partially offset by an increase in certificates of deposit. We continue to experience intense competition for deposits. During the second half of 2007, as short-term market interest rates declined, certain larger financial institutions attempted to sustain their liquidity by offering retail deposits at above market rates. In response, we have maintained our deposit pricing discipline, which has resulted in net deposit outflows, and instead have taken advantage of lower cost borrowings for funding some of our loan growth during the second half of 2007. Savings accounts decreased $237.8 million from December 31, 2006 to $1.89 billion at December 31, 2007. Money market accounts decreased $101.7 million from December 31, 2006 to $333.9 million at December 31, 2007. NOW and demand deposit accounts decreased $18.6 million from December 31, 2006 to $1.48 billion at December 31, 2007. The decreases in savings, money market and NOW and demand deposit accounts for the year ended December 31, 2007 were significantly lower than the decreases we had experienced during the year ended December 31, 2006. Certificates of deposit increased $183.7 million to $7.90 billion at December 31, 2007, from $7.71 billion at December 31, 2006. Our certificates of deposit increased primarily as a result of the success of our marketing efforts and competitive pricing strategies during the first half of 2007.

Total borrowings, net, increased $348.7 million to $7.18 billion at December 31, 2007, from $6.84 billion at December 31, 2006, primarily due to an increase in FHLB-NY advances, partially offset by a decrease in reverse repurchase agreements. The net increase in total borrowings is a result of our use of lower cost borrowings to fund some of our loan growth in the second half of 2007. For additional information, see “Liquidity and Capital Resources.”

Stockholders’ equity decreased to $1.21 billion at December 31, 2007, from $1.22 billion at December 31, 2006. The decrease in stockholders’ equity was the result of dividends declared of $95.2 million and common stock repurchased of $80.1 million. These decreases were partially offset by net income of $124.8 million, other comprehensive income, net of tax, of $18.9 million, stock-based compensation and the allocation of shares held by the employee stock ownership plan, or ESOP, of $16.3 million and the effect of stock options exercised and related tax benefit of $11.3 million. The increase in other comprehensive income is primarily due to the net increase in the fair value of our securities available-for-sale, due primarily to the write-down of the FHLMC preferred stock, coupled with an increase in the funded status of our pension and other postretirement benefits plans at December 31, 2007 as compared to December 31, 2006.

Results of Operations

General

Net income for the year ended December 31, 2007 decreased $50.1 million to $124.8 million, from $174.9 million for the year ended December 31, 2006. Diluted earnings per common share decreased to $1.36 per share for the year ended December 31, 2007, from $1.80 per share for the year ended December 31, 2006. Return on average assets decreased to 0.58% for the year ended December 31, 2007, from 0.80% for the year ended December 31, 2006. Return on average stockholders’ equity decreased to 10.39% for the year ended December 31, 2007, from 13.73% for the year ended December 31, 2006. Return on average tangible stockholders’ equity, which represents average stockholders’ equity less average goodwill, decreased to 12.28% for the year ended December 31, 2007, from 16.06% for the year

52


ended December 31, 2006. The decreases in the returns on average assets, average stockholders’ equity and average tangible stockholders’ equity for the year ended December 31, 2007, compared to the year ended December 31, 2006, were primarily due to the decrease in net income.

Our results of operations for the year ended December 31, 2007 include a $20.5 million, before-tax ($13.3 million, after-tax), other-than-temporary impairment write-down charge to reduce the carrying amount of our investment in two issues of FHLMC perpetual preferred securities to the securities’ market value of $83.0 million at December 31, 2007. This charge reduced diluted earnings per common share by $0.14 per share for the year ended December 31, 2007. This charge also reduced our return on average assets by 6 basis points, return on average stockholders’ equity by 111 basis points, and return on average tangible stockholders’ equity by 131 basis points. For a further discussion of the other-than-temporary impairment write-down, see “Critical Accounting Policies - Securities Impairment.”

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for further discussion of the potential impact of changes in interest rates on our results of operations.

For the year ended December 31, 2007, net interest income decreased $56.9 million to $333.5 million, from $390.4 million for the year ended December 31, 2006. The decrease in net interest income for the year ended December 31, 2007 was primarily the result of an increase in interest expense due to the upward repricing of our liabilities which are more sensitive to increases in interest rates than our assets, partially offset by an increase in interest income. While the U.S. Treasury yield curve remained flat-to-inverted during 2006 and the first half of 2007, it did so at progressively higher levels of interest rates. These higher interest rates, coupled with a very competitive environment for deposits, resulted in significant increases in the costs of our certificates of deposit, borrowings and Liquid CDs.

The net interest margin decreased to 1.62% for the year ended December 31, 2007, from 1.87% for the year ended December 31, 2006. The net interest rate spread decreased to 1.50% for the year ended December 31, 2007, from 1.76% for the year ended December 31, 2006. The decreases in the net interest margin and net interest rate spread were primarily due to the cost of our interest-bearing liabilities rising more rapidly than the yield on our interest-earning assets. Our Liquid CDs, certificates of deposit and borrowings reprice more frequently, reflecting increases in interest rates more rapidly, than our mortgage loans and securities which have longer repricing intervals and terms. In addition, the average balances of our Liquid CDs and certificates of deposit, which have a higher average cost than our other deposit products, have increased significantly. The average balance of net interest-earning assets decreased $38.1 million to $614.0 million for the year ended December 31, 2007, from $652.1 million for the year ended December 31, 2006.

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.”

53


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, 2007, 2006 and 2005. Average yields are derived by dividing income by the average balance of the related assets and average costs are derived by dividing expense by the average balance of the related liabilities, for the periods shown. Average balances are derived from average daily balances. The yields and costs include amortization of fees, costs, premiums and discounts which are considered adjustments to interest rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

 

 



 

 

2007

 

2006

 

2005

 

 

 







(Dollars in Thousands)

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 





















Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family

 

$

10,995,688

 

$

587,863

 

 

5.35

%

$

9,984,760

 

$

510,105

 

 

5.11

%

$

9,461,023

 

$

459,929

 

 

4.86

%

Multi-family, commercial real estate and construction

 

 

4,171,915

 

 

254,536

 

 

6.10

 

 

4,204,883

 

 

259,242

 

 

6.17

 

 

3,862,281

 

 

239,119

 

 

6.19

 

Consumer and other loans (1)

 

 

397,476

 

 

30,178

 

 

7.59

 

 

478,447

 

 

35,735

 

 

7.47

 

 

526,071

 

 

31,160

 

 

5.92

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

Total loans

 

 

15,565,079

 

 

872,577

 

 

5.61

 

 

14,668,090

 

 

805,082

 

 

5.49

 

 

13,849,375

 

 

730,208

 

 

5.27

 

Mortgage-backed and other securities (2)

 

 

4,850,753

 

 

219,040

 

 

4.52

 

 

5,946,591

 

 

267,535

 

 

4.50

 

 

7,671,532

 

 

340,626

 

 

4.44

 

Federal funds sold and repurchase agreements

 

 

39,838

 

 

2,071

 

 

5.20

 

 

131,418

 

 

6,410

 

 

4.88

 

 

195,863

 

 

6,123

 

 

3.13

 

Federal Home Loan Bank stock

 

 

167,651

 

 

11,634

 

 

6.94

 

 

143,002

 

 

7,787

 

 

5.45

 

 

130,759

 

 

6,030

 

 

4.61

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

Total interest-earning assets

 

 

20,623,321

 

 

1,105,322

 

 

5.36

 

 

20,889,101

 

 

1,086,814

 

 

5.20

 

 

21,847,529

 

 

1,082,987

 

 

4.96

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Goodwill

 

 

185,151

 

 

 

 

 

 

 

 

185,151

 

 

 

 

 

 

 

 

185,151

 

 

 

 

 

 

 

Other non-interest-earning assets

 

 

753,377

 

 

 

 

 

 

 

 

786,062

 

 

 

 

 

 

 

 

852,475

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total assets

 

$

21,561,849

 

 

 

 

 

 

 

$

21,860,314

 

 

 

 

 

 

 

$

22,885,155

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

2,014,253

 

 

8,126

 

 

0.40

 

$

2,325,346

 

 

9,362

 

 

0.40

 

$

2,742,417

 

 

11,015

 

 

0.40

 

Money market

 

 

379,634

 

 

3,780

 

 

1.00

 

 

536,549

 

 

5,287

 

 

0.99

 

 

804,855

 

 

7,513

 

 

0.93

 

NOW and demand deposit

 

 

1,465,463

 

 

951

 

 

0.06

 

 

1,500,131

 

 

877

 

 

0.06

 

 

1,569,419

 

 

928

 

 

0.06

 

Liquid CDs

 

 

1,549,774

 

 

73,352

 

 

4.73

 

 

1,092,533

 

 

50,460

 

 

4.62

 

 

350,923

 

 

10,708

 

 

3.05

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

Total core deposits

 

 

5,409,124

 

 

86,209

 

 

1.59

 

 

5,454,559

 

 

65,986

 

 

1.21

 

 

5,467,614

 

 

30,164

 

 

0.55

 

Certificates of deposit

 

 

7,823,767

 

 

369,830

 

 

4.73

 

 

7,539,840

 

 

318,784

 

 

4.23

 

 

7,146,664

 

 

251,235

 

 

3.52

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

Total deposits

 

 

13,232,891

 

 

456,039

 

 

3.45

 

 

12,994,399

 

 

384,770

 

 

2.96

 

 

12,614,278

 

 

281,399

 

 

2.23

 

Borrowings

 

 

6,776,394

 

 

315,755

 

 

4.66

 

 

7,242,568

 

 

311,659

 

 

4.30

 

 

8,566,812

 

 

322,808

 

 

3.77

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

Total interest-bearing liabilities

 

 

20,009,285

 

 

771,794

 

 

3.86

 

 

20,236,967

 

 

696,429

 

 

3.44

 

 

21,181,090

 

 

604,207

 

 

2.85

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Non-interest-bearing liabilities

 

 

351,080

 

 

 

 

 

 

 

 

349,170

 

 

 

 

 

 

 

 

333,522

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total liabilities

 

 

20,360,365

 

 

 

 

 

 

 

 

20,586,137

 

 

 

 

 

 

 

 

21,514,612

 

 

 

 

 

 

 

Stockholders’ equity

 

 

1,201,484

 

 

 

 

 

 

 

 

1,274,177

 

 

 

 

 

 

 

 

1,370,543

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

21,561,849

 

 

 

 

 

 

 

$

21,860,314

 

 

 

 

 

 

 

$

22,885,155

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/ net interest rate spread (3)

 

 

 

 

$

333,528

 

 

1.50

%

 

 

 

$

390,385

 

 

1.76

%

 

 

 

$

478,780

 

 

2.11

%

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest-earning assets/ net interest margin (4)

 

$

614,036

 

 

 

 

 

1.62

%

$

652,134

 

 

 

 

 

1.87

%

$

666,439

 

 

 

 

 

2.19

%

 

 



 

 

 

 



 



 

 

 

 



 



 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

 

 

1.03

x

 

 

 

 

 

 

 

1.03

x

 

 

 

 

 

 

 

1.03

x

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 


 

 

(1)

Mortgage loans and consumer and other loans include loans held-for-sale and non-performing loans and exclude the allowance for loan losses.

 

 

(2)

Securities available-for-sale are included at average amortized cost.

 

 

(3)

Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

 

 

(4)

Net interest margin represents net interest income divided by average interest-earning assets.

54


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, 2007
Compared to
Year Ended December 31, 2006

 

Year Ended December 31, 2006
Compared to
Year Ended December 31, 2005

 

 

 


 



 

 

Increase (Decrease)

 

Increase (Decrease)

 

 

 





(In Thousands)

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 





















Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family

 

$

53,118

 

$

24,640

 

$

77,758

 

$

26,008

 

$

24,168

 

$

50,176

 

Multi-family, commercial real estate and construction

 

 

(1,923

)

 

(2,783

)

 

(4,706

)

 

20,906

 

 

(783

)

 

20,123

 

Consumer and other loans

 

 

(6,124

)

 

567

 

 

(5,557

)

 

(3,014

)

 

7,589

 

 

4,575

 

Mortgage-backed and other securities

 

 

(49,675

)

 

1,180

 

 

(48,495

)

 

(77,631

)

 

4,540

 

 

(73,091

)

Federal funds sold and repurchase agreements

 

 

(4,735

)

 

396

 

 

(4,339

)

 

(2,433

)

 

2,720

 

 

287

 

Federal Home Loan Bank stock

 

 

1,487

 

 

2,360

 

 

3,847

 

 

596

 

 

1,161

 

 

1,757

 





















Total

 

 

(7,852

)

 

26,360

 

 

18,508

 

 

(35,568

)

 

39,395

 

 

3,827

 





















Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

 

(1,236

)

 

 

 

(1,236

)

 

(1,653

)

 

 

 

(1,653

)

Money market

 

 

(1,561

)

 

54

 

 

(1,507

)

 

(2,674

)

 

448

 

 

(2,226

)

NOW and demand deposit

 

 

(21

)

 

95

 

 

74

 

 

(51

)

 

 

 

(51

)

Liquid CDs

 

 

21,660

 

 

1,232

 

 

22,892

 

 

31,966

 

 

7,786

 

 

39,752

 

Certificates of deposit

 

 

12,333

 

 

38,713

 

 

51,046

 

 

14,476

 

 

53,073

 

 

67,549

 

Borrowings

 

 

(20,885

)

 

24,981

 

 

4,096

 

 

(53,396

)

 

42,247

 

 

(11,149

)





















Total

 

 

10,290

 

 

65,075

 

 

75,365

 

 

(11,332

)

 

103,554

 

 

92,222

 





















Net change in net interest income

 

$

(18,142

)

$

(38,715

)

$

(56,857

)

$

(24,236

)

$

(64,159

)

$

(88,395

)





















Interest Income

Interest income for the year ended December 31, 2007 increased $18.5 million to $1.11 billion, from $1.09 billion for the year ended December 31, 2006. This increase was primarily the result of an increase in the average yield on interest-earning assets to 5.36% for the year ended December 31, 2007, from 5.20% for the year ended December 31, 2006, partially offset by a decrease of $265.8 million in the average balance of interest-earning assets to $20.62 billion for the year ended December 31, 2007, from $20.89 billion for the year ended December 31, 2006. The increase in the average yield on interest-earning assets was primarily the result of the overall increase in interest rates over the past several years. The decrease in the average balance of interest-earning assets was primarily due to a decrease in the average balances of mortgage-backed and other securities, federal funds sold and repurchase agreements and consumer and other loans, partially offset by an increase in the average balance of mortgage loans.

Interest income on one-to-four family mortgage loans increased $77.8 million to $587.9 million for the year ended December 31, 2007, from $510.1 million for the year ended December 31, 2006, which was primarily the result of an increase of $1.01 billion in the average balance of such loans, coupled with an increase in the average yield to 5.35% for the year ended December 31, 2007, from 5.11% for the year ended December 31, 2006. The increase in the average balance of one-to-four family mortgage loans was the result of strong levels of originations and purchases which have outpaced the levels of repayments over the past year. The increase in the average yield on one-to-four family mortgage loans was primarily

55


due to the impact of the upward repricing of our adjustable rate mortgage loans, coupled with new originations at higher interest rates than the rates on the loans being repaid.

Interest income on multi-family, commercial real estate and construction loans decreased $4.7 million to $254.5 million for the year ended December 31, 2007, from $259.2 million for the year ended December 31, 2006, which was primarily the result of a decrease in the average yield to 6.10% for the year ended December 31, 2007, from 6.17% for the year ended December 31, 2006, coupled with a decrease of $33.0 million in the average balance of such loans. The decrease in the average yield on multi-family, commercial real estate and construction loans was primarily due to a decrease of $3.0 million in prepayment penalties to $6.8 million for the year ended December 31, 2007, compared to $9.8 million for the year ended December 31, 2006. The decrease in the average balance of multi-family, commercial real estate and construction loans reflects the levels of repayments which outpaced the levels of originations over the past year. Our originations of multi-family, commercial real estate and construction loans have declined in recent periods due primarily to the competitive market pricing previously discussed and our decision to not aggressively pursue such loans under current market conditions.

Interest income on consumer and other loans decreased $5.5 million to $30.2 million for the year ended December 31, 2007, from $35.7 million for the year ended December 31, 2006, primarily due to a decrease of $81.0 million in the average balance of the portfolio, partially offset by an increase in the average yield to 7.59% for the year ended December 31, 2007, from 7.47% for the year ended December 31, 2006. The decrease in the average balance of consumer and other loans was primarily the result of a decline in consumer demand for home equity lines of credit resulting from higher interest rates due to the increases in the prime rate during the first half of 2006. The increase in the average yield on consumer and other loans was primarily the result of an increase in the average yield on our home equity lines of credit due to the increase in the prime rate during the first half of 2006. Home equity lines of credit are adjustable rate loans which generally reset monthly and are indexed to the prime rate. Home equity lines of credit represented 89.9% of this portfolio at December 31, 2007.

Interest income on mortgage-backed and other securities decreased $48.5 million to $219.0 million for the year ended December 31, 2007, from $267.5 million for the year ended December 31, 2006. This decrease was primarily the result of a decrease of $1.10 billion in the average balance of the portfolio, reflecting our previously discussed strategy of reducing the securities portfolio. The average yield was 4.52% for the year ended December 31, 2007 and 4.50% for the year ended December 31, 2006.

Interest income on federal funds sold and repurchase agreements decreased $4.3 million to $2.1 million for the year ended December 31, 2007, primarily due to a decrease of $91.6 million in the average balance of the portfolio, partially offset by an increase in the average yield to 5.20% for the year ended December 31, 2007, from 4.88% for the year ended December 31, 2006. The increase in the average yield reflects the federal funds rate increases during the first half of 2006. Dividend income on FHLB-NY stock increased $3.8 million to $11.6 million for the year ended December 31, 2007, primarily due to an increase in the average yield to 6.94% for the year ended December 31, 2007, from 5.45% for the year ended December 31, 2006, coupled with an increase of $24.6 million in the average balance of FHLB-NY stock. The increase in the average yield was the result of increases in the dividend rates paid by the FHLB-NY. The increase in the average balance reflects the increase in the levels of FHLB-NY borrowings during 2007 compared to 2006.

Interest Expense

Interest expense for the year ended December 31, 2007 increased $75.4 million to $771.8 million, from $696.4 million for the year ended December 31, 2006. This increase was primarily the result of an increase in the average cost of total interest-bearing liabilities to 3.86% for the year ended December 31, 2007, from 3.44% for the year ended December 31, 2006. The increase in the average cost of interest-bearing liabilities was primarily due to the impact of higher interest rates on our certificates of deposit and borrowings, coupled with the increases in the average balances of Liquid CDs and certificates of deposit, which have a higher average cost than our other deposit products. The average balance of interest-bearing liabilities decreased $227.7 million to $20.01 billion for the year ended December 31, 2007, from

56


$20.24 billion for the year ended December 31, 2006, due to a decrease in the average balance of borrowings, partially offset by an increase in the average balance of deposits.

Interest expense on deposits increased $71.2 million to $456.0 million for the year ended December 31, 2007, from $384.8 million for the year ended December 31, 2006, primarily due to an increase in the average cost of total deposits to 3.45% for the year ended December 31, 2007, from 2.96% for the year ended December 31, 2006, coupled with an increase of $238.5 million in the average balance of total deposits. The increase in the average cost of total deposits was primarily due to the impact of higher interest rates on our certificates of deposit, coupled with the increases in the average balances of Liquid CDs and certificates of deposit. The increase in the average balance of total deposits was primarily the result of increases in the average balances of Liquid CDs and certificates of deposit, partially offset by decreases in the average balances of savings, money market and NOW and demand deposit accounts primarily as a result of continued competition for these types of deposits.

Interest expense on certificates of deposit increased $51.0 million to $369.8 million for the year ended December 31, 2007, from $318.8 million for the year ended December 31, 2006, primarily due to an increase in the average cost to 4.73% for the year ended December 31, 2007, from 4.23% for the year ended December 31, 2006, coupled with an increase of $283.9 million in the average balance. During the year ended December 31, 2007, $7.17 billion of certificates of deposit, with a weighted average rate of 4.73% and a weighted average maturity at inception of fifteen months, matured and $6.98 billion of certificates of deposit were issued or repriced, with a weighted average rate of 4.88% and a weighted average maturity at inception of ten months. Interest expense on Liquid CDs increased $22.9 million to $73.4 million for the year ended December 31, 2007, from $50.5 million for the year ended December 31, 2006, primarily due to an increase of $457.2 million in the average balance, coupled with an increase in the average cost to 4.73% for the year ended December 31, 2007, from 4.62% for the year ended December 31, 2006. The increases in the average balances of Liquid CDs and certificates of deposit were primarily a result of the success of our marketing efforts and competitive pricing strategies throughout 2006 and the first half of 2007 which focused on attracting these types of deposits. However, as previously discussed, certain larger financial institutions continued to offer retail deposits at above market rates during the second half of 2007 even as short-term market rates declined. Although we experienced net deposit outflows in the second half of 2007 as we maintained our pricing discipline, the increase in deposits in the first half of 2007 was sufficient to result in the increase of the average balances of Liquid CDs and certificates of deposit for the year.

Interest expense on savings accounts decreased $1.3 million to $8.1 million for the year ended December 31, 2007, from $9.4 million for the year ended December 31, 2006, as a result of a decrease of $311.1 million in the average balance. Interest expense on money market accounts decreased $1.5 million to $3.8 million for the year ended December 31, 2007, from $5.3 million for the year ended December 31, 2006, as a result of a decrease of $156.9 million in the average balance.

Interest expense on borrowings for the year ended December 31, 2007 increased $4.1 million to $315.8 million, from $311.7 million for the year ended December 31, 2006, resulting from an increase in the average cost to 4.66% for the year ended December 31, 2007, from 4.30% for the year ended December 31, 2006, substantially offset by a decrease of $466.2 million in the average balance. The increase in the average cost of borrowings reflects the upward repricing of borrowings which matured and were refinanced over the past year. The decrease in the average balance of borrowings was primarily the result of our strategy in 2006 and the first half of 2007 of reducing both the securities and borrowings portfolios through normal cash flow, while emphasizing deposit and loan growth.

Provision for Loan Losses

The provision for loan losses totaled $2.5 million for the year ended December 31, 2007, reflecting the higher levels of non-performing loans and net loan charge-offs experienced during the second half of 2007. No provision for loan losses was recorded for the year ended December 31, 2006. The allowance for loan losses was $78.9 million at December 31, 2007 and $79.9 million at December 31, 2006. The allowance for loan losses as a percentage of non-performing loans decreased to 74.25% at December 31,

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2007, from 134.55% at December 31, 2006, primarily due to an increase in non-performing loans. The allowance for loan losses as a percentage of total loans was 0.49% at December 31, 2007 and 0.53% at December 31, 2006. We believe our allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, giving consideration to the composition and size of our loan portfolio, charge-off experience and non-accrual and non-performing loans. The balance of our allowance for loan losses represents management’s best estimate of the probable inherent losses in our loan portfolio at December 31, 2007 and December 31, 2006.

We review our allowance for loan losses on a quarterly basis. Material factors considered during our quarterly review are our historical loss experience and the impact of current economic conditions. Our net loan charge-off experience was two basis points of average loans outstanding for the year ended December 31, 2007, compared to one basis point of average loans outstanding for the year ended December 31, 2006. Net loan charge-offs totaled $3.5 million for the year ended December 31, 2007 and $1.2 million for the year ended December 31, 2006. Net loan charge-offs during 2007 included a $1.5 million charge-off related to a non-performing construction loan which was sold. Net loan charge-offs during 2006 included a $947,000 charge-off related to a non-performing multi-family loan which was sold in 2006.

The composition of our loan portfolio, by property type, has remained relatively consistent over the last several years. At December 31, 2007, our loan portfolio was comprised of 73% one-to-four family mortgage loans, 18% multi-family mortgage loans, 6% commercial real estate loans and 3% other loan categories. Our loan-to-value ratios upon origination are low overall, have been consistent over the past several years and provide some level of protection in the event of default should property values decline. For further discussion of our loan-to-value ratios, see “Asset Quality.”

Our non-performing loans, which are comprised primarily of mortgage loans, increased $46.9 million to $106.3 million, or 0.66% of total loans, at December 31, 2007, from $59.4 million, or 0.40% of total loans, at December 31, 2006. This increase was primarily due to an increase in non-performing one-to-four family mortgage loans and occurred primarily during the second half 2007. Despite the increase in non-performing loans at December 31, 2007, our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. We sold non-performing mortgage loans totaling $10.4 million, primarily multi-family and commercial real estate loans, during the year ended December 31, 2007. For further discussion of the sale of these loans, including the impact the sale may have had on our non-performing loans, non-performing assets and related ratios at December 31, 2007, see “Asset Quality.”

Our non-performing mortgage loans had an average loan-to-value ratio, based on current principal balance and original appraised value, of 73% at December 31, 2007 and 71% at December 31, 2006. The average age of our non-performing mortgage loans since origination was 3.5 years at December 31, 2007. In reviewing the loan-to-value ratios of our non-performing loans at December 31, 2007 and December 31, 2006, we determined that there was no additional inherent loss in our non-performing loan portfolio compared to the estimates included in our existing methodology. Additionally, we continue to adhere to prudent underwriting standards. We underwrite our one-to-four family mortgage loans primarily based upon our evaluation of the borrower’s ability to pay. We generally do not obtain updated estimates of collateral value for loans until classified or requested by our Asset Classification Committee. We monitor property value trends in our market areas to determine what impact, if any, such trends may have on our loan-to-value ratios and the adequacy of the allowance for loan losses. Based on our review of property value trends, including updated estimates of collateral value on classified loans, we do not believe the current decline in the housing market had a significant negative impact on the value of our non-performing loan collateral as of December 31, 2007. Since we determined there was sufficient collateral value to support our non-performing loans and we have not experienced a significantly higher level of related loan charge-offs, no change to our allowance coverage percentages was required as of December 31, 2007.

We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. Subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that we have ever actively pursued. Our loss experience for

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the first nine months of 2007 was relatively consistent with our experience over the past several years, in that losses were primarily attributable to a small number of loans. During the fourth quarter of 2007, the continued decline in the housing and real estate markets, as well as the overall economic environment, contributed to an increase in our non-performing loans and net loan charge-offs. As a geographically diversified lender, we are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry nationally. Based on our evaluation of the issues regarding the real estate and housing markets, as well as the overall economic environment, and in recognition of the increases in non-performing loans and net loan charge-offs during the second half of 2007, we determined that a provision for loan losses was warranted for the year ended December 31, 2007.

For further discussion of the methodology used to determine the allowance for loan losses, see “Critical Accounting Policies-Allowance for Loan Losses” and for further discussion of our loan portfolio composition and non-performing loans, see “Asset Quality.”

Non-Interest Income

Non-interest income for the year ended December 31, 2007 decreased $15.6 million to $75.8 million, from $91.4 million for the year ended December 31, 2006. This decrease was primarily due to the $20.5 million other-than-temporary impairment write-down of securities, previously discussed under “Critical Accounting Policies - Securities Impairment,” and a decrease of $3.5 million in mortgage banking income, net. These decreases were partially offset by an increase of $6.4 million in other non-interest income, primarily due to the $5.5 million charge for the termination of our interest rate swap agreements in the 2006 first quarter, and a net gain on sales of securities in 2007 of $2.2 million related to the sale of an equity security. There were no sales of securities in 2006.

Mortgage banking income, net, which includes loan servicing fees, net gain on sales of loans, amortization of MSR and valuation allowance adjustments for the impairment of MSR, decreased $3.5 million to $1.3 million for the year ended December 31, 2007, from $4.8 million for the year ended December 31, 2006. This decrease was primarily due to a provision recorded in the valuation allowance for the impairment of MSR of $951,000 for the year ended December 31, 2007, compared to a recovery of $2.0 million for the year ended December 31, 2006. The provision recorded for the year ended December 31, 2007 primarily reflects the lack of current market demand for MSR due to the turmoil in the credit market which has negatively impacted the pricing of loan servicing. The recovery recorded for the year ended December 31, 2006 primarily reflected the decrease in projected loan prepayment speeds at December 31, 2006 compared to December 31, 2005.

Non-Interest Expense

Non-interest expense increased $9.5 million to $231.3 million for the year ended December 31, 2007, from $221.8 million for the year ended December 31, 2006. This increase was primarily due to increases in compensation and benefits expense and other expense, partially offset by a decrease in advertising. Our percentage of general and administrative expense to average assets increased to 1.07% for the year ended December 31, 2007, from 1.01% for the year ended December 31, 2006, primarily due to the increase in general and administrative expense in 2007 compared to 2006.

Compensation and benefits expense increased $7.6 million to $124.0 million for the year ended December 31, 2007, compared to $116.4 million for the year ended December 31, 2006. This increase was primarily due to increases in salaries, incentive compensation, stock-based compensation and ESOP expense, partially offset by a decrease in the net periodic cost of pension benefits. The increase in salaries expense primarily reflects normal performance increases over the past year. The increase in stock-based compensation expense reflects the additional expense related to restricted stock granted in December 2006. The increase in ESOP expense primarily reflects an increase in shares released in 2007 as compared to 2006. The decrease in the net periodic cost of pension benefits was primarily the result of a decrease in the amortization of the net actuarial loss.

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Other expense increased $3.4 million to $33.3 million for the year ended December 31, 2007 from $29.9 million for the year ended December 31, 2006, primarily due to increased legal fees and other costs as a result of the goodwill litigation. See Item 3, “Legal Proceedings,” for further discussion of the goodwill litigation.

Advertising expense decreased $1.1 million to $6.6 million for the year ended December 31, 2007, from $7.7 million for the year ended December 31, 2006, primarily due to a reduction in print advertising for certificates of deposit during the second half of 2007.

Income Tax Expense

For the year ended December 31, 2007, income tax expense totaled $50.7 million, representing an effective tax rate of 28.9%, compared to $85.0 million, representing an effective tax rate of 32.7%, for the year ended December 31, 2006. The decrease in the effective tax rate for the year ended December 31, 2007 was primarily the result of a decrease in pre-tax book income without any significant change in the amount of permanent differences, such as tax exempt income, coupled with tax benefits from the release of certain accruals for previous tax positions that have statutorily expired.

Comparison of Financial Condition and Operating Results for the Years Ended December 31, 2006 and 2005

Financial Condition

Total assets decreased $825.8 million to $21.55 billion at December 31, 2006, from $22.38 billion at December 31, 2005, consistent with our strategy of balance sheet reduction in the flat-to-inverted yield curve environment. The primary reason for the decrease in total assets was a decrease in securities, partially offset by an increase in loans receivable.

Our total loan portfolio increased $579.4 million to $14.97 billion at December 31, 2006, from $14.39 billion at December 31, 2005. The increase in interest rates compared to the prior year and the slowdown in the housing market have reduced the level of repayment and refinance activity, which has enabled us to continue to grow our mortgage loan portfolios, despite a lower level of mortgage loan originations compared to previous periods.

Mortgage loans, net, increased $652.7 million to $14.53 billion at December 31, 2006, from $13.88 billion at December 31, 2005. This increase was due primarily to increases in our one-to-four family and multi-family mortgage loan portfolios. Gross mortgage loans originated and purchased during the year ended December 31, 2006 totaled $3.43 billion, of which $3.05 billion were originations and $385.6 million were purchases. This compares to gross mortgage loans originated and purchased during the year ended December 31, 2005 totaling $4.32 billion, of which $3.45 billion were originations and $874.5 million were purchases. Total mortgage loans originated include originations of loans held-for-sale totaling $232.2 million during the year ended December 31, 2006 and $361.5 million during the year ended December 31, 2005. The decrease in mortgage loans originated and purchased is primarily attributable to the softening in the real estate market and the decrease in refinance activity due to increased interest rate levels. Mortgage loan repayments decreased to $2.58 billion for the year ended December 31, 2006, from $2.82 billion for the year ended December 31, 2005.

Our mortgage loan portfolio, as well as our originations and purchases, continue to consist primarily of one-to-four family mortgage loans. Our one-to-four family mortgage loans increased $456.2 million to $10.21 billion at December 31, 2006, from $9.76 billion at December 31, 2005, and represented 68.7% of our total loan portfolio at December 31, 2006. Our multi-family mortgage loan portfolio increased $160.7 million to $2.99 billion at December 31, 2006, from $2.83 billion at December 31, 2005. Our commercial real estate loan portfolio increased $24.3 million to $1.10 billion at December 31, 2006, from $1.08 billion at December 31, 2005. Multi-family and commercial real estate loan originations totaled $664.4 million for the year ended December 31, 2006 and $952.9 million for the year ended December 31, 2005.

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At December 31, 2006, the average loan balance within our combined multi-family and commercial real estate portfolio continued to be less than $1.0 million and the average loan-to-value ratio, based on current principal balance and original appraised value, continued to be less than 65%.

Securities decreased $1.23 billion to $5.34 billion at December 31, 2006, from $6.57 billion at December 31, 2005. This decrease was primarily the result of principal payments received of $1.25 billion and reflects our strategy of reducing the securities and borrowings portfolios. At December 31, 2006, our securities portfolio is comprised primarily of fixed rate REMIC and CMO securities. The amortized cost of our fixed rate REMICs and CMOs totaled $5.19 billion at December 31, 2006 and had a weighted average current coupon of 4.28%, a weighted average collateral coupon of 5.74% and a weighted average life of 3.5 years.

Deposits increased $413.6 million to $13.22 billion at December 31, 2006, from $12.81 billion at December 31, 2005, primarily due to increases in Liquid CDs and certificates of deposit, partially offset by decreases in savings, money market and NOW and demand deposit accounts. Liquid CDs increased $827.7 million to $1.45 billion at December 31, 2006, from $619.8 million at December 31, 2005. Certificates of deposit increased $253.3 million to $7.71 billion at December 31, 2006, from $7.46 billion at December 31, 2005. Our Liquid CDs and certificates of deposit increased primarily as a result of the success of our marketing efforts and competitive pricing strategies. We continued to experience intense competition for deposits. Savings accounts decreased $381.5 million since December 31, 2005 to $2.13 billion at December 31, 2006. Money market accounts decreased $213.1 million from December 31, 2005 to $435.7 million at December 31, 2006. NOW and demand deposit accounts decreased $72.9 million from December 31, 2005 to $1.50 billion at December 31, 2006. The decreases in savings and money market accounts may be indicative of increasing consumer demand for higher yielding investment alternatives.

Total borrowings, net, decreased $1.10 billion to $6.84 billion at December 31, 2006, from $7.94 billion at December 31, 2005, primarily due to a decrease in reverse repurchase agreements. The net decrease in total borrowings reflects our strategy of reducing the securities and borrowings portfolios.

Stockholders’ equity decreased to $1.22 billion at December 31, 2006, from $1.35 billion at December 31, 2005. The decrease in stockholders’ equity was the result of common stock repurchased of $251.2 million, dividends declared of $92.1 million and an adjustment of $19.2 million to accumulated other comprehensive loss upon adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” effective December 31, 2006. These decreases were partially offset by net income of $174.9 million, the effect of stock options exercised and related tax benefit of $28.8 million, stock-based compensation and the allocation of shares held by the ESOP of $14.0 million and other comprehensive income, net of tax, of $10.5 million, which was primarily due to the net increase in the fair value of our securities available-for-sale.

Results of Operations

General

Net income for the year ended December 31, 2006 decreased $58.9 million to $174.9 million, from $233.8 million for the year ended December 31, 2005. Diluted earnings per common share decreased to $1.80 per share for the year ended December 31, 2006, from $2.26 per share for the year ended December 31, 2005. Return on average assets decreased to 0.80% for the year ended December 31, 2006, from 1.02% for the year ended December 31, 2005. Return on average stockholders’ equity decreased to 13.73% for the year ended December 31, 2006, from 17.06% for the year ended December 31, 2005. Return on average tangible stockholders’ equity decreased to 16.06% for the year ended December 31, 2006, from 19.72% for the year ended December 31, 2005. The decreases in the returns on average assets, average stockholders’ equity and average tangible stockholders’ equity for the year ended December 31, 2006, compared to the year ended December 31, 2005, were primarily due to the decrease in net income, partially offset by the decreases in average assets and average stockholders’ equity.

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Net Interest Income

For the year ended December 31, 2006, net interest income decreased $88.4 million to $390.4 million, from $478.8 million for the year ended December 31, 2005. The decrease in net interest income for the year ended December 31, 2006 was primarily the result of an increase in interest expense due to the upward repricing of our liabilities which are more sensitive to increases in short-term interest rates than our assets. The interest rate environment, characterized by a flat-to-inverted yield curve, coupled with a very competitive environment for deposits, resulted in significant increases in the costs of our short-term borrowings, Liquid CDs and certificates of deposit.

The net interest margin decreased to 1.87% for the year ended December 31, 2006, from 2.19% for the year ended December 31, 2005. The net interest rate spread decreased to 1.76% for the year ended December 31, 2006, from 2.11% for the year ended December 31, 2005. The decreases in the net interest margin and net interest rate spread were primarily due to the cost of our interest-bearing liabilities rising more rapidly than the yield on our interest-earning assets. Our short-term borrowings, Liquid CDs and certificates of deposit reprice more frequently, reflecting increases in interest rates more rapidly, than our mortgage loans and securities which have longer repricing intervals and terms. The average balance of net interest-earning assets decreased to $652.1 million for the year ended December 31, 2006, from $666.4 million for the year ended December 31, 2005.

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

Interest Income

Interest income for the year ended December 31, 2006 increased $3.8 million to $1.09 billion, from $1.08 billion for the year ended December 31, 2005. This increase was primarily the result of an increase in the average yield on interest-earning assets to 5.20% for the year ended December 31, 2006, from 4.96% for the year ended December 31, 2005, substantially offset by a decrease of $958.4 million in the average balance of interest-earning assets to $20.89 billion for the year ended December 31, 2006, from $21.85 billion for the year ended December 31, 2005. The increase in the average yield on interest-earning assets was primarily the result of an increase in interest rates compared to the prior year. The decrease in the average balance of interest-earning assets was primarily due to a decrease in the average balance of mortgage-backed and other securities, partially offset by an increase in the average balance of mortgage loans.

Interest income on one-to-four family mortgage loans increased $50.2 million to $510.1 million for the year ended December 31, 2006, from $459.9 million for the year ended December 31, 2005, which was primarily the result of an increase of $523.7 million in the average balance of such loans, coupled with an increase in the average yield to 5.11% for the year ended December 31, 2006, from 4.86% for the year ended December 31, 2005. The increase in the average balance of one-to-four family mortgage loans was the result of the levels of originations and purchases outpacing the levels of repayments over the past year. The increase in the average yield on one-to-four family mortgage loans was primarily due to the impact of the increase in interest rates compared to the prior year on our adjustable rate mortgage loans.

Interest income on multi-family, commercial real estate and construction loans increased $20.1 million to $259.2 million for the year ended December 31, 2006, from $239.1 million for the year ended December 31, 2005, which was primarily the result of an increase of $342.6 million in the average balance of such loans, slightly offset by a decrease in the average yield to 6.17% for the year ended December 31, 2006, from 6.19% for the year ended December 31, 2005. The increase in the average balance of multi-family, commercial real estate and construction loans reflects the levels of originations which outpaced the levels of repayments. The decrease in the average yield on multi-family, commercial real estate and construction loans was primarily due to a decrease of $2.3 million in prepayment penalties to $9.8 million for the year ended December 31, 2006, compared to $12.1 million for the year ended December 31, 2005, partially offset by the impact of the increase in interest rates.

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Interest income on consumer and other loans increased $4.5 million to $35.7 million for the year ended December 31, 2006, from $31.2 million for the year ended December 31, 2005, primarily due to an increase in the average yield to 7.47% for the year ended December 31, 2006, from 5.92% for the year ended December 31, 2005, partially offset by a decrease of $47.6 million in the average balance of the portfolio. The increase in the average yield on consumer and other loans was primarily the result of an increase in the average yield on our home equity lines of credit due to the increases in the prime rate of 200 basis points during 2005 and 100 basis points during 2006. The decrease in the average balance of consumer and other loans was primarily the result of a decline in consumer demand for home equity lines of credit resulting from the increases in the prime rate. Home equity lines of credit represented 91.0% of this portfolio at December 31, 2006.

Interest income on mortgage-backed and other securities decreased $73.1 million to $267.5 million for the year ended December 31, 2006, from $340.6 million for the year ended December 31, 2005. This decrease was primarily the result of a decrease of $1.72 billion in the average balance of the portfolio, slightly offset by an increase in the average yield to 4.50% for the year ended December 31, 2006, from 4.44% for the year ended December 31, 2005. The decrease in the average balance of mortgage-backed and other securities reflects our strategy of reducing the securities and borrowings portfolios.

Dividend income on FHLB-NY stock increased $1.8 million to $7.8 million for the year ended December 31, 2006, primarily due to an increase in the average yield to 5.45% for the year ended December 31, 2006, from 4.61% for the year ended December 31, 2005, coupled with an increase of $12.2 million in the average balance of FHLB-NY stock. The increase in the average yield was the result of increases in the dividend rates paid by the FHLB-NY. Interest income on federal funds sold and repurchase agreements increased $287,000 to $6.4 million for the year ended December 31, 2006, primarily due to an increase in the average yield to 4.88% for the year ended December 31, 2006, from 3.13% for the year ended December 31, 2005, substantially offset by a decrease of $64.4 million in the average balance of the portfolio. The increase in the average yield reflects the FOMC federal funds rate increases totaling 200 basis points during 2005 and 100 basis points during 2006.

Interest Expense

Interest expense for the year ended December 31, 2006 increased $92.2 million to $696.4 million, from $604.2 million for the year ended December 31, 2005. This increase was primarily the result of an increase in the average cost of total interest-bearing liabilities to 3.44% for the year ended December 31, 2006, from 2.85% for the year ended December 31, 2005, partially offset by a decrease of $944.1 million in the average balance of interest-bearing liabilities to $20.24 billion for the year ended December 31, 2006, from $21.18 billion for the year ended December 31, 2005. The increase in the average cost of interest-bearing liabilities was primarily due to the impact of the increase in short- and medium-term interest rates compared to the prior year on our Liquid CDs, certificates of deposit and borrowings, coupled with the impact of the increases in the average balances of Liquid CDs and certificates of deposit, which have a higher average cost than our other deposit products. The decrease in the average balance of interest-bearing liabilities was primarily due to a decrease in the average balance of borrowings, partially offset by an increase in the average balance of deposits.

Interest expense on deposits increased $103.4 million to $384.8 million for the year ended December 31, 2006, from $281.4 million for the year ended December 31, 2005, primarily due to an increase in the average cost of total deposits to 2.96% for the year ended December 31, 2006, from 2.23% for the year ended December 31, 2005, coupled with an increase of $380.1 million in the average balance of total deposits. The increase in the average cost of total deposits was primarily due to the impact of higher interest rates on our Liquid CDs and certificates of deposit, coupled with the increases in the average balances of those deposits. The increase in the average balance of total deposits was primarily the result of increases in the average balances of Liquid CDs and certificates of deposit, partially offset by decreases in the average balances of savings, money market and NOW and demand deposit accounts primarily as a result of continued intense competition for these types of deposits. The decreases in

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savings and money market accounts may also be indicative of increasing consumer demand for higher yielding investment alternatives.

Interest expense on certificates of deposit increased $67.6 million to $318.8 million for the year ended December 31, 2006, from $251.2 million for the year ended December 31, 2005, primarily due to an increase in the average cost to 4.23% for the year ended December 31, 2006, from 3.52% for the year ended December 31, 2005, coupled with an increase of $393.2 million in the average balance. During the year ended December 31, 2006, $5.87 billion of certificates of deposit, with a weighted average rate of 3.68% and a weighted average maturity at inception of seventeen months, matured and $5.80 billion of certificates of deposit were issued or repriced, with a weighted average rate of 4.88% and a weighted average maturity at inception of eleven months. Interest expense on Liquid CDs increased $39.8 million to $50.5 million for the year ended December 31, 2006, from $10.7 million for the year ended December 31, 2005, primarily due to an increase of $741.6 million in the average balance, coupled with an increase in the average cost to 4.62% for the year ended December 31, 2006, from 3.05% for the year ended December 31, 2005. The increases in the average balances of certificates of deposit and Liquid CDs were primarily a result of the success of our marketing efforts and competitive pricing strategies which focused on attracting and retaining these types of deposits. Growth in our certificates of deposit and Liquid CDs contributes to the management of interest rate risk, enables us to reduce our borrowing levels and continues to produce new customers from our communities, creating relationship development opportunities.

Interest expense on borrowings for the year ended December 31, 2006 decreased $11.1 million to $311.7 million, from $322.8 million for the year ended December 31, 2005, resulting from a decrease of $1.32 billion in the average balance, partially offset by an increase in the average cost to 4.30% for the year ended December 31, 2006, from 3.77% for the year ended December 31, 2005. The decrease in the average balance of borrowings was primarily the result of our strategy of reducing the securities and borrowings portfolios. The increase in the average cost of borrowings reflects the impact of the increase in interest rates compared to the prior year.

Provision for Loan Losses

During the years ended December 31, 2006 and 2005, no provision for loan losses was recorded. The allowance for loan losses totaled $79.9 million at December 31, 2006 and $81.2 million at December 31, 2005. The allowance for loan losses as a percentage of non-performing loans increased to 134.55% at December 31, 2006, from 124.81% at December 31, 2005, primarily due to the decrease in non-performing loans from December 31, 2005 to December 31, 2006. The allowance for loan losses as a percentage of total loans was 0.53% at December 31, 2006 and 0.56% at December 31, 2005. We believe our allowance for loan losses has been established and maintained at levels that reflect the risks inherent in our loan portfolio, giving consideration to the composition and size of our loan portfolio, our charge-off experience and our non-accrual and non-performing loans. The balance of our allowance for loan losses represents management’s best estimate of the probable inherent losses in our loan portfolio at December 31, 2006 and 2005.

We review our allowance for loan losses on a quarterly basis. Material factors considered during our quarterly review are our historical loss experience and the impact of current economic conditions. Our net charge-off experience was consistent with that of the prior year and was one basis point of average loans outstanding for each of the years ended December 31, 2006 and 2005. Net loan charge-offs totaled $1.2 million for the year ended December 31, 2006, compared to $1.6 million for the year ended December 31, 2005. Included in the net loan charge-offs for the year ended December 31, 2006 was a single multi-family loan charge-off totaling $947,000. Included in net loan charge-offs for the year ended December 31, 2005 was a single commercial real estate loan charge-off totaling $650,000. In reviewing our charge-off experience for the years ended December 31, 2006 and 2005, we determined that the single events noted above represented unique loans and/or circumstances and were not indicative of a trend of increased charge-offs.

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The composition of our loan portfolio has remained consistent over the last several years. At December 31, 2006, our loan portfolio was comprised of 69% one-to-four family mortgage loans, 20% multi-family mortgage loans, 7% commercial real estate loans and 4% other loan categories. Our loan-to-value ratios upon origination are low overall, have been consistent over the past several years and provide some level of protection in the event of default should property values decline. For further discussion of our loan-to-value ratios, see “Asset Quality.”

Our non-performing loans continue to remain at low levels relative to the size of our loan portfolio. Our non-performing loans, which are comprised primarily of mortgage loans, decreased $5.6 million to $59.4 million, or 0.40% of total loans, at December 31, 2006, from $65.0 million, or 0.45% of total loans, at December 31, 2005. This decrease was primarily due to a reduction in non-performing multi-family mortgage loans, partially offset by an increase in non-performing one-to-four family mortgage loans.

During the 2006 third quarter, we sold $10.1 million of non-performing loans, primarily multi-family and one-to-four family mortgage loans, of which $5.5 million were non-performing as of December 31, 2005. The remainder became non-performing during 2006. Since these loans were sold in the third quarter of 2006, we are unable to determine with any degree of certainty whether some or all of these loans would have remained non-performing as of December 31, 2006 had they not been sold, particularly in light of our aggressive collection efforts and prior experience with other borrowers. However, assuming the $10.1 million of non-performing loans sold were not sold and were both outstanding and non-performing at December 31, 2006, our non-performing loans would have totaled $69.5 million, or an increase of $4.5 million from December 31, 2005. Additionally, at December 31, 2006, our ratio of non-performing loans to total loans would have increased to 0.46% and the allowance for loan losses as a percentage of total non-performing loans would have decreased to 114.92%.

There has been a slow down in the housing market, particularly during the second half of 2006. We are closely monitoring the local and national real estate markets and other factors related to the risks inherent in the loan portfolio. We believe this slow down in the housing market has not had a discernable negative impact on our loan loss experience as measured by trends in our net loan charge-offs and losses on real estate owned. Our non-performing mortgage loans have not increased substantially and had an average loan-to-value ratio, based on current principal balance and original appraised value, of 71% at December 31, 2006 and 69% at December 31, 2005. The average age of our non-performing mortgage loans since origination was 3.7 years at December 31, 2006. Therefore, the majority of non-performing mortgage loans in our portfolio were originated prior to 2006 when real estate values were rising and, at December 31, 2006, would likely have current loan-to-value ratios equal to or lower than those at the origination date. In reviewing the negligible change in the loan-to-value ratios of our non-performing loans from 2005 to 2006, we determined that there was no additional inherent loss in our non-performing loan portfolio compared to the estimates included in our existing methodology. We underwrite our one-to-four family mortgage loans primarily based upon our evaluation of the borrower’s ability to pay. We generally do not obtain updated estimates of collateral value for loans until classified or requested by our Asset Classification Committee. We monitor property value trends in our market areas to determine what impact, if any, such trends may have on our loan-to-value ratios and the adequacy of the allowance for loan losses. Based on our review of property value trends, including updated estimates of collateral value on classified loans, we do not believe the current slow down in the housing market had a discernable negative impact on the value of our non-performing loan collateral as of December 31, 2006. Since we determined there was sufficient collateral value to support our non-performing loans and we have not experienced an increase in related loan charge-offs, no change to our allowance coverage percentages was required. Based on our evaluation of the foregoing factors, our 2006 analyses indicated that no provision for loan losses was warranted for the year ended December 31, 2006 and that our allowance for loan losses at December 31, 2006 was adequate.

For further discussion of the methodology used to determine the allowance for loan losses, see “Critical Accounting Policies-Allowance for Loan Losses” and for further discussion of our loan portfolio composition and non-performing loans, see “Asset Quality.”

65


Non-Interest Income

Non-interest income for the year ended December 31, 2006 decreased $10.8 million to $91.4 million, from $102.2 million for the year ended December 31, 2005. This decrease was primarily due to decreases in other non-interest income, customer service fees, mortgage banking income, net, and other loan fees.

Other non-interest income decreased $7.0 million to $1.5 million for the year ended December 31, 2006, from $8.5 million for the year ended December 31, 2005. This decrease was primarily due to the $5.5 million charge for the termination of our interest rate swap agreements in the 2006 first quarter, coupled with $1.7 million of non-recurring income recorded in 2005 related to a gain on the sale of an inactive subsidiary, gains recognized in a trust account previously established for certain former directors and a gain on the settlement of an insurance claim.

Customer service fees decreased $1.5 million to $64.8 million for the year ended December 31, 2006, from $66.3 million for the year ended December 31, 2005. The decrease was primarily due to decreases in ATM fees and other checking charges, partially offset by an increase in insufficient fund fees related to transaction accounts.

Mortgage banking income, net, decreased $1.2 million to $4.8 million, from $6.0 million for the year ended December 31, 2005. This decrease was primarily due to decreases in net gain on sales of loans, the recovery of the valuation allowance for the impairment of MSR and loan servicing fees, partially offset by a decrease in amortization of MSR. Net gain on sales of loans decreased $1.4 million to $2.1 million for the year ended December 31, 2006, from $3.5 million for the year ended December 31, 2005, primarily due to a reduction in the volume of loans sold. We recorded a recovery in the valuation allowance for the impairment of MSR of $2.0 million for the year ended December 31, 2006 and $2.7 million for the year ended December 31, 2005. Loan servicing fees decreased $557,000 to $4.5 million for the year ended December 31, 2006, from $5.0 million for the year ended December 31, 2005, primarily as a result of the decrease in the balance of loans serviced for others to $1.36 billion at December 31, 2006, from $1.50 billion at December 31, 2005. 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 $1.5 million to $3.7 million for the year ended December 31, 2006, from $5.2 million for the year ended December 31, 2005, primarily due to the increase in interest rates from the prior year resulting in lower levels of mortgage refinance activity in 2006.

Other loan fees decreased $922,000 to $4.1 million for the year ended December 31, 2006, from $5.0 million for the year ended December 31, 2005. This decrease was primarily related to the outsourcing of our mortgage loan servicing activities effective December 1, 2005.

Non-Interest Expense

Non-interest expense decreased $6.9 million to $221.8 million for the year ended December 31, 2006, from $228.7 million for the year ended December 31, 2005. This decrease was primarily due to decreases in other expense, compensation and benefits expense and advertising expense, partially offset by an increase in occupancy, equipment and systems expense. Our percentage of general and administrative expense to average assets was 1.01% for the year ended December 31, 2006, compared to 1.00% for the year ended December 31, 2005.

Other expense decreased $5.1 million to $29.9 million for the year ended December 31, 2006 from $35.0 million for the year ended December 31, 2005. This decrease was primarily due to a decrease of $4.7 million in legal fees and various one-time charges totaling $581,000 in the 2005 third quarter related to the outsourcing of our mortgage loan servicing activities. The decrease in legal fees was primarily the result of the completion of the trial phase of the Long Island Savings Bank goodwill litigation in the first half of 2005, coupled with a reimbursement of $850,000 for certain legal fees in the 2006 third quarter related to the New York State Attorney General’s investigation of Independent Financial Marketing Group and its related entities, which is one of our service providers.

66


Compensation and benefits expense decreased $3.0 million to $116.4 million for the year ended December 31, 2006, compared to $119.4 million for the year ended December 31, 2005. This decrease was primarily due to decreases in salary expense and corporate incentive bonuses, partially offset by an increase in stock-based compensation cost of $4.5 million, reflecting grants of restricted stock in December 2005 and 2006, as well as stock option expense recognized due to our adoption of revised SFAS No. 123, “Share-Based Payment,” or SFAS No. 123(R), effective January 1, 2006. The decrease in salary expense is primarily due to the outsourcing of our mortgage loan servicing activities and other company-wide cost saving initiatives in 2005, partially offset by normal performance increases during 2006 for officers and staff.

Advertising expense decreased $1.1 million to $7.7 million for the year ended December 31, 2006, from $8.8 million for the year ended December 31, 2005, primarily due to the introduction of a business banking marketing campaign in the 2005 first quarter, which was not repeated in 2006. Occupancy, equipment and systems expense increased $2.3 million to $66.0 million for the year ended December 31, 2006 from $63.7 million for the year ended December 31, 2005, primarily due to an increase in data processing charges resulting from the outsourcing of our mortgage loan servicing activities.

Income Tax Expense

For the year ended December 31, 2006, income tax expense totaled $85.0 million, representing an effective tax rate of 32.7%, compared to $118.4 million, representing an effective tax rate of 33.6%, for the year ended December 31, 2005. The decrease in the effective tax rate for the year ended December 31, 2006 was primarily the result of a decrease in pre-tax book income without any significant change in the amount of permanent differences, such as tax exempt income.

Asset Quality

As previously discussed, the composition of our loan portfolio, by property type, has remained relatively consistent over the last several years. At December 31, 2007, our loan portfolio was comprised of 73% one-to-four family mortgage loans, 18% multi-family mortgage loans, 6% commercial real estate loans and 3% other loan categories. This compares to 69% one-to-four family mortgage loans, 20% multi-family mortgage loans, 7% commercial real estate loans and 4% other loan categories at December 31, 2006.

The following table provides further details on the composition of our one-to-four family and multi-family and commercial real estate mortgage loan portfolios in dollar amounts and in percentages of the portfolio at the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 



 

 

2007

 

2006

 

 

 



 

 

 

 

 

 

Percent
of Total

 

 

 

 

 

Percent
of Total

 

(Dollars in Thousands)

 

 

Amount

 

 

 

 

Amount

 

 

 



One-to-four family:

 

 

 

 

 

 

 

 

 

 

 

 

 

Full documentation interest-only

 

$

5,415,787

 

 

46.57

%

$

4,023,693

 

 

39.39

%

Full documentation amortizing

 

 

3,320,047

 

 

28.55

 

 

3,288,462

 

 

32.20

 

Reduced documentation interest-only

 

 

2,230,041

 

 

19.18

 

 

2,149,782

 

 

21.05

 

Reduced documentation amortizing

 

 

662,395

 

 

5.70

 

 

752,209

 

 

7.36

 















Total one-to-four family

 

$

11,628,270

 

 

100.00

%

$

10,214,146

 

 

100.00

%















Multi-family and commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Full documentation amortizing

 

$

3,337,692

 

 

83.92

%

$

3,545,178

 

 

86.73

%

Full documentation interest-only

 

 

639,666

 

 

16.08

 

 

542,571

 

 

13.27

 















Total multi-family and commercial real estate

 

$

3,977,358

 

 

100.00

%

$

4,087,749

 

 

100.00

%















We do not originate negative amortization loans, payment option loans or other loans with short-term interest-only periods. During the second quarter of 2006, we began underwriting our one-to-four family interest-only hybrid ARM loans based on a fully amortizing thirty year loan. Additionally, effective in 2007, in accordance with federal banking regulatory guidelines, we began underwriting our one-to-four

67


family interest-only hybrid ARM loans at the higher of the fully indexed rate or the initial note rate. Based on our underwriting standards and cumulative experience with our interest-only loans, these loans have performed as well as our fully amortizing loan products. Our non-performing interest-only one-to-four family mortgage loans as a percentage of total non-performing one-to-four family mortgage loans is consistent with our total interest-only one-to-four family mortgage loans as a percentage of our total one-to-four family mortgage loan portfolio. The respective allowance coverage factors utilized for interest-only and amortizing loans give appropriate recognition to the potential for increased risk of default (and risk of loss) attributable to payment increases on interest-only loans once principal amortization begins. Our interest-only multi-family and commercial real estate loans do not represent a material component of our loan portfolio. Our reduced documentation loans are comprised of SIFA, SISA and Super Streamline loans. During the 2007 second quarter, we discontinued originating SISA and Super Streamline loans and during the 2007 fourth quarter, we discontinued originating SIFA loans.

Our loan-to-value ratios upon origination are low overall and have been consistent over the past several years. The average loan-to-value ratios, based on current principal balance and original appraised value, of total one-to-four family loans outstanding as of December 31, 2007, by year of origination, were 65% for 2007, 67% for 2006, 69% for 2005, 68% for 2004 and 57% for pre-2004 originations. As of December 31, 2007, average loan-to-value ratios, based on current principal balance and original appraised value, of total multi-family and commercial real estate loans outstanding, by year of origination, were 65% for 2007, 67% for 2006, 66% for 2005, 63% for 2004 and 58% for pre-2004 originations.

The average loan-to-value ratios, based on current principal balance and original appraised value, of total one-to-four family loans outstanding as of December 31, 2006, by year of origination, were 67% for 2006, 69% for 2005, 69% for 2004 and 62% for pre-2004 originations. As of December 31, 2006, average loan-to-value ratios, based on current principal balance and original appraised value, of total multi-family and commercial real estate loans outstanding, by year of origination, were 62% for 2006, 66% for 2005, 65% for 2004 and 60% for pre-2004 originations.

As previously discussed, subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that we have ever actively pursued. The market does not apply a uniform definition of what constitutes “subprime” lending. Our reference to subprime lending relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and the other federal bank regulatory agencies, or the Agencies, on June 29, 2007, which further references the “Expanded Guidance for Subprime Lending Programs,” or the Expanded Guidance, issued by the Agencies by press release dated January 31, 2001. In the Expanded Guidance, the Agencies indicated that subprime lending does not refer to individual subprime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such accounts. The Agencies also excluded prime loans that develop credit problems after acquisition and community development loans from the subprime arena. According to the Expanded Guidance, subprime loans are other loans to borrowers which display one or more characteristics of reduced payment capacity. Five specific criteria, which are not intended to be exhaustive and are not meant to define specific parameters for all subprime borrowers and may not match all markets or institutions’ specific subprime definitions, are set forth, including having a FICO score of 660 or below. Based upon the definition and exclusions described above, we are a prime lender. Within our loan portfolio, we have loans that, at the time of origination, had FICO scores of 660 or below. However, as we are a portfolio lender we review all data contained in borrower credit reports and do not base our underwriting decisions solely on FICO scores. We believe the aforementioned loans, when made, were amply collateralized and otherwise conformed to our prime lending standards.

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Non-Performing Assets

The following table sets forth information regarding non-performing assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 


(Dollars in Thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 













Non-accrual delinquent mortgage loans (1)

 

$

104,378

 

$

58,110

 

$

64,351

 

$

31,462

 

$

28,321

 

Non-accrual delinquent consumer and other loans

 

 

1,476

 

 

818

 

 

500

 

 

544

 

 

792

 

Mortgage loans delinquent 90 days or more and still accruing interest (2)

 

 

474

 

 

488

 

 

176

 

 

573

 

 

563

 


















Total non-performing loans

 

 

106,328

 

 

59,416

 

 

65,027

 

 

32,579

 

 

29,676

 

Real estate owned, net (3)

 

 

9,115

 

 

627

 

 

1,066

 

 

920

 

 

1,635

 


















Total non-performing assets

 

$

115,443

 

$

60,043

 

$

66,093

 

$

33,499

 

$

31,311

 


















Non-performing loans to total loans

 

 

0.66

%

 

0.40

%

 

0.45

%

 

0.25

%

 

0.23

%

Non-performing loans to total assets

 

 

0.49

 

 

0.28

 

 

0.29

 

 

0.14

 

 

0.13

 

Non-performing assets to total assets

 

 

0.53

 

 

0.28

 

 

0.30

 

 

0.14

 

 

0.14

 


 

 

(1)

Includes multi-family and commercial real estate loans totaling $14.2 million, $17.1 million, $28.6 million, $11.5 million and $6.1 million at December 31, 2007, 2006, 2005, 2004 and 2003, respectively.

 

 

(2)

Mortgage loans delinquent 90 days or more and still accruing interest consist solely of loans delinquent 90 days or more as to their maturity date but not their interest due.

 

 

(3)

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is carried in other assets, net of allowances for losses, at the lower of cost or fair value, less estimated selling costs. The allowance for losses at December 31, 2007 was $493,000. There was no allowance for losses at December 31, 2006, 2005, 2004 and 2003.

Total non-performing assets increased $55.4 million to $115.4 million at December 31, 2007, from $60.0 million at December 31, 2006. Non-performing loans, the most significant component of non-performing assets, increased $46.9 million to $106.3 million at December 31, 2007, from $59.4 million at December 31, 2006. The increases in non-performing assets and non-performing loans were primarily due to an increase of $48.3 million in non-performing one-to-four family mortgage loans, of which $32.5 million were reduced documentation loans. The increase in non-performing loans and assets occurred primarily during the second half of 2007. We believe the increase is primarily due to the overall increase in our loan portfolio and the continued decline of the real estate and housing markets, as well as the overall economic environment. Despite the increase in non-performing loans at December 31, 2007, our non-performing loans continue to remain at low levels in relation to the size of our loan portfolio. The ratio of non-performing loans to total loans increased to 0.66% at December 31, 2007, from 0.40% at December 31, 2006. Our ratio of non-performing assets to total assets increased to 0.53% at December 31, 2007, from 0.28% at December 31, 2006. The allowance for loan losses as a percentage of total non-performing loans decreased to 74.25% at December 31, 2007, from 134.55% at December 31, 2006.

During the year ended December 31, 2007, we sold $10.4 million of non-performing mortgage loans, primarily multi-family and commercial real estate loans, of which $2.3 million were non-performing as of December 31, 2006. The remainder became non-performing during 2007. We are unable to determine with any degree of certainty whether some or all of these loans would have remained non-performing as of December 31, 2007 had they not been sold, particularly in light of our aggressive collection efforts and prior experience with other borrowers. However, assuming the $10.4 million of non-performing loans sold were not sold and were both outstanding and non-performing at December 31, 2007, our non-performing loans would have totaled $116.7 million, or an increase of $57.3 million from December 31, 2006, and our non-performing assets would have totaled $125.8 million, or an increase of $65.8 million from December 31, 2006. Additionally, at December 31, 2007, our ratio of non-performing loans to total loans would have increased to 0.72%, our ratio of non-performing assets to total assets would have increased to 0.58% and the allowance for loan losses as a percentage of total non-performing loans would have decreased to 67.6%.

We discontinue accruing interest on mortgage loans when such loans become 90 days delinquent as to their interest due, even though in some instances the borrower has only missed two payments. At December 31, 2007, $38.3 million of mortgage loans classified as non-performing had missed only two

69


payments, compared to $17.3 million at December 31, 2006. We discontinue accruing interest on consumer and other loans when such loans become 90 days delinquent as to their payment due.

The following table provides further details on the composition of our non-performing one-to-four family and multi-family and commercial real estate mortgage loans in dollar amounts, percentages of the portfolio and loan-to-value ratios, based on current principal balance and original appraised value, at the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 



 

 

2007

 

2006

 

 

 





(Dollars in Thousands)

 

Amount

 

Percent
of
Total

 

Loan
-to-
Value

 

Amount

 

Percent
of
Total

 

Loan
-to-
Value

 















Non-performing loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full documentation interest-only

 

$

24,127

 

 

26.99

%

 

78

%

$

8,513

 

 

20.70

%

 

77

%

Full documentation amortizing

 

 

16,590

 

 

18.56

 

 

68

 

 

16,404

 

 

39.89

 

 

71

 

Reduced documentation interest-only

 

 

35,733

 

 

39.98

 

 

76

 

 

5,945

 

 

14.46

 

 

74

 

Reduced documentation amortizing

 

 

12,930

 

 

14.47

 

 

64

 

 

10,262

 

 

24.95

 

 

68

 





















Total one-to-four family

 

$

89,380

 

 

100.00

%

 

73

%

$

41,124

 

 

100.00

%

 

72

%





















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family and commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full documentation amortizing

 

$

14,200

 

 

100.00

%

 

69

%

$

17,474

 

 

100.00

%

 

70

%





















At December 31, 2007, the geographic composition of our non-performing one-to-four family mortgage loans was consistent with the geographic composition of our one-to-four family mortgage loan portfolio and, as of December 31, 2007, did not indicate a negative trend in any one particular geographic location.

If all non-accrual loans at December 31, 2007, 2006 and 2005 had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of $6.7 million for the year ended December 31, 2007, $3.5 million for the year ended December 31, 2006 and $3.8 million for the year ended December 31, 2005. This compares to actual payments recorded as interest income, with respect to such loans, of $4.0 million for the year ended December 31, 2007, $1.8 million for the year ended December 31, 2006 and $2.4 million for the year ended December 31, 2005.

Excluded from non-performing assets are restructured loans that have complied with the terms of their restructure agreement for a satisfactory period and have, therefore, been returned to performing status. Restructured loans that are in compliance with their restructured terms totaled $1.2 million at December 31, 2007, $1.5 million at December 31, 2006, $1.6 million at December 31, 2005, $2.8 million at December 31, 2004 and $3.9 million at December 31, 2003.

In addition to non-performing assets, we had $829,000 of potential problem loans at December 31, 2007, compared to $734,000 at December 31, 2006. Such loans are 60-89 days delinquent as shown in the following table.

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Delinquent Loans

The following table shows a comparison of delinquent loans at December 31, 2007, 2006 and 2005.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60-89 Days Past Due

 

90 Days or More Past Due

 

 

 





(Dollars in Thousands)

 

Number
of Loans

 

Amount

 

Number
of Loans

 

Amount

 











At December 31, 2007: